Dismissal of a director: conditions, procedure, compensation and remedies

Removing a director may seem straightforward: often, a vote at a general meeting is sufficient. However, between the principle of free removal, the requirement for just cause in certain cases, and the risk of unfair or vexatious removal, there are numerous pitfalls.

Whether you are a partner, shareholder or director, you will find here the conditions, procedure, consequences and remedies. You will thus learn how to ensure a decision is sound or defend your rights.

What is the removal of a director?

Dismissal brings an executive’s term of office to an end before its scheduled expiry. It is ordered by the partners, a corporate body or a court. In principle, it does not result in the loss of partner status.

Goldwin, a law firm specialising incompany law in Paris, advises directors and shareholders on this matter. Dismissal often arises from adispute between shareholders.

What is the difference between dismissal, resignation, non-renewal and termination?

Dismissal is initiated by the company or a court, and the director is subject to it. Resignation is initiated by the director. Non-renewal allows the term of office to run its course. Finally, dismissal terminates an employment contract.

Which directors can be dismissed?

All directors may be dismissed, regardless of the company’s legal form. Only the competent body and the procedure differ.

The three procedures for removal: ad nutum, for just cause, judicial

French law recognises three mechanisms. Each follows its own logic.

What does ‘ad nutum’ dismissal mean?

Dismissal ad nutum refers to the power to dismiss a director or authorised representative at any time, without notice and without justification.

This immediate dismissal may be carried out at the company’s discretion, without compensation for the person concerned.
However, its exercise is subject to certain restrictions: if it is accompanied by an intention to cause harm or is vexatious in nature, the person dismissed may claim damages.

When is just cause required to dismiss a director?

Certain legislation or articles of association require just cause. Without it, the dismissal remains valid, but the director may be entitled to damages.
This provision does not block the decision; it determines the cost. The company dismisses the director and then bears the financial risk if the court rejects the grounds.

Some specific examples of just cause:

The judge dismisses vague allegations.

• A mere difference of strategic vision, without any objective breach.
• A mere desire to change the governance structure: the Court of Cassation requires that the company’s best interests be verified
• Allegations that are undated or impossible to prove.

Judicial removal of the managing director: who can apply to the court and on what legitimate grounds?

Any shareholder, even a minority shareholder, may apply to the court for the dismissal of the manager of a limited liability company (SARL) on legitimate grounds.
This remedy resolves situations where the majority protects the manager, particularly in the case of a majority manager who votes against their own dismissal.

• Who brings the matter before the court: any shareholder, even a minority shareholder.
• What is the outcome: the court orders the removal and may appoint an interim director.

To establish a legitimate ground, the judges verify that the reason is objective, verifiable, and that it jeopardises the company’s interests or its proper functioning (misconduct is not essential).

This includes, in particular, mismanagement, a breach of the law or the articles of association, or a conflict of interest, provided that the complaint relates to the manager’s professional conduct.
Finally, the court checks that the manager was given the opportunity to explain themselves before the decision was made.

Conditions for removal depending on the company’s legal form

The rules governing dismissal vary depending on the company’s legal form: each type of company’s articles of association specify its own competent body, its own majority requirement, and, in some cases, the requirement for just cause.

Dismissal of the manager of a limited liability company (SARL)

The removal of the manager of an SARL is decided at a general meeting, following prior inclusion on the agenda, by shareholders representing more than half of the shares (Article L223-25 of the Commercial Code). In the absence of this majority, a second vote may be held, in which a decision is taken by a majority of the votes cast.
The manager retains their right to vote, including on their own dismissal, which complicates the removal of a manager who holds a majority stake.

Dismissal of the manager of an SNC (Société en Nom Collectif)

The SNC is governed by Article L221-12 of the Commercial Code.

Dismissal of the chairman and directors of an SAS and an SASU

In an SAS (Simplified Joint-Stock Company), the law does not provide for this legal regime: the articles of association themselves set out the conditions for removal (Article L227-5):

• who may decide on removal: the shareholders, a committee or another body;
• by what majority;
• with or without just cause, and with or without notice.

If the articles of association are silent on the matter, dismissal is, in principle, unrestricted.

If they require just cause, the shareholders must comply with this: a vote, even a unanimous one, cannot override this provision in the articles of association; the articles must first be amended.

And as with a public limited company (SA), the freedom to draw up the articles of association never exempts the company from the right to be heard.

In a single-member simplified joint-stock company (SASU), the sole shareholder decides alone, but remains bound by the same articles of association.

