Approval Clause in a Shareholders' Agreement: Complete Guide
The approval clause is a contractual provision that subjects any share transfer to the prior consent of the other shareholders of a company. It is integrated into the articles of association or the shareholders' agreement, with different legal effects depending on the choice made.
What Is the Approval Clause? Definition and Purpose
The approval clause subjects any share transfer to the prior consent of the other shareholders. It protects the composition of the capital against the entry of an unwanted third party.
In a company, capital is a strategic asset. The approval clause is the contractual lock that prevents uncontrolled entries into your shareholder base: governance dilution, conflicts of interest, loss of cohesion between partners.
Its principle is straightforward: before transferring shares to a third party, a shareholder must obtain the consent of the other partners or a body designated by the agreement.
A Shareholder Control Mechanism
A concrete example: an SAS is founded by three partners and raises EUR 300,000 from a business angel. Six months later, one founder wishes to transfer their shares to a competitor. Without an approval clause, nothing legally prevents this. With a well-drafted clause, the transfer is blocked until the other partners approve it. If approval is refused, the partners are obliged to buy out the shares or find an acceptable buyer.
This mechanism applies to all forms of transfer: sale, gift, contribution in kind, and succession if the agreement explicitly provides for it.
Why It Is Essential in an SAS
The SAS provides no statutory approval right by default. Article L.227-14 of the Commercial Code allows — but does not require — founders to include one. The absence of this clause is one of the most common legal mistakes during a first fundraising round. Consult our complete guide on the shareholders' agreement for more context.
Key takeaway: without an approval clause in an SAS, any third party can enter your capital without your being able to object.
Approval Clause in the Articles or in the Agreement: What Is the Difference?
Statutory Clause: Enforceable Against All, Penalty of Nullity
When the approval clause appears in the articles of an SAS, it is enforceable against all partners. In the event of a breach, Article L.227-15 of the Commercial Code provides for the nullity of the transfer. Article L.227-19 further specifies that unanimous consent is no longer required to adopt or amend the clause — a reinforced majority suffices.
Integrating the clause into the articles offers maximum protection, recommended for companies with multiple partners or those anticipating successive funding rounds.
Key takeaway: Statutory clause = transfer is void. Extra-statutory clause = damages only.
Extra-Statutory Clause: Confidential but Less Protective
When the approval clause appears only in the shareholders' agreement, it only binds the signatories. In the event of a breach, only damages may be claimed under Article 1231-1 of the Civil Code. However, the extra-statutory clause benefits from full confidentiality, as the agreement is not filed with the commercial registry.
How Does the Approval Procedure Work?
The transferring shareholder notifies their approval request to the other partners, who have 3 months to respond. Silence constitutes approval; refusal obliges the other partners or the company to buy back the shares within the same period.
The Approval Request: Form and Timelines
The request is generally sent by registered letter. The agreement must specify: the notification form, the response deadline, voting rules (unanimity or majority), and the conditions under which silence constitutes approval. In the absence of a specific provision, the statutory 3-month period applies.
Refusal of Approval: Obligations and Consequences
In the event of refusal, the partners must buy back the transferor's shares within 3 months. If no buyback is completed, the transfer is automatically authorized on the original terms. In case of pricing dispute, Article 1843-4 of the Civil Code provides for an independent expert. A single-asset SPV must also integrate this mechanism to govern co-investor exits.
Key takeaway: after the 3-month period without a buyback, the originally refused transfer is automatically authorized.
Approval Clause and Fundraising: What to Anticipate
An overly restrictive approval clause can block your next round. Plan for exceptions from the outset.
Approval Upon Entry of a Co-Investor
A unanimous approval clause can block a fundraise if a single founder objects. The clause must explicitly address capital increases — either by excluding them from the scope of approval, or by providing a different voting rule. See our guide on finding investors for practical advice on managing investor entry.
Compatibility with Subsequent Rounds
It is recommended to include from the outset exceptions for: professional investors within the meaning of AMF regulation, regulated investment funds (FPCI, SLP, FCPR), and vehicles structured by a mandated third party. Some agreements also include a clause for automatic lifting of the approval requirement in the event of a stock market listing or full company sale.
Key takeaway: an overly restrictive approval clause can block your next round. Plan for exceptions from the outset.
Approval Clause vs. Pre-emption Clause: Do Not Confuse Them
Two Complementary Mechanisms, Not Interchangeable
The approval clause grants a blocking right. The pre-emption clause grants a priority right. These two mechanisms are complementary and coexist in most well-structured agreements.
When to Combine Both in the Same Agreement
The pre-emption clause operates first. If no partner wishes to buy back the shares, the approval clause filters the identity of the third-party buyer. A club deal structuring several co-investors benefits from this double protection to govern individual exits.
Key takeaway: pre-emption grants a priority right. Approval grants a blocking right. The two mechanisms are complementary.
How Overlord Structures the Approval Clause in Your Vehicles
Overlord systematically integrates an approval clause into the documentation of each structured investment vehicle: SPV, club deal, SAS co-investment vehicle.
The drafting takes into account three parameters: the legal form adopted, the number of co-investors, and the anticipated funding rounds. Gaspard de Monclin, a business lawyer trained in Paris, London, and New York, supervises the compliance of every agreement structured by Overlord. KYC/AML checks are integrated into the same process.
The platform handles documentation, compliance, and onboarding. To structure your vehicle, visit the fund structuring page.
FAQ: Approval Clause and Shareholders' Agreement
What is the approval clause in a shareholders' agreement?
A contractual provision subjecting any share transfer to the prior consent of the other shareholders, to control the composition of the shareholder base.
Is the approval clause mandatory in an SAS?
No, it is optional in an SAS (Art. L.227-14). In a SARL, approval is a legal obligation (Art. L.223-14).
What is the difference between an approval clause and a pre-emption clause?
The approval clause grants a blocking right; the pre-emption clause grants a priority right to purchase. Both are complementary.
What happens if approval is refused?
The partners must buy back the shares within 3 months. If not completed, the transfer is automatically authorized. Pricing disputes are resolved by an independent expert (Art. 1843-4 Civil Code).
Should the approval clause be in the articles or in the agreement?
In the articles: enforceable against all, breach results in nullity (Art. L.227-15). In the agreement only: binds signatories only, breach gives rise to damages only.
Does the approval clause apply during a fundraising round?
Yes, unless an exception is expressly provided. Include exceptions for professional investors, regulated funds, and structured vehicles from the outset.
What are the penalties for breaching an approval clause?
In the articles: transfer is null and void (Cass. com., 15 January 2013). In the agreement only: damages under Article 1231-1 of the Civil Code.
Conclusion
The approval clause is the first lock on your shareholder base. Well-structured, it protects founders and co-investors without blocking future funding rounds. For further reading, consult the complete guide on shareholders' agreements and our page on fund structuring.