Clarification of corporate officers’ duty of loyalty towards minority shareholders

In an April 12, 2016 judgment, the commercial division of the Court of Cassation clarified the scope of the duty of loyalty applicable to corporate officers vis-à-vis minority shareholders in the context of a share transfer.

In this regard, corporate officers and managers are required to provide certain information in relation to the company that they manage to any shareholders or members of said company who intend to sell any of their shares or stock. The information to be disclosed includes any existing negotiations aimed at a subsequent resale of those shares to third parties, provided that such information is likely to have an impact on the seller’s intent to complete the initial share transfer.

In an April 13, 2016 judgment quashing a Nancy Court of Appeal judgment, the Court of Cassation clarified (and limited) the scope of the duty of loyalty applicable to corporate officers under those circumstances. The Supreme Court ruled that, while an officer had to “reveal to the shareholders any information likely to influence their decision […] [the duty of loyalty] did not require the officer to carry out in-depth investigations to uncover any fact that they ignore”. The duty to inform thus solely covers information that the officer personally possesses. It neither requires the officer to carry out investigations likely to enlighten the transferor nor to provide them with any public information (such as information relating to the market).

In this instance, the shareholders of a company that managed a medical clinic had sold their shares to members of said company’s supervisory board. A few months later, the whole share capital of the company was sold to a third party in consideration of a price per share higher than the price paid by the supervisory board members to the minority shareholders. Consequently, the minority shareholders sued the officers for breach of their duty of loyalty, alleging in particular that:

• They concealed the existence of negotiations aimed at the sale of the entirety of the share capital of the company on the basis of a valuation significantly higher than the one used in the original sale;
• They concealed the interest of an investment fund which “had completed numerous acquisitions in the country and the region and which had clearly announced its willingness to carry out new acquisitions; a fact that the officers and the members of the supervisory board could not ignore”; and
• They failed to “inform all shareholders, albeit minority shareholders, about these transactions and the likelihood that such investment funds would be interested in the short or long term in an acquisition of the company”.

The Court of Appeal granted their claim. However, the Court of Cassation reversed the Court of Appeal’s decision and clarified the limits to the officers’ duty of information. It remanded the case for further proceedings.

May 1, 2016, Corporate Law, Mergers and Acquisitions