Dismissal of directors of a public limited company (CEO, Managing Director, Deputy Managing Director, Executive Board)

The law distinguishes between each role.

Dismissal of an association’s officer (chairperson, treasurer, etc.)

The 1901 Act does not provide for a specific procedure for removal. The articles of association and internal rules take precedence. Unless otherwise stipulated, removal is, in principle, unrestricted.

Who may remove an officer? In principle, the body that elected the officer. The general meeting removes members of the board of directors, and the board of directors removes members of the executive committee (chairperson, treasurer, secretary) if it has elected them.

If the articles of association are silent on this matter, case law generally allows for unrestricted removal without cause (ad nutum), but it requires thatthe rights of the defence be respected where the measure is of a punitive nature: notification of the allegations, the opportunity to explain oneself, and a hearing at which both sides may be heard. It is therefore best to ensure this is provided for in all cases.

How do you remove a director? A step-by-step guide

Step 1: check the articles of association, the shareholders’ agreement and the nature of the directorship

Before any vote, review the articles of association. They specify who may remove the director, by what majority and on what grounds. They may also stipulate a notice period.

Next, consult the shareholders’ agreement. It often sets out additional rules, and ignoring them may render those who decide on the removal liable.

Finally, check whether the director holds their directorship alongside an employment contract.

Also check the clauses relating to compensation, non-competition, exit and the buy-back of shares.

Finally, consider a negotiated exit. Mediation and the resolution of disputes between partners can sometimes avoid a court case.

Step 2: Convene the general meeting or organise a consultation

• Convene all the partners in accordance with the procedures laid down by law and the articles of association.
• Include an explicit item on the agenda; for example, ‘Dismissal of Mr/Ms X from their position as managing director’.
• Set out the grounds for the dismissal in the notice of meeting.

Step 3: Vote on the removal and allow the director to be heard

The director must be informed of the grounds and given the opportunity to present their observations before the decision is taken. Otherwise, they are entitled to damages, even if there are valid grounds.

The vote is then taken in accordance with the statutory or articles-of-association majority.

Step 4: draw up the minutes and notify the decision

The minutes shall record:

• the proper convening of the members;
• the statement of reasons, at least in summary form;
• the result of the vote (in favour, against, abstentions);
• the decision and, where applicable, the appointment of a successor.

Keep to the facts. Any offensive remarks in the minutes may form the basis for a claim for vexatious dismissal.

Then notify the director of the decision.

Step 5: Complete the formalities (registration with the court registry, Kbis extract, replacement of the director)

Publish a notice in a legal gazette and declare the change via the one-stop shop within one month.

Publication in the Bodacc (Official Bulletin of Civil and Commercial Announcements) makes the change enforceable against third parties. Without it, the company remains bound by the former director’s acts towards third parties acting in good faith.

The declaration file must include:

• Minutes of the decision.
• Certificate of publication of the statutory notice.
• Identity documents and a declaration of no criminal convictions for the successor.

A poorly prepared removal from office can prove costly.

What are the consequences of dismissal for the director?

Dismissal bringsan end to the director’sterm of office, powers and remuneration. In principle, it does not affect any employment contract they may have or their shareholdings.

Immediate effects.
Dismissal brings the term of office toan end as soon as the decision is made, unless otherwise stipulated.
The director loses their powers of representation and management. Their remuneration as a director ceases, unless there is a severance pay clause.

Employment contract.
A separate employment contract generally remains in force. The removal from office does not automatically terminate it.
Article L225-61 expressly provides for this in the case of the management board. The company must therefore comply with the rules governing dismissal.

Unemployment.
According to Unédic, a corporate office alone does not entitle the holder to unemployment benefit.
To be eligible, the director must also have a recognised employment contract, separate from the directorship: actual work performed, specific remuneration and a relationship of subordination.

Shares and post-directorship clauses.
In principle, a dismissed director retains their status as a shareholder.
Shareholder agreements often provide for a compulsory buy-back of shares, which is lawful in principle.
A non-competition clause remains valid if it is limited in time, geographical scope and subject matter.

Unfair dismissal and vexatious dismissal: where are the boundaries?

The principle of free dismissal has its limits.

Unfair dismissal: definition and criteria

A revocation is unfair when the company breaches its duty of loyalty. It is abrupt, without the opportunity to be heard, or undertaken with the intention of causing harm.

• The reasons were not communicated.
• The director was not given the opportunity to present their case.
• The successor was appointed before the vote.
• The timing was chosen to cause harm, without any objective reason.

