Vol 14 (2017) - Issue 2

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The Limits on Shareholders’ Freedom to Exercise their Right to Terminate the Managing Director in French Companies

Dissatisfied shareholders, when they consider replacing the management team, should ensure that proper process is complied with. This is particularly true, in underperforming companies, where turnaround plans often require speedy action, including termination of the Managing Director. An unlawful termination and related subsequent litigation may add unnecessary trauma to the company’s dire financial situation, on top of the many other issues it needs to address. The author reviews recent decisions by the Commercial Chamber of the French Supreme Court in relation to the duty of loyalty owed by the Managing Director to the company and vice versa and gives various examples of the sanctions and amount of damages awarded.

A. The duty of loyalty, a two way concept
a) The Managing Director ('MD') of a French commercial company has a duty of loyalty towards the company and its shareholders. This duty has regularly been recognised by French courts.
For years, reported case law in relation to the duty of loyalty owed by the MD to the shareholders was essentially linked to situations where MDs had concealed their intention to sell their shareholdings in the company and the company’s potential value, in order to purchase the shares held by other shareholders and thereafter to resell a controlling interest with a profit.
More recently the Versailles Court of Appeal ruled that a MD cannot conceal from the board of directors and shareholders that he had initiated negotiations in relation to a proposed transaction affecting the shareholding of the company, even where the company was in distress. The Versailles Court took the view that the MD’s behaviour was disloyal and contrary to the company’s and main shareholder’s common interest. This decision was upheld by the French Supreme Court. In the subject case, the MD’s negotiations with other investors and bankers apparently contributed to spreading contradictory rumours in the market at a time where the MD knew that the main shareholder was negotiating the company’s debt refinancing and was not planning to dispose of his shares in the company. As a consequence, the MD’s appointment was terminated and he was deprived of his contractual termination package provided in a 'written mandate', i.e a separate agreement, because of the breach of his duty of loyalty and his gross misconduct prohibiting him from further carrying on his management position as per the separate agreement.

b) The company also has a duty of loyalty towards its MD. Compliance by the company with this duty generally comes to the fore when termination of the MD’s position has been decided. Under French law, termination of a MD’s position will be deemed in breach of the company’s duty of loyalty and unlawful, where the termination is decided 'brutally', i.e with no prior notice and information as to the reasons for the termination before this issue is put to a vote by the relevant corporate body.