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France: The Versailles Court of Appeal Fine-tunes the Duty of Loyalty Owed by Managing Directors
Anker Sørensen, Partner, Reed Smith LLP, Paris, FranceA Managing Director of a French Société Anonyme has a statutory duty of loyalty towards the shareholders of such company. This principle was set in stone by a ruling of the French Supreme Court (Cour de cassation) in 1996. It has further been ruled that under this duty, a Managing Director ('MD') must inform the board of directors and shareholders of any ongoing negotiations in relation to a proposed transaction affecting the shareholding of a company, even in the situation where such a company is in distress. Non-compliance with this duty may lead to the termination of a MD's appointment and exclusion of his right to contractual compensation.
A. Factual background
In early 2010, a major car-rental company (the 'Company') hired an experienced and senior MD with a view to turning around the Company. The latter had not been performing as expected and required a substantial cash injection and debt restructuring. Throughout the duration of his appointment the MD, who was also appointed to the board, signed various agreements with the Company, including:
i) a 'contrat de mandat' (a written mandate) whereby he committed to use his best efforts to develop the Company's business, to serve and act with loyalty, care and good judgment;
ii) a share purchase plan agreement ('plan d'actionnariat des dirigeants'); and
iii) put and call option agreements with the main shareholder of the Company.
In January 2012, the main shareholder of the Company, a major French Private Equity firm (the 'Main Shareholder') informed the Company's management via one of its representatives on the board of directors, that it had started negotiations in respect of a significant debt refinancing program, and that it was therefore not considering a sale of its shareholding in the Company.
Nevertheless, the MD initiated conversations with one of the Main Shareholder's key competitors and started preliminary discussions with various bankers and lawyers in relation to a change of control of the Company. He also publicly mentioned to several members of the management team that he did not believe in the Company's strategy and the viability of its business model.
This apparently contributed to the spreading of negative and contradictory rumours in the market, at a time where the Main Shareholder was negotiating the debt refinancing. As a consequence, the MD's appointment was terminated in February 2012 for breach of his duty of loyalty towards the Main Shareholder. The Company also took the view that the MD was not entitled to benefit from the agreed termination package provided in the mandate because he had committed a 'faute grave' (gross misconduct). Under the mandate, the faute grave was defined as a breach of a contractual obligation resulting in the MD being prohibited from further carrying out his functions in the Company ('une faute grave rendant impossible son maintien dans les fonctions de directeur général').
B. Concept of duty of loyalty The duty of loyalty owed by the MD to the shareholders of a company was established by the French Supreme Court on 27 February 1996 and has since been regularly upheld by French courts. In most reported cases, the MD has been deemed in breach of his duty of loyalty when concealing his intentions to his fellow shareholders and the potential value of the company's shares, in order to purchase them from the latter and later reselling a controlling interest in the company with a profit.
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