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Who’s afraid of a seat on a French board?

Who’s afraid of a seat on a French board?

There was a time when you could feel flattered by being asked to joint the board of a big French company.Now it’s more like a flak-jacket that you need.

The ramifications of a French Supreme Court (cour de cassation) decision seem likely to result in an increase in the number of actions seeking to ascribe personal liability to board members of French sociétés anonymes.

In one case, although the directors concerned claimed that they were unaware of the misleading nature of the information published by the company, then argued that they were simply non-executive directors and pointed out that they had resigned from their board functions, they were nonetheless found liable to pay damages for having failed to take sufficient action and clearly demonstrate their disagreement with the decisions in question.

Indeed, their attention had been drawn to the fact that difficulties resulted for the company because it was lacking reliable management tools and their resignation occurred several months afterwards. In the meantime, in the court’s opinion, they should have taken action to discuss and address the difficulties of which they had been informed.

There now appears to be a presumption (1) of fault and (2) that the director in question was seeking to hide the fault, with the burden of proof to rebut these presumptions lying with the directors demonstrating that they acted as prudent and diligent board members, notably by unambiguously opposing the criticised decision.

In light of this particular decision, where provisions necessary to cover the risk of losses on doubtful loans had not been booked, it is now up to each director to demonstrate that he/she has acted prudently in the circumstances and has, when in disagreement with a proposed resolution, clearly materialised such objections, notably by having the reasons entered into the board minutes.

Directors of French companies need to bear this judicial trend in mind. In some circumstances, where items on the agenda are potentially litigious, they may be well advised to request the presence of a bailiff who as a neutral but authoritative third party can formally memorialise a director’s objections.

For a transcript of the Supreme Court decision see http://lgl.kn/f0aa1 and http://lgl.kn/493e6

Jocelyne Delsouiller

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