Legal guide for company directors and CEOs in France

In France, ESG reporting became mandatory for listed companies in 2001, with requirements – particularly with regard to climate change – and scope broadened in 2010 and then 2015. Extra-financial reporting was then transformed into the Extra-Financial Performance Statement (EFPS) to comply with the 2014 European directive on transparency and publication of non-financial information (NFRD).

Company managers are in charge of implementing these policies in order to comply with the legal obligations.

All companies, regardless of their size, status or sector of activity, can implement a corporate social responsibility (CSR) approach.

Managers are in charge of reporting and their duties will vary depending on the size of the company and its related obligations.

Since 2019, all French companies, without exception, must “take into consideration” environmental and social issues in the management of their activities. This establishes a minimum legal basis for integrating these CSR dimensions into the conduct of economic affairs. Voluntary companies can adopt the status of a company with a mission by including a raison d'être with social and environmental objectives in their articles of association. However, this requires monitoring by a specific committee, controlled by a third party.

Larger companies and listed companies are increasingly subject to specific regulations. For the past 15 years, they have been required to publish information on their environmental and social impacts (ESG reporting or EFPS). Since 2017, large companies must also put in place monitoring measures that prevent environmental (e.g. pollution), social (e.g. human rights violations) and governance (e.g. corruption) risks in their production units, subsidiaries and at their suppliers.

As suppliers or subcontractors of large companies, medium-sized companies are also increasingly encouraged to adopt such an approach. This can be seen in particular in the calls for tenders or purchasing policies of major client groups, which are increasingly demanding details of their suppliers’ environmental, social and governance measures. More and more companies are taking this into account and selecting the most virtuous.

Managers are in charge of the ESG reporting, along the following axes:

Extra-Financial Performance Statement (EFPS)

The EFPS is the result of the transcription of the above-mentioned European Directive and replaced the previous CSR reporting system. Its aim is to provide a strategic steering tool for the company, both concise and accessible, focused on essential information.

Scope

Large companies – mainly Sociétés Anonymes or SAs – when turnover and workforce exceed the following thresholds:

• EUR 20 million balance sheet or EUR 40 million turnover and 500 employees for listed companies
• EUR 100 million balance sheet or EUR 100 million turnover and 500 employees for non-listed companies.

Content

• social
• environmental
• anti-corruption
• human rights.

The list of elements concerned by the declaration includes, in particular, the measures taken by companies to adapt to the consequences of climate change, the reduction targets voluntarily set in the medium and long term to reduce greenhouse gas emissions and the means implemented to this end, as well as actions aimed at fighting discrimination and promoting diversity. The EFPS shall be included in the management report and shall also be published on the company’s website.

Vigilance plan

Vigilance plans were introduced in France in 2017. Large companies are obliged to publish and act in order to avoid or reduce the human rights and environmental impacts of their activities and those of their entire supply chain. The vigilance plan must be published in the company’s universal registration document.

Vigilance plans are particularly scrutinised by NGOs, which are now using this legal mechanism to denounce companies’ failings before the courts.

Scope

SAs employing, at the close of 2 consecutive financial years, at least 5,000 employees in France in their own or in their direct or indirect subsidiaries, or 10,000 employees worldwide.

Content

• risk map
• regular assessment procedures for the value chain
• appropriate actions to mitigate risks or prevent serious harm
• a mechanism for alerting and collecting reports
• a system for monitoring the measures implemented and evaluating their effectiveness.

Carbon/ESG footprint

The carbon/ESG footprint is intended to identify the potential for reducing greenhouse gas emissions. It must be updated every 4 years.

Scope

Companies with more than 500 employees (250 in the French overseas departments).

It must cover Scope 1, i.e. direct emissions directly linked to the manufacture of the product, and Scope 2, i.e. indirect emissions associated with energy. It is also strongly recommended that Scope 3 be covered, i.e. upstream emissions (raw material purchases, freight, employee travel, etc.) and downstream emissions (waste, product or service use, etc.). This scope generally represents 75% of a company’s emissions.

During the post-COVID-19 recovery plan, the Minister for the Economy stated that he was in favour of a simplified greenhouse gas assessment requirement for companies with more than 50 employees by 31 December 2023 (1 year earlier for companies with more than 250 employees).

Professional Equality Index

The Professional Equality Index aims to put an end to professional inequalities between sexes by making it possible to uncover and understand any pay gaps at work in certain companies. Despite the principle of “equal pay for equal work” enshrined in law, women’s pay remains on average 9% lower than men’s.

Scope

All companies with more than 50 employees must now publish this index, based on 100 points, and transmit it to the labour administration. If a company does not comply, a financial penalty of up to 1% of its wage bill may be imposed.