Example:
The majority shareholder of Company X convenes a meeting for the following day, without specifying the agenda, and already presents a new manager – appointed the day before – to the ousted director.

Vexatious dismissal: insulting or brutal circumstances

A dismissal is vexatious when it damages the director’s reputation or good standing.
The circumstances are just as important as the decision itself.
Examples include a brutal public announcement or insulting remarks recorded in the minutes.

If a fault on the part of the company is proven (public humiliation, defamatory accusations), the director may be entitled to damages.

What damages and compensation are available in the event of wrongful dismissal?

The director may be entitled to compensation for financial loss, personal distress and damage to their reputation. The judge determines the amount, as there is no statutory scale.

The various types of damages for which compensation may be awarded

• Financial loss: loss of remuneration and benefits associated with the position.
• Non-pecuniary loss: damage to dignity at the time of dismissal.
• Damage to reputation: public announcement, insulting remarks.
• Loss of opportunity: for example, expected variable remuneration.

Can a director dismissed without just cause be entitled to compensation?

Yes, in the case of the manager of a limited liability company (SARL), the managing director and the executive board of a public limited company (SA). This is not the case for the chairman of a public limited company (SA), unless there has been misconduct. In a simplified joint-stock company (SAS), the articles of association determine the matter.

How is severance pay calculated?

There is no statutory scale.
The court determines the damages based on the actual loss suffered. It takes into account the remuneration, the size of the company, any fault on the part of the director and the remaining term of office.

The loss should not be confused with the remuneration due until the end of the term. No reliable figure can be given without the documents in the case file.

What remedies are available in the event of wrongful dismissal?

The dismissed director may claim damages or, more rarely, seek to have the decision set aside, butmust do so within the limitation period.

Bringing a claim for damages before the competent court

An unfair dismissal is not set aside: it remains valid. The director loses their post, but may be entitled to compensation.

There are two grounds for this:

• Article L223-25 of the Commercial Code provides for compensation where there is no just cause for the dismissal of the manager of a limited liability company (SARL).
• Article 1240 of the Civil Code provides for compensation in cases of wrongful conduct: brutality, disloyalty or vexatious remarks. The latter applies even if valid grounds exist.

The director must therefore quantify their financial loss and non-pecuniary loss separately.

For a commercial company, the Commercial Court has jurisdiction. The claim is initially brought against the company. Bringing a claim against a partner requires proof of their personal fault.

The general limitation period is five years. It runs from the day on which the director became aware of the facts.

Challenging the validity of the decision (nullity)

Nullity remains an exceptional remedy: the usual sanction is a financial penalty, not the annulment of the dismissal. It may be ordered in the event of an irregular notice of meeting or failure to comply with the required majority.

In an SAS, breaching a clause in the articles of association is not sufficient in itself: it must also be demonstrated that, without this breach, the vote could have led to a different outcome. For example, if the articles of association stipulate a fifteen-day notice period and only three days’ notice was given, the dismissal is set aside only if the director can demonstrate that this insufficient notice period prevented them from persuading enough shareholders to ensure the vote failed.

Compiling your evidence file

The court will award compensation based on what the director can prove. Gather evidence covering four key areas:

• the rules: articles of association and shareholders’ agreement;
• the procedure: notice of meeting, minutes and records of comments made;
• the circumstances: emails, messages and witness statements regarding remarks made and information provided to third parties;
• the loss: payslips, benefits associated with the directorship and income received since the dismissal.

Why seek legal advice?

The rules governing dismissal vary depending on the company’s legal form, its articles of association and the circumstances. A solicitor will identify the applicable rules, ensure the procedure is carried out correctly and defend your interests in the event of a dispute.

From the partner’s perspective, they review the articles of association and the partnership agreement, prepare the notice of meeting and the minutes, and verify the grounds for dismissal before the vote.

From the director’s perspective, they verify the validity of the dismissal, quantify the loss and negotiate compensation or an amicable settlement. If negotiations fail, they will initiate legal proceedings.

A business lawyer also examines related matters: employment contracts, non-competition and share buy-back clauses, and the liability of those involved.

Their role is not limited to litigation: they are involved at an early stage, from the drafting of the partnership agreement or the director’s employment contract, to anticipate the terms of departure, non-competition or compensation clauses, and minimise the risk of litigation at the time of dismissal.

Are you preparing to dismiss a director, or are you the target of such a dismissal?
Goldwin Avocats, based in Paris’s 16th arrondissement, will assess your situation and outline your options.
Please get in touch for an initial consultation.