As the annual accounts approval season gets underway, recent case law on dividend distributions calls for shareholders to carefully assess their strategy for allocating the fiscal year’s profits. Key decisions must be made during the annual general meeting—not after the fact.
In a ruling dated February 12, 2025,1 the French Cour de cassation reaffirmed that only the annual general meeting convened to approve the accounts of the past fiscal year has the authority to decide on dividend distributions drawn from the ‘retained earnings’ account.
This decision provides much-needed clarification following the divergent positions taken by lower courts in recent years.
At a general meeting held on April 30, 2017, the shareholders of a French simplified joint-stock company approved the accounts of the last ended fiscal year and allocated the profit made to the “retained earnings” account. At as second general meeting held two months later, the shareholders decided to distribute dividends drawn from these retained earnings. Following the sale of all the company’s shares, the former shareholders brought legal action against the company seeking payment of the dividend.
It is worth recalling that the distribution of dividends by French commercial companies is governed by articles L. 232-11 and L. 232-12 of the French Commercial Code, which provide as follows:
These provisions raise the question whether the amounts allocated to the “retained earnings” account by the most recent annual general meeting were included in the “distributable amounts” it acknowledged. This would determine whether a subsequent meeting could distribute them.
In response to this question, the Court states that: “Retained earnings from a fiscal year are included in the distributable profit of the following fiscal year and, consequently, only the meeting approving the accounts of that fiscal year has the authority to decide on their allocation and, if applicable, their distribution.“
The Court thus closes the door on mid-year distribution of amounts drawn from retained earnings. This position is consistant with the usual understanding that the general meeting has not decided on the allocation of these amounts and has deferred that decision to the following year. Therefore, they are not part of the distributable profit of the considered fiscal year. Instead, they are added to the profit of the subsequent year, which the annual general meeting may then decide to distribute, allocate to reserves, or maintain as retained earnings.
The Court emphasizes the mandatory nature of these provisions, highlighting that any decision to distribute said retained earnings made outside the general meeting convened to approve the annual accounts is at risk of being null and void.
The distribution of retained earnings being forbidden, the alternative lies in the payment of interim dividends during the fiscal year. However, this mechanism is subject to strict conditions laid out in Article L. 232-12, paragraph 2 of the French Commercial Code:
Finally, Article R. 232-17 of the French Commercial Code provides that the board of directors, the executive board, or the managers, as the case may be, are authorized to decide on the payment of an interim dividend and to determine both its amount and payment date.
This decision follows a series of first-instance and appellate rulings that had cast doubt on which amounts could be distributed during the course of the year. Lastly, a recent decision by the Paris Court of Appeal suggests that, unlike retained earnings, reserves may indeed be distributed outside of the annual general meeting.
In a judgment dated September 23, 2022,2 the Paris Commercial Court put an end to the widespread practice of distributing dividends from reserve accounts during the year.
Adopting a strict interpretation of Article L. 232-11 of the French Commercial Code—contrary to prevailing practice and legal commentary—the Court held that only the annual general meeting convened to approve the accounts is authorized to decide on such a distribution.
This restrictive interpretation was justified by the underlying purpose of the relevant provisions. They are intended to ensure that the company demonstrates a distribution capacity compatible with preserving its financial soundness.
By a decision rendered early this year,3 the Paris Court of Appeal offered a different interpretation. Contrary to the retained earnings, the amounts recorded in reserve accounts must have been allocated by a prior annual general meeting. These amounts represent profits accumulated over time and thus constitute enduring assets. Consequently, their distribution may be permitted outside the annual general meeting approving the accounts.
In the absence of a decision from the French Cour de cassation, the position of the Paris Court of Appeal thus provides some comfort for possible distributions during the year by drawing on the reserves.
From a practical standpoint, such distributions during the year must be carried out with careful attention to ensure they do not undermine the company’s financial stability. Even more when they occur late in the fiscal year,
