France: Directors' Liability In French Corporations - What You Should Know Before Accepting A Position As CEO In France, Directly Or Through A Company

1. Who can be held liable?

In principle, the legally appointed management bodies can be held liable.

Thus, in a French « SAS » (French simplified stock corporation), the president and all general directors are concerned, while board members of a French « SA » (French stock corporation) have a different exposure to liability depending on their individual statutes.

In case of collegiate bodies, members are jointly and severally responsible toward third parties, but can be exempted internally, depending on their contribution to the error/misconduct.

Furthermore, French law extended the liability risk to de facto managers, such as mother companies, shareholders, banks, etc., which interfere constantly in essential functions of the management, granting them de facto the control of the company or that create a mixing up of assets.

You should also note that, while legal representatives of foreign companies appointed as president of a French company argued not to be exposed to sanctions themselves, not being directly CEO in France, or others who asserted to have accepted the mandate for free, the French High Court (« Cour de Cassation ») considered in two decisions dated 9 December 2020 and 5 May 2021 that not to receive any remuneration is not a criterion for liability, nor does an indirect mandate prevent from liability.

2. On what basis liability may be imposed?

a. Civil liability

• Legal basis

Art. L.225-251 and Art. L.225-257 of the French commercial Code provide for specific liability situations in a French « SA » and Art. L.227-8 in a French « SAS », while the French Civil Code (Art. 1240 and 1241) provides for general rules for liability in tort.

Anyway, the existence of a damage must be demonstrated as well as a clear causal link between the error/misconduct and the damage.

As a wrongful behaviour attracts liability, we would like to draw your attention on the following situations:

• Violation of legal and/or regulatory provisions, as for example irregularities in the accounts, non-convening of mandatory shareholders' meeting, etc.
• Misconduct in management

i.e., actions contrary to the interests of the company, regardless of their seriousness and whether they were intended or only known to the management.

However, with reference to Art. L.651-2 of the French Commercial Code, simple negligence cannot be subject to sanctions, but the question is whether the fact that a manager could not have ignored the error would be considered as simple negligence or automatically constitutes an intentional fault.

Recent French case law considered, on the one hand, that the impossibility to ignore the statutes of insolvency constitutes not systematically an error and, on the other hand, that any knowledge of a management mistake demonstrates obviously an intentional element and induces insofar the responsibility of the manager.

Thus, managers should in no way ignore problems in French companies they are aware of.

• Who can claim damages?

Either shareholders, if they can prove that they have suffered an individual damage, or the company ("action sociale"), action to be engaged by one or several legal representatives of the company to repair damages suffered by the company or, in very limited cases, by third parties.

The latter can only seek the liability of the management if they have committed prejudicial acts independent of their functions as CEO or general director in the company, which is rarely the case.

• What is the limitation period?

The entitlement to compensation is subject to a time bar of three years starting on the date of misconduct/error or, where applicable, the date of discovery.

b. Criminal liability

• Requirements

In the frame of their day-to-day management, chairmen and general directors could be held criminally liable if:

• They personally commit a criminal offense, such as misappropriation of corporate assets, false accounts, tax evasion, bribery, etc.
• If the agents or employers of the company break criminal rules within the scope of the company's business or organisation ("responsabilité pénale du chef d'entreprise"), in particular in the areas of labour, environmental or tax law, because intentional action is not required, i.e., negligence is sufficient.
• What is the limitation period?

The time bar depends on the criminal defence (1, 6 or 20 years in general).

c. Specific liability risks in distressed businesses

The management is exposed to greater risk in case of insolvency followed by a liquidation with significant debts.

Additionally, to civil law responsibility, the manager may be sued for lack of assets (art. L651-1 ff. French commercial Code), if his management errors contributed to such a lack and occurred during his mandate.

Consequently, once a director is aware of major difficulties and not able to improve them, he should withdraw as soon as possible from his duties instead of ignoring the situation. The limitation period for such lawsuit amounts to three years from the court decision of liquidation.

French law provides also for personal bankruptcy leading to professional sanctions as well as for criminal offense of bankruptcy with a fine of 75.000 € and an imprisonment of up to 5 years.

3. How to limit liability risks?

Clear division of tasks between the different management bodies would permit to prove that specific persons and not the whole management is liable for offenses.

It is also advisable to work with legally valid powers of attorney empowering for certain parts of their functions (a general power of attorney is not allowed under French law) specific persons with the right education and experience, while continuing to supervise them.

At last D&O insurances are a good way of protection for managers, but policies should be reviewed carefully since they very often contain warranty exclusion provisions and liability ceilings.

Consequently, you should think twice and examine the legal context before accepting a management mandate in a French company.

Alerion is a member of Ally Law, a global law firm network providing sophisticated legal services to major corporations with a sharp focus on value. Its 72 firms include nearly 3,000 lawyers in 100 business centers worldwide. For more information, visit www.ally-law.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.