In a recent ruling, the Commercial Division of the French Court of Cassation reaffirmed the obligation of loyalty incumbent upon company executives during the resignation process from their salaried positions.
Case Overview
The president of the management board (Directoire) of a Société Anonyme (SA), who was also an employee, failed to inform the company’s governing bodies about the possibility for the SA to waive a non-compete clause included in his employment contract. This omission was deemed a breach of his duty of loyalty as an executive. The case in question is Cass. com. 20-3-2024 no. 23-14.824 F-D, T. v. Sté Le Grenier.
Background
The employment contract of an SA employee included a non-compete clause, accompanied by compensatory indemnity, which the company could waive by notifying the employee within fifteen days of the termination of the employment contract. The employee, later appointed as president of the management board, resigned from both his salaried and executive positions. Following this, the SA was ordered by a labor court to pay the compensatory indemnity of €34,000. The company then pursued the former executive in commercial court, alleging a breach of loyalty for failing to inform the company about its right to waive the non-compete clause.
Legal Findings
The court determined that by not informing the company’s governing bodies of the SA’s ability to waive the non-compete clause, the executive breached his duty of loyalty at the time of his resignation from his salaried position. The court highlighted the established jurisprudence that mandates a duty of loyalty from company executives, both towards the company and its shareholders. This duty includes the obligation to inform shareholders of any negotiations that may affect their decision to sell their shares or to disclose any personal acquisitions of property used by the company.
Extension of Loyalty Duty
This ruling extends the duty of loyalty of an executive to include the company’s governance bodies, particularly in dualistic corporate structures. The SA in question had a management board and a supervisory board. The president of the management board submitted his resignation to the president of the supervisory board without informing him or the other management board members about the company’s option to waive the non-compete clause. The distinction between management and oversight roles in such a structure necessitates clear and complete communication to the appropriate governing body.
Conclusion
This case underscores the critical importance of loyalty and transparent communication from executives towards all relevant governing bodies within a company, especially during transitional periods like resignation. It highlights the need for executives to ensure they are fully informing the appropriate bodies about any relevant contractual provisions and company options, thus maintaining trust and preventing potential legal disputes.
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Information by ALARIS AVOCATS, English speaking lawyers in France (Paris)