De facto control and management companies: a ruling favourable to funds

An employee dismissed on economic grounds argued that the economic difficulties faced by an entity should be assessed at the level of a broader group consisting, on the one hand, of the parent company of the wholly owned subsidiary that employed her and, on the other hand, of another parent company and its own wholly owned subsidiary. The shares of the two parent companies had in common that they were all held, at the time of the facts, by a professional private equity fund (“FPCI”) managed by a French portfolio management company.

The question was therefore whether the exercise of voting rights was sufficient to qualify the management company as a dominant undertaking exercising de facto control within the meaning of Article L. 233-3, I, 3° of the French Commercial Code.

The French Supreme Court held that, since the management company is not a shareholder, it exercises the voting rights in the portfolio company of the underlying fund only by operation of law and in the interest of the unitholders. The management company cannot therefore be regarded as holding those voting rights for the purposes of de facto control (Cass. Soc., 18 March 2026, No. 24-18.976).

Article L. 233-3, I, 3° of the French Commercial Code defines de facto control by the “holding” of voting rights enabling a company to determine decisions at shareholders’ meetings. In the case of an FPCI (and more generally any mutual investment fund), the question for the Supreme Court was whether the FPCI’s management company can be said to “hold” such voting rights.

The reporting judge noted that commentators had already considered the issue, observing that the term “holding” implies ownership links. However, it is the FPCI that holds the shares, not the management company, which merely exercises voting rights pursuant to its management mandate.

Other analyses have rightly recalled that the legislator did not intend to dissociate the exercise of shareholders’ rights from the status of shareholder. The purpose of the provision was solely to recognise control in cases of diluted shareholdings or shareholder absenteeism at general meetings.

The French Supreme Court adopted this reasoning, combining two elements: the legal nature of a mutual fund, and the manner in which voting rights are exercised by the management company.

Legally, an FPCI, as a mutual investment fund, has no legal personality. It is a co-ownership of financial instruments represented vis-à-vis third parties by its management company. As a result, the assessment of de facto control must be made at the level of the management company.

However, the management company does not hold the voting rights; it exercises them under a mandate in the exclusive interest of the unitholders, by operation of law (Monetary and Financial Code, Art. L. 214-24-42).

The report also refers to parliamentary debates confirming that a company “holds” voting rights only if it actually owns them, and that the notion of control cannot be detached from ownership of share capital.

Furthermore, management companies, classified as financial holding companies under European law, are expressly excluded from the category of “dominant undertakings” under Article L. 2331-1 of the Labour Code, unless interference in the management of portfolio companies is demonstrated—something unlikely in minority investment strategies but potentially debatable in majority holdings.

This decision is favourable to funds and management companies, with some points of attention for funds whose portfolio includes multiple companies operating in the same sector.

The Court expressly based its position on (i) the absence of legal personality of the FPCI and its status as a co-ownership of financial instruments, and (ii) the exercise of voting rights by the management company under a statutory mandate.

While the absence of legal personality reinforces the Court’s reasoning, it should not be decisive. For instance, a *société de libre partenariat* (SLP), which has legal personality but operates similarly to an FPCI, should in principle be subject to the same case law. Despite its corporate form, the management company must act in the exclusive interest of investors, excluding de facto control.

The introduction of the *société de libre partenariat spéciale*, which lacks legal personality, further supports the view that such entities are essentially mutual investment funds borrowing certain corporate features, and should therefore be treated consistently with FPCIs.

The Court also emphasised that management companies must report on their voting practices. While already a regulatory obligation vis-à-vis the French Financial Markets Authority, the decision highlights the importance of refining voting policies to avoid being characterised as controlling undertakings.

Recent updates to the professional code of conduct for asset management (adopted on 7 May 2026) reinforce this requirement: managers must be able to justify at all times the positions taken when exercising voting rights, and must provide investors with detailed information on how votes were cast on each resolution.

This combined framework encourages greater transparency in the exercise of voting rights within managed portfolios.