Content

• pay gap between sexes
• difference in the distribution of individual pay rises
• number of female employees who receive a rise after returning from maternity leave
• sex parity among the 10 highest paid employees
• distribution gap in promotions (only in companies with more than 250 employees)

Anti-corruption plan

The aim of an anti-corruption plan is to facilitate the detection of certain offences such as influence peddling and corruption.

Scope

Companies with more than 500 employees, or which belong to a group with more than 500 employees; and also those with a turnover (or consolidated turnover) of more than EUR 100 million. In addition to companies, managers are also made responsible under this new scheme.

Content

• code of conduct defining and illustrating the various behaviours to be avoided in order to prevent acts of corruption or influence peddling
• risk map that identifies, analyses and prioritises the company’s internal and external exposure risks according to its activity and geographical areas of exposure
• procedure for assessing the situation of customers, first-tier suppliers and intermediaries with regard to risk mapping
• internal or external accounting control procedures designed to ensure that accounting elements (books, registers and accounts) are not used to conceal corruption or influence peddling
• training for managers and employees most at risk, as well as an internal alert system
• a disciplinary system to punish employees for violations of the code of conduct
• an internal control and evaluation system for the measures implemented.

In a “société anonyme” or SA, a company is legally required to appoint a board of directors (“Conseil d’administration”) with at least one managing director (“Directeur general”) and, if any, one or several deputy managing directors (“Directeur general délégué”) or a supervisory board (“Conseil de surveillance”) with a management board (“Directoire”). Directors can be legal persons (see below) but managing directors and deputies must be natural persons.

In a “société par actions simplifiée” or SAS, shareholders have the power to freely determine the organisation of the management bodies in the articles of association. However, shareholders must at least appoint a president (“Président”) who represents the company in its relationships with third parties.

Certain restrictions exist regarding persons who are entitled to be appointed. In particular, persons who have been disqualified from acting as a director or manager, and persons without legal capacity to act (mentally impaired or non-emancipated minors), cannot be appointed.

Directors or managers do not have to hold qualifying shares. However, the articles of association may include such a requirement, except in state-owned companies. In listed companies, it is recommended that directors hold a significant number of shares, however.

The articles of association may also contain other requirements, for example a requirement for specific skills (confirmed by a diploma or professional qualification) or an age limitation.

A director or manager is not required to be a French national, nor must he/she be resident in France.

In a SA, a legal entity can be appointed as director. In this case, a permanent representative (“représentant permanent”) must be appointed to represent the legal entity on the board. This permanent representative must satisfy all the eligibility requirements which apply to directors. In a SAS, unless otherwise provided for in the articles of association, the managers and, in particular, the president may be legal persons. In this case, the managers of the legal person are subject to the same conditions as if they were president or manager in their own name.

The board of directors of a SA must comply with a certain degree of balance between women and men. In listed companies, and in large and medium-sized limited companies, the proportion of directors of each sex in boards of directors cannot be lower than 40%.

The articles of association may provide that some directors must be elected by employees, and SAs which employ more than 1,000 employees in France, or more than 5,000 employees worldwide including subsidiaries, must organise the election of one or two directors by employees of the company.

At the time of the company’s incorporation, the first directors or managers of an SAS are designated in the articles of association. 

Following the incorporation of a SA with a board of directors, the directors (other than directors elected by employees) are appointed at the ordinary general shareholders’ meeting.
If there is a vacancy on a board of directors (through death or resignation), the board of directors can temporarily fill such vacancy. Any such temporary appointment must be ratified at the next general shareholders’ meeting.

In a SA with a board of directors, all relevant information about proposed directors must be communicated or made available to shareholders prior to any general meeting convened in order to decide on their appointment. The articles of association set out the length of the term of office which may not exceed 6 years.

Directors are eligible for re-appointment unless the articles of association provide otherwise. Upon the expiry of a director’s term of office, the board of directors of a SA must convene a general meeting to consider the vacancy.

In SAs with a management board and a supervisory board, members of the latter are appointed in the same way as directors (see above), whereas members of the management board are appointed by the supervisory board.

The method of appointment of the president and other managers of a SAS is freely determined by the articles of association. A collective decision of shareholders is not necessarily required.

The appointment of a director or manager must be published in a legal notice bulletin, filed with the office of the commercial court (“greffe du tribunal de commerce”), registered with the trade and companies register and notified through the official bulletin of civil and commercial notices.

Details of directors’ and managers’ remuneration are set out in a report on the annual accounts, but only in a listed SA or in a SA that is controlled by a listed company.

In a SA with a board of directors, directors, managing directors and deputy managing directors may be dismissed at any time by the shareholders in ordinary general meetings (for directors) and by the board of directors (for managing and deputy managing directors). There is no need to provide reasons for the dismissal. However, such a decision must not be taken in insulting or hurtful circumstances, but only after a “proper hearing”. Otherwise the company could be liable to pay damages. Directors may resign at any time, without giving any reason. 

