The shareholders in an SAS are free to stipulate in the articles of association whether the termination of the mandate of a director may be decided ad nutum or whether reasonable grounds for such termination are necessary. What about the conditions for termination of the mandate of a director if the SAS’s articles of association don’t stipulate anything? Under these circumstances, can a director whose mandate has been terminated obtain compensation if such termination is unjustified? Or can the termination only be ad nutum? Our Corporate team provides an overview of the commercial chamber of the French Court of Cassation’s judgement on 9 March 2022, which answers some of these questions.
The freedom to terminate the mandate of a company director depends on the legal structure of the company he manages.
A company director may face one of the following situations:
– ad nutum termination of his mandate (literally “on a nod of the head”), meaning freely, with no prior warning, details of the reasons, or compensation, as provided for by the law, for example, for the Chairman of the Board of Directors of a French SA (2) (article L. 225-47 of the French Code of Commerce);
– termination of his mandate on reasonable grounds, meaning grounds that provide the director with the possibility of receiving compensation if the mandate’s termination is unjustified, as provided for by the law, for example, for the Managing Director of a French SARL (3) (article L. 223-25 of the French Code of Commerce).
As regards companies with the SAS legal structure, the legislator has decided to allow company shareholders to decide what they include in their articles of association.
Shareholders are therefore free to stipulate in their SAS’s articles of association whether the termination of the director’s mandate can be decided ad nutum or whether there must be reasonable grounds for termination.
What about the conditions for the termination of a director’s mandate if nothing is stipulated in the SAS’s articles of association? In such a case, would a director whose mandate has been terminated be able to claim compensation if such termination was considered unjustified? Or could such termination be ad nutum?
The commercial chamber of the Court of Cassation’s judgement on 9 March 2022 provides answers to some of these questions.
In this case, the Managing Director of a French SAS whose mandate had been terminated by the company’s shareholders requested the payment of compensation on the grounds that his termination was unjustified and was led in a ruthless and distressing manner. This former director considered that, as there was no provision in the articles of association, the termination of his mandate could only take place on reasonable grounds.
As the Court of Appeal rejected his petition, he decided to lodge an appeal with the Court of Cassation.
The Court of Cassation confirmed the Court of Appeal’s decision. It recalled that the articles of association freely establish the conditions for the termination of the mandate of a director of an SAS and stated that when the articles of association do not expressly make termination subject to the existence of reasonable grounds, the termination is ad nutum. The director’s application for compensation for the termination of his mandate without cause was therefore to be rejected.
Even though this case concerned the termination of the mandate of a Managing Director of an SAS, the solution retained should also be applied to the termination of the mandate of a Chairman or Assistant Managing Director of an SAS.
Once again, this judgement illustrates the particular attention that must be paid to the formulation of an SAS’s articles of association. As an SAS offers its shareholders greater freedom and flexibility (as the binding legal rules are limited), the formulation of the articles of association must be strict in order to avoid the absence of conditions or inconsistencies that can lead to practical difficulties or surprises for the company’s shareholders.
(1) Société par actions simplifiée: simplified joint-stock company.
(2) Société anonyme: public limited company.
(3) Société à responsabilité limitée: limited liability company.
