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29 July 2013
Shareholders are increasingly resorting to legal action to protect their investments. They engage in such legal activism not only when they have suffered a loss directly, but also when the company in which they hold shares has suffered the loss.
However, shareholders' scope of action remains limited in the latter case. Shareholders must not interfere in the management of the company. Consequently, they are systematically refused the right to take direct action against third parties which have caused the company harm. Shareholders' only remedy is to take action against the company executives who fail to defend the company properly against third parties for the loss suffered by the company.
In this area, there is a tendency to extend the scope of corporate officers' liability towards shareholders which, in the absence of a direct right of action against third parties on behalf of the company, enables shareholders to exert considerable pressure on corporate officers to take action against third parties.
In a March 19 2013 ruling(1) the Commercial Division of the Supreme Court reiterated the strict conditions for corporate actions brought by shareholders in order to obtain damages for the company's loss (also known as an 'ut singuli' action). In this case, the action brought by the minority shareholders on behalf of the company against third parties was held to be inadmissible.
The Supreme Court reaffirmed the principle that an ut singuli action does not allow shareholders to be substituted for the company's corporate officers in order to enable the company to bring a claim against third parties. The shareholders have no right to take legal action against third parties in the name of the company – only corporate officers can bring such an action. Therefore, in accordance with Article L225-252 of the Commercial Code, an ut singuli action consists of the shareholders holding the company's corporate officers to account. Claims are time barred three years after the event giving rise to the loss in question or, if such event was concealed, after the time it was revealed.
In the case at hand, the shareholders filed an unsuccessful claim against third parties on behalf of the company following inaction by the company's executives. Nevertheless, an ut singuli action could have been brought had the corporate officers engaged in wrongdoing. Pursuant to Article L225-251 of the code, there is wrongdoing if a corporate officer breaches a legislative or regulatory provision or the company's bylaws, or engages in mismanagement by either act or omission.
Therefore, shareholders have a right of action against corporate officers who have failed to take adequate measures to seek redress for the company for the actions of third parties. In a sense, shareholders have an indirect right of action against third parties in that the threat of legal action by shareholders could incite company executives to bring legal action against third parties in the name of the company.
Article L225-252 of the Commercial Code, which deals with shareholder actions, is interpreted strictly by the courts. They allow shareholders to make claims against corporate officers only for the purpose of obtaining redress for loss suffered by the company (ut singuli actions) or for their own loss (individual actions).
However, the liability of corporate officers also covers former corporate officers and directors, their accomplices and those who receive the proceeds of any offences committed by such executives, as upheld in a January 28 2004 ruling of the Criminal Division of the Supreme Court.(2)
Furthermore, in a January 17 2013 ruling(3) the Limoges Court of Appeal reinforced the liability of corporate officers by extending the scope of directors' liability in individual actions. This ruling came about in an action brought by shareholders for damages for their own individual losses, but can also be applied to corporate actions.
In this case a shareholder had claimed damages for a loss resulting from false financial information about the company that had been disclosed in the context of a share issue. Liability was attributed not only to the chairman and general manager (président-directeur général) who drafted the misleading statements, but also to the members of the board of directors who had failed to discuss the company's difficulties which had been brought to their attention. The wrongdoing, loss and causal link had been established. The appeal court found that the misleading information had been distributed with the aim of encouraging third parties to buy shares or shareholders to keep their shares in the company. Thus, board member directors have seen the scope of their liability extended to cases where they have abstained or omitted to act.
This ruling is in keeping with the March 30 2010 Crédit Martiniquais decision, which laid down the principle that:
"each member of the board of directors or supervisory board of a société anonyme commits an individual wrongful act if he or she, whether by positive action or by abstaining, takes part in an improper decision on the part of such body, unless it can be demonstrated that he or she acted as a prudent and diligent director, in particular by opposing such decision."
The Limoges Court of Appeal further extended the liability of board members – they must now take positive action when they encounter any issues, rather than merely voting against or abstaining on improper decisions submitted to the board.
For further information on this topic please contact Rhidian David or Cyrille Gaucher at Cabinet Hughes Hubbard & Reed by telephone (+33 1 44 05 80 00), fax (+33 1 44 05 80 54) or email (email@example.com or firstname.lastname@example.org).
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