In SAs with a management board and a supervisory board, members of the latter are dismissed in the same way as directors (see above), whereas members of the management board are dismissed by the supervisory board.

Managers of a SAS are dismissed in accordance with the procedure set out in the articles of association. The articles of association will determine whether the shareholders, a group of shareholders or a supervising body may have the right to dismiss a manager. A dismissal decision does not have to be justified unless required by the articles of association. In any case, such a decision must be taken only after a “proper hearing” and not in insulting or hurtful circumstances. The articles of association may provide for the payment of damages in the event of a manager’s removal and set out the basis of the payment. Managers may resign at any time in accordance with the procedure set out in the articles of association (such as complying with notice provisions). 

However, in both a SA or SAS, when the resignation is reckless, the manager or director may be ordered to pay damages to repair any loss suffered by the company. 

The removal of a director or manager must be published in a legal notice bulletin, filed with the office of the commercial court, registered with the trade and companies register and notified through the official bulletin of civil and commercial notices. The removal does not put an end to the director’s or manager’s liability for the past. He/she can still be liable if he/she has breached directors’ or managers’ duties prior to his/her removal.

The board of directors of a SA determines the company’s strategy and supervises its implementation in accordance with the company’s corporate interest and taking into account the social and environmental impact of its business. It has all the powers to carry out the company’s corporate object, except for matters expressly reserved to the general shareholders’ meeting by law or by the articles of association. Practically, the managing director exercises most of these powers.

The board of directors of a SA carries out such inspections and verifications as it considers appropriate. The chairman or the managing director is required to send all documents and information needed to perform this task to each director. However, certain decisions are expressly reserved to the board: convening general meetings, drawing up the company’s accounts and annual management reports, co-appointing directors, and nominating and dismissing the chairman and managing director.

In SAs with a management board and a supervisory board, the latter plays a more limited role than a board of directors (e.g. they only control the accounts and do not draw them). The management board manages the company in the same capacity as a managing director.

The president of a SAS (and any manager empowered to do so by the articles of association), the managing director (and any deputy managing director) in a SA with a board of directors, the president of the management board (and any of its members empowered to do so by the supervisory board) in a SA with a management board and a supervisory board, represent the company in its relationships with third parties. They are called legal representatives. A legal representative has all the powers to fulfil the corporate object of the company in all circumstances and in the name of the company. However, the articles of association may limit the powers granted to the legal representative  in his/her relationships with the shareholders, board of directors or supervisory board. Such restrictions are not enforceable against third parties. In the absence of legal provisions, the powers of the other managers must be precisely set out in the articles of association. In principle, they are not legal representatives of the company as regards third parties, but they may be granted a delegation of powers by the president. (The delegated powers, however, are necessarily limited.)

A SA with a board of directors must have at least three directors, and at the most eighteen excluding directors elected by employees. The articles of association set out the number of directors required within these limits.

The board of directors of a SA is a collegiate body. Its decisions must be taken by an absolute majority of the directors present or represented. In principle, the chairman of the meeting has a casting vote.

What contractual relationship does a director or a manager have with the company?
Agreements entered into between the company and a director or manager are “free” (i.e. no need for any authorisation or approval) only if they are arm's length agreements and relate to ordinary business. These “free” agreements are not subjected to a prior authorisation process.

Several specific agreements are prohibited to a director who is not a legal entity: loans raised from the company, overdraft agreements and guarantees given for his/her commitments towards a third party.

All other agreements entered into, directly or indirectly, between the company and one of its directors, or one of its shareholders holding more than 10% of voting rights in the company, have to follow a specific procedure.

In a SA with a board of directors, such agreements must first be authorised by the board of directors. If such authorisation is not obtained, these agreements may be terminated if they have been harmful to the company. Moreover, these agreements must be approved by the general shareholders’ meeting following the presentation of a special report from the auditors. If such approval is not obtained, these agreements may not be terminated but the directors concerned will be liable for the harmful consequences suffered by the company.

In a SA with a management board and a supervisory board, such agreements are authorised by the supervisory board, which works in a similar way to a board of directors.

In a SAS, such agreements must be approved by the shareholders following the presentation of a special report from the statutory auditors. By way of derogation, where the company has only one shareholder, agreements entered into directly or through intermediaries between the company and its manager, its sole shareholder or, in the case of a shareholder company, the company controlling it, shall only be recorded in the register of decisions.

Under specific conditions, a director or manager may be an employee with an active status. The entry into, or modification of, an employment agreement with a director or manager in the exercise of his/her duties must follow the prior approval procedure mentioned above.

