Company transformation and gift: how to value partnership shares?

Imagine for a moment: you are a property owner in Mougins, and you have received a gift of shares in a family company. Years later, on the death of the donor, the company has changed its legal form and the liabilities have disappeared. How do you value these shares for the purpose of accounting to the estate? This question, which seems technical, has concrete consequences on the amount of inheritance tax to be paid.

The Court of Cassation, in a judgment of 8 July 2009 (No. 07-18.041), provides a clear answer: the transformation of a public limited company (société anonyme or SA) into a general partnership (société en nom collectif or SNC) has no impact on the status of the partnership shares that were the subject of a gift. They must be valued at the date of the opening of the succession, taking into account the disappearance of the liabilities for a reason unrelated to the donees.

In other words, the change of legal form does not erase the obligation to bring the shares into the estate, and the increase in value linked to the activity of the donees or the disappearance of the liabilities must be taken into account. But what does that actually change? Let's dive into the details.

The facts: a story that happens every day

Mrs. Y... épouse X... had, by deeds of 26 September 1974 and 28 June 1975, made gifts of partnership shares to her children and her spouse. The shares were those of a public limited company whose liabilities were then significant. On 8 January 1976, the SA was transformed into a general partnership (SNC), a change of legal form that alters the nature of the partners' rights (unlimited liability for the SNC).

Mrs. Y... died on 5 October 1986. At the time of the succession, the liabilities that burdened the company at the time of the gifts had disappeared, thanks to the activity of the donees (the children and the spouse). In addition, the value of the shares had increased. The notary in charge of the liquidation then had to determine the value of the shares to be brought into the estate.

The heirs (some of whom had not received gifts) contested the proposed valuation, arguing that the transformation into an SNC had changed the nature of the partnership shares and that the increase in value should be attributed to the donees. The Court of Appeal agreed with them, but the Court of Cassation overturned that decision, referring the case to another court.

The reasoning of the court — broken down

In its judgment of 8 July 2009, the Court of Cassation recalls a fundamental principle of succession law: gifts that are subject to accounting must be valued at the date of the opening of the succession (death of the donor), in accordance with Article 860 of the Civil Code (in its wording then in force). This principle aims to maintain equality between heirs.

But careful: the value to be taken into account is that of the partnership shares as they existed at the time of the gift, not the value of the company after transformation. In short, the change of legal form (SA → SNC) has no impact on the status of the gifted shares: the shares remain partnership shares, even if their legal regime has evolved.

The Court also specifies that the increase in value resulting from the activity of the donees (the children and the spouse) within the company must be taken into account, because they contributed to the disappearance of the liabilities. On the other hand, the increase in value due to an unrelated cause (for example, favourable economic conditions) would be treated differently. Here, the judges consider that the liabilities disappeared thanks to the activity of the donees, which justifies retaining the value at the date of death, without deducting the liabilities that no longer exist.

What few people know is that this solution is part of a consistent line of case law: the transformation of a company does not affect the nature of the gifted partnership shares. Thus, the heirs must bring in the value of the shares at the date of death, taking into account the evolution of the business.

What this means for you — in concrete terms

For a owner of partnership shares in Grasse or elsewhere, this decision has direct implications. If you have received shares as a gift and the company changes its legal form (for example, from an SARL to an SAS), you should know that this change does not affect the obligation to bring those shares into the estate.

Let's take a numerical example: in 2010 you receive shares in an SA with liabilities of €100,000. The net value of the shares is then €200,000. In 2020, on the death of the donor, the company has become an SNC, the liabilities have been repaid thanks to your activity, and the value of the shares is €400,000. For the accounting, you will have to bring in €400,000 (value at the date of death), not €200,000. This will increase the inheritance tax payable by the other heirs, but also your own share.

For a potential buyer, this decision reminds of the importance of checking the history of gifts and company transformations before buying shares. If you are considering acquiring shares in an SNC that was formerly an SA, ask yourself about the origin of the shares: were they gifted? If so, the seller may be obliged to bring them into a future estate.

Finally, for a notary or wealth management adviser, this case law is a valuable tool for advising clients on the valuation of gifts subject to accounting. undefined, I have come across cases where heirs contested the valuation by invoking the change of corporate form: this decision allows the debate to be resolved.

Four tips to avoid this type of dispute

• Document the evolution of the company: keep all transformation deeds (SA into SNC, etc.) and annual accounts. They will serve to prove the value of the shares at each stage.
• Have the shares valued regularly: after a gift, have an expert valuation carried out every 5 to 10 years to fix the value and avoid later disputes.
• Include a clawback clause in the gift deed: specify the valuation methods for the shares in the event of a company transformation, to anticipate differences of interpretation.
• Consult a specialised lawyer: before accepting a gift of partnership shares, or in the event of a company transformation, a lawyer can advise you on the inheritance implications.

Further reading: related case law and developments

This decision is part of a line of judgments of the Court of Cassation that protect the principle of equality between heirs. One can cite the judgment of 11 December 2007 (No. 06-20.932), which holds that a gift of partnership shares must be valued at the date of death, even if the company has been dissolved. Another example: the judgment of 14 January 2009 (No. 07-21.505) specifies that the increase in value due to the activity of the donee is taken into account in the valuation.

The trend is therefore towards a valuation at the date of death, taking into account the activity of the donees. However, if the increase in value results from an unrelated cause (e.g., speculative bubble), the judges could disregard it. In the future, it is possible that the Court will further clarify the criteria for distinguishing between increase in value linked to activity and increase in value due to market conditions.

Checklist before taking action

• Am I concerned by a gift of partnership shares? If so, check the date of the gift and the date of any death.
• Has the company changed its legal form? For example, an SA transformed into an SNC. If so, this transformation does not affect the obligation to bring the shares into the estate.
• Have the liabilities disappeared? If so, was it due to the activity of the donees or an external cause? This influences the value to be retained.
• Do I need an expert valuation? To avoid disputes, have the shares valued by a chartered accountant or statutory auditor.
• Should I consult a lawyer? In case of dispute or doubt, a consultation can clarify your rights and obligations.

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