Paris Court of Appeal, No. 06/22560 | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, 22 May 2008, No. 06/22560

I C AA L

Vs.

Z C AA L

Z C W

ROUNDHILL TRUST

K L

Z M C

On 1 May 1979, Edwin, Z and I C signed a protocol providing for the establishment of a holding company in Liechtenstein to bring their activities together. Article 4 of the agreement specified that the intention of each party was to allocate its shares in the holding company to a family foundation, without this being an obligation.

The articles of association of the holding company named Z C W were signed by the three brothers on 5 September 1979. Article 31 stipulated an arbitration clause providing that any dispute that may arise during the life of the company or the liquidation period thereof between the shareholders and the company or between the shareholders themselves and which are linked in any way to the interpretation or implementation of the constitutional charter or the articles or acts or resolutions of the bodies of the company or to the company’s activity, will be submitted to three arbitrators according to the rules of the Paris International Chamber of Commerce in the absence of amicable resolution.

I and Z C each set up a family foundation, I C AA L and Z C AA L.

J C sold his shares to the family foundations of his brothers. Therefore, the holding company’s shareholding became composed of I C AA L and Z C AA L respectively at 15% and 85%, the Roundhill Trust and K L each holding one share.

In 1996, Z C appointed his sons Z M and U as ‘executive vice presidents’, each of whom is responsible for supervising half of the group’s activities worldwide.

Z C died on XXX and serious dissensions opposed his two sons and their mother A C. After various procedures, they signed an agreement on 26 April 2000 a ‘settlement agreement’ which was also signed on the same day by Z C AA L. The agreement providing for the sale of the assets, approved by the company’s board of directors, was submitted to the shareholders' meeting, which ratified it despite the opposition of I C and I C AA L.

Under these circumstances, I C AA L filed a request for arbitration against Z C AA L, Z C W, Roundhill Trust, K L and against A, U and Z M C seeking the annulment of various resolutions of the general meetings, in particular those relating to the settlement agreement, as well as the award of damages.

A first partial award rendered on 25 April 2005 by Mr. G O, Chairman, and Messrs. X and AB J. AD, arbitrators, decided that the law applicable to the arbitration agreement is French law, that the law applicable to the merits is the law of Liechtenstein, and that the arbitration agreement is valid and that the subject matter of the dispute is arbitrable.

A second partial award of 22 June 2006 against which I C AA L brought the present action for annulment decides:

‘XXX, Fourth and P Q [A, U and Z M C] are not bound by the Arbitration Agreement and consequently the Court has no jurisdiction over them.

All other decisions, including all decisions concerning costs in relation to Third, Fourth and P Q are reserved for future awards’.

In support of its action that it bases on the absence of an arbitration agreement or, alternatively, on the non-compliance with the mission (Article 1502-1 and 1502-3 of the Code of civil procedure), I C AA L essentially maintains:

that the shareholder within the meaning of the arbitration clause means the family foundations and the heirs of the founders who are the economic beneficiaries of these foundations,
that, assuming that the arbitration clause is not interpreted in this manner, consorts C were involved in the execution of the partnership agreement and were not unaware of the existence or the scope of the arbitration clause.

Therefore, it requests the Court to annul the award and to order Q to pay I C AA L €50,000 in respect of Article 700 of the CPC.

Z C AA L, Z C W, Roundhill Trust, K L, A, U and Z M C submit the dismissal of the appeal and the sentencing of the claimant to pay to each of them €5,000 as damages and an aggregate sum of 80,000€ under Article 700 of the CPC.

They consider that the party claiming the annulment is making an erroneous interpretation of the notion of shareholder and of the will of the founders, and that it is not demonstrated that the Q natural persons who did not exceed their prerogatives within the company consented to be bound by the arbitration clause.

UPON WHICH,

Whereas, it is not disputed that the arbitration is international.

Whereas, the action for annulment which criticises the arbitral tribunal for having declared itself incompetent towards the natural persons is in fact criticising the arbitral tribunal for not having complied with the terms of its mission (Article 1502-3° of the CPC); That it is admissible on this basis.

Whereas, the judge ruling on annulment controls the decision of the arbitral tribunal on its competence by seeking all elements of law and fact resulting from the file and enabling the assessment of the scope of the arbitration agreement, and deducing its consequences with regard to the compliance of the arbitrators with the mission entrusted to them.

Whereas, the settlement agreement signed on 26 April 2000 between consorts C and Z C AA L states in its preamble that the foundation and the company believe that it is in their interest to establish procedures and agreements to set up a mechanism leading to a sale or division of the company. It provides, inter alia, for the creation of a special committee composed of three members appointed respectively by A, U and Z M C with the mission of selecting a banker capable of achieving within 12 months the sale of the shares or activities of the company or a division of its activities (Article 3.6). It also provides for the creation of an advisory committee, composed of members appointed respectively by U and Z M C and by the chairman general manager of the company, responsible for making recommendations on the day-to-day management of the company and its subsidiaries. It also stipulates (Article 4.6.1) that upon receipt of the valuation and opinion from the banker, a sale procedure will be initiated unless the foundation and the company agree on a plan for division with the unanimous agreement of C.

This agreement has been ratified ‘in principle’ by the board of directors, which did not have knowledge of its exact content, then by the shareholders' meeting while the agreement was already being executed as the members of the special committee had been appointed, it being recalled that Z C AA L, majority shareholder at 85%, was already a signatory.

It has effectively resulted in the sale of the substantial part of the group’s assets.

Whereas, I C AA L maintains that by signing this settlement agreement which aims to liquidate the company, consorts C have usurped the rights reserved for the shareholders’ meeting concerning the liquidation and dissolution of the company, especially since this agreement did not provide for a meeting of the shareholders to allow for the election of A C as chairman of the board of directors and the election of the persons nominated by U and Z M C to sit thereon as provided for in the said agreement. It emphasises that consorts C did not sign the settlement agreement in their quality as directors of the company, but in a personal capacity as economic beneficiaries of the foundation Z C.

Q argue that consorts C are not shareholders and have not consented to the arbitration clause, even implicitly, the will of the three founding brothers being irrelevant in this respect. They emphasise that the settlement agreement put in place a number of measures aimed at deeply studying the various options for resolving the conflict between C through an independent and professional body, the special committee composed of experienced businessmen and charged with the appointment of an investment bank for the valuation of the company. This process should have enabled the company and Z C AA L to make a decision without the natural persons usurping the rights and attributions of the competent bodies of the company at any time in the execution of this agreement.

Whereas, the settlement agreement led in fact to the liquidation of the company since the substantial part of the assets was sold and no option other than the dissolution was seriously contemplated. Thus, the settlement agreement is included in the provisions of the arbitration clause as relating to the life or liquidation of the company.

On this occasion, consorts C alone appointed the three members of the special committee responsible for selecting with discretionary power the investment banker who is able to value the company and to reach the sale of the shares or the activities or a division of the activities if the company and the foundation accept it - in this case, subject to the unanimous agreement of consorts C, all parties otherwise agreeing to abide by the decisions of the special committee who is ultimately the only one able to accept or reject the valuation and opinion of the banker, who was chosen from a list from which U and Z M C had previously expressed their preferences.

The ‘concept’ of this agreement (concept of the agreement), which remained confidential, was accepted by the board of directors, which therefore without knowing its content empowered A C, who had become chairman and managing director, to sign it on behalf of the company.

Certainly, the general meeting was called upon to acknowledge the agreement. However, this was done as a formality since the agreement was already signed by Z C AA L, which holds 85% of the shares.

Consorts C by signing this settlement agreement in a personal capacity, which in fact sealed the fate of the company since it stipulated that it was binding on all of its signatories and that it ultimately gave full authority to the special committee designated by C alone, behaved like the true shareholders of the company, even designating on this occasion the members of the board of directors and agreeing on the appointment of the chairman. They have thus exercised prerogatives reserved for shareholders. The formal acceptance of this agreement by the board of directors and the general meeting does not change the degree of their involvement in any way.

It should also be noted that the ‘committee of the protectors of the foundation Z C’ was, in accordance with the articles of association, in charge of giving to the board of the Foundation, its management and representative bodies, instructions on how to exercise the right to vote in the shareholders' meetings or boards of directors of the companies in which the foundation held a shareholding. However, it appears that this committee which met on 19 April 2000 in order to decide on the acceptance of the settlement agreement was composed of A C, his brother, a candidate from U C and a candidate from Z M C and that it clearly had no autonomy, contrary to the view of the arbitral tribunal, with regard to the influence exercised by consorts C who are actually the real holders of the power in the company.

It should also be emphasised, on the one hand, that the articles of association of Z C AA L AE A C, after the death of the founder, allow for the periodical exercise of 17% of the voting rights at the company’s general meetings, and, on the other hand, that Z M C presented itself in a letter dated 18 February 1999 as one of the majority shareholders of the company. Finally, A, U and Z M C were considered as shareholders since they had been called on 24 July 2001 by the company’s organisation committee to a shareholders' meeting where it was imperative ‘that all shareholders be present’ or where it is said at the board of directors’ meeting of 26 April 2000 ‘(…) Mr D explained that I C and the FFJA [AA L I C] were included in the Agreement [the settlement agreement] so that all shareholders are included (…)’.

Therefore, A, U and S C cannot legitimately claim to be strangers to the arbitration clause. They cannot have been unaware of its content and they have implicitly accepted it in view of their involvement in the operation and liquidation of the company. On this occasion, they behaved under the cover of Z C AA L as the true majority shareholders of the holding company.

The award is therefore annulled for non-compliance of the arbitrators with their mission.

Whereas, in view of the direction of this judgment, the claim for damages filed by Q is dismissed.

Whereas, under Article 700 of the CPC, Q, who are unsuccessful, are dismissed of their claim and pay to I C AA L 50.000€.

FOR THESE REASONS:

ANNULS the partial award rendered in Paris on 22 June 2006 by Mr. G T, Chairman, and Messrs. X and AB J. AD, arbitrators;

CONDEMNS Z C AA L, Z C W, Roundhill Trust, K L, A, U and Z M C to pay to I C AA L €50,000 under Article 700 of the CPC;

DISMISSES all other requests;

CONDEMNS Z C AA L, Z C W, Roundhill Trust, K L, A, U and Z M C to the costs;

ADMITS SCP Verdun Seveno, avowed, to benefit from Article 699 of the CPC.