Directors of a SA may be remunerated by directors’ fees of an annual basic amount to reward their regular attendance at board meetings. Additional extraordinary remuneration may be granted by the board to directors who carry out specific activities (specific missions or mandates). This must be approved using the specific “control” procedure detailed above. The remuneration of the chairman and managing director is determined by the board of directors. Details of such remuneration are published in the corporate governance report, but only in listed companies or in companies which are controlled by a listed company. In listed companies, a say on pay shareholder procedure must be followed regarding the compensation of corporate officers.

The articles of association of a SAS may freely determine the terms and conditions of managers’ remuneration.

According to case law, if a director or manager has a personal interest in a decision which is to be voted upon, he/she may still participate in the vote unless his/her conflict of interest goes against the corporate interest. When there is a conflict between the corporate interest and his/her interests as a shareholder, a director or manager must favour the company’s interest.

The director or manager must act in accordance with the corporate object. The board of directors or management board of a SA and the president of a SAS have only powers within the framework of the corporate object. However, this rule only has effect in relation to the shareholders. Indeed, in its relationships with third parties, the company is bound by acts, even when such acts exceed the corporate object.

The director must attend board meetings. Even if he/she is absent, he/she is still liable for board decisions that are harmful to the company or third parties.

The director has a duty of confidentiality in respect of the board’s proceedings.

Generally, the director or manager must always act according to the corporate interest. He/she must also be particularly careful if the company has financial difficulties.

A director or manager may be held liable for the following categories of breaches towards the company, shareholders and third parties:

• breaches of the law and regulations applicable to a SA or SAS
• breaches of the articles of association, and
• mismanagement.

Directors or managers are personally liable towards third parties who are not shareholders only if the breach of their duties committed by them is an intentional and serious one, qualifying as not intrinsically connected with the performance of these duties.

A director or manager is only liable if the breach he/she has committed has caused personal damage to the victim.

Directors may be liable individually or jointly depending on whether a director individually, or several directors collectively, have breached their directors’ duties. Directors may also be criminally liable for offences committed during the exercise of their duties. Directors may be liable for certain specific offences such as misuse of company property, misuse of power and distribution of fictitious dividends.

In the event of bankruptcy, a specific action may be brought against directors or managers who may be ordered to pay off all or part of the company’s debts. 

Liability suits brought against directors or managers by third parties suffering damages, by shareholders acting individually or on behalf of the company (“action ut singuli”) lapse 3 years from the commission of the harmful act.

French law prohibits any limitation of directors’ or managers’ liability in the articles of association. Articles of association which require the consent of a shareholders’ meeting for an action to be brought against a director or manager, or provide an anticipated waiver of this action, will be ineffective. Regardless of any decision passed by the shareholders in a general meeting, a director or manager who acted outside the scope of his/her powers may still be sued.

Except as otherwise provided for in the articles of association, foreigners (EU residents or non-EU residents) may be directors or managers of limited companies. A director of a SA who is not chairman or managing director does not have to obtain a temporary visa (“carte de séjour temporaire”). The president, managing director or deputy managing director of a SAS does.

A director’s or manager’s fees paid to directors or managers of limited companies are taxable in France whether or not the director or manager lives in France. The chairman’s remuneration in a SA and the manager’s remuneration in a SAS are subject to income tax (employees’ regime).

In a SA, a director’s fees are not subject to the national insurance scheme as long as the director’s work is not salaried, i.e. the director is not an employee of the company. The chairman and the managing director of a SA and managers of a SAS are mandatorily subject to the national insurance scheme, even if they do not have an employment contract.

In a SA with a board of directors, the chairman of the board and the managing director may be the same person if permitted by the articles of association.

The chairman of the board is in charge of organising and managing the board. The chairman makes sure that the company’s management bodies are properly run and that the directors are capable of fulfilling their offices. The chairman may not substitute himself/herself for the board of directors or for shareholders’ general meetings. In practice, the chairman has a non-executive role, while the managing director fulfils the executive office. 

The chairman is selected from the directors of the company by an absolute majority decision of the board of directors, unless the articles of association prescribe a qualified majority. The chairman may be dismissed at any time by the board of directors; provisions in the articles of association which restrict this rule are considered ineffective. There is no need to provide reasons for the dismissal, but such a decision must be taken only after a “proper hearing” and not in insulting or hurtful circumstances.

The managing director is in charge of the general management of the company. He/she has the power to act in the name of the company except in relation to matters which are expressly reserved to the general shareholders’ meeting or to the board of directors by law or by the articles of association. The managing director represents the company in its relationships with third parties.

As regards third parties, the company is even bound by acts exceeding the corporate object, unless the company can establish that the third party was aware of this. The managing director is appointed and may be dismissed at any time by the board of directors. The managing director may be assisted in the exercise of his/her duties by a maximum of five deputy managing directors appointed by the board after a managing director’s proposal. A deputy managing director’s status is effectively the same as that of a managing director.

The appointment and removal of a chairman, managing director or deputy managing