Corporate securities (stocks or shares) may be dismembered in the context of equity-related transactions, in particular in the context of gifts or inheritance. These dismemberments have certain consequences in terms of the distribution of dividends and reserves. A legal precedent dated 22 June 2016 has clarified the rights of the bare owner and the usufructuary.

Dismemberment of ownership

Ownership, whether of movable or immovable property, has three characteristics:

– Abusus: the right to use the property, to enjoy it without altering it
– Fructus: the right to dispose of the fruits of the property (rents, income, etc.)
– Usus: the right to alter the property or cede it

When an owner decides to dismember the property he or she owns, the usus and the fructus are attributed to the usufructuary, and the abusus is attributed to the bare owner.

Although in principle bare owners may sell the securities they hold, they must first obtain the agreement of the usufructuary.

Beneficiaries of dividends

In principle, the partners or shareholders of the company are entitled to dividends. When securities are dismembered, the dividends consequently accrue to the usufructuary. The right to dividends is granted only after the approval of the accounts, the determination of the existence of the sums to be distributed and of the proportion allocated to each partner (see Cass. Com. 28 November 2006).

Beneficiaries of reserves and the ruling of the 1st Civil Chamber of France’s Court of Cassation on 22 June 2016

The profits of a company are not considered as “fruit” (fructus) except when attributed in the form of dividends. If profits are placed in a reserve, their nature changes and they become one of the elements of the company’s assets. Thus, in the case of dismemberment, these reserves are attributed to:

– the entitled beneficiaries in the event of a liquidating dividend
– the bare owners, given that the usufructuary has a right of enjoyment (unless otherwise agreed between the usufructuary and the bare owner) in the form of a quasi-usufruct: the usufructuary then receives the reserves distributed but with the responsibility of returning them at the end of the usufruct (Article 587 of France’s Civil Code).

The judgement handed down on 22 June 2016 by France’s Court of Cassation ruled in respect of a tax-related dispute. Following the death of a shareholder of a company, the surviving spouse received the usufruct of the securities and the children received the bare ownership. To settle the undivided estate, the heirs argued that the reserves distributed by the company should be attributed to the usufructuaries and thus exit the undivided corporate assets, the reserves constituting “fruit”.

The Court rejected this argument, stating that “although the usufructuary is entitled to the distributed profits, there is no right to the profits that have been set aside in a reserve, which constitute an increase in the company’s assets and as such are attributed to the bare owner [and that] the funds coming from the distribution of existing reserves […] should benefit only the bare owners and be included in the assets of the undivided estate.”

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