Reed Smith Client Alert

Authors: Andrew Tetley

Type: Client Alerts

Summary

The French Court of cassation recently decided that it is a prerequisite that board members of public companies (“sociétés anonymes”) be informed of the reasons for their revocation, prior to this issue being put to a vote.

From now on, a public company which fails to inform a board member of the reasons for his/her revocation prior to the vote, will be at risk of being sued for wrongful revocation and of having to pay compensation.

This is an important case law reversal, as providing reasons for revocation was not a requirement until this decision.

French Court of Cassation, Commercial Chamber, 14 May 2013 - Sté Asterop c/ Mr. G

Facts

The claimant was a board member, chairman of the board (“Président du Conseil d’Administration”) and also the general manager (“Directeur Général”) of a French public company. During the annual ordinary shareholders’ meeting for which the agenda made no mention of a possible revocation, his revocation was decided - apparently with a large majority - by the main shareholders. He was granted several suspensions in the meeting, which he chaired, in order to allow him to contact his advisers and to draw up a two-page communiqué setting out his comments on the intended revocation.

The claimant brought an action in damages against: i) the company for wrongful revocation, arguing that the adversarial principle had not been respected and that his revocation was frivolous and vexatious (“entourée de circonstances à caractère vexatoire”), and ii) the majority shareholders for breach of a shareholders’ agreement to which he was a party and which required the prior approval of the board, with specific majority conditions, for the appointment of key personnel.

Decision of the Court of Appeal

The claimant’s plea for damages was rejected by the Court of Appeal on all the grounds advanced in his appeal. In particular, the Court of Appeal noted that the meeting was suspended several times, allowing the claimant to contact relevant third parties and to draft a communiqué which was attached to the minutes of the meeting. The Court added that the adversarial principle required only that the claimant be able to make written and oral representations before the shareholders’ vote, and that such was the case in the present decision. The Court also indicated that the shareholders’ right, when convened at an ordinary meeting, to revoke a board member cannot be limited by an agreement, even be that a shareholders’ agreement. The claimant appealed against this decision to the Court of Cassation.

Decision of the Court of Cassation

The French Court of Cassation allowed the appeal in part, ruling that the Court of Appeal failed to determine whether the claimant “had knowledge of the reasons for his revocation before the vote”. The Court dismissed the appeal in regards to the breach of the shareholders’ agreement argument because it considered and ruled that any provision, which in effect limits the right of the shareholders’ meeting to revoke a board member at any time, is unlawful.

Discussion and recommendations

Unlike the “Directeur Général” in public companies and the “Gérant” in French “sociétés à responsabilité limitée”, for example, whose revocation can be decided at any time by the board or shareholders, but requires just reasons, board members in French “sociétés anonymes” may be revoked by an ordinary shareholders’ meeting at any time without notice, without just reasons and without indemnities. This rule is known as "révocation ad nutum". As an exception to this rule, the revocation is wrongful, thereby giving rise to a claim in damages, where the revocation occurs in circumstances which undermine the affected member’s reputation or honour, or where the adversarial principle [due process], i.e. the right to be heard and make appropriate representations before and during the shareholders’ vote, is not respected.

A right to revoke without giving just reasons to the affected board member does not mean a right to revoke without giving any reason whatsoever. However, until this decision by the Court of Cassation, French courts (including the Court of Cassation) had for years ruled that the shareholders’ meeting had no duty to provide any reasons whatsoever to a board member prior to deciding on his or her revocation. The importance of this recent decision is highlighted by the fact that it was expressly based on article 1382 of the French Civil Code, a key article in the law of tort.

Shareholders generally wish to see a proportionate return on their investments in companies. Particularly in times of recession, where performance is of the essence, dissatisfied shareholders may be quicker to consider replacing board members and directors to improve profitability. In order to avoid creating another crisis scenario, such as litigation with revoked management, shareholders must take care to ensure proper process is adhered to when they decide on the revocation of board members and directors in French companies.

Client Alert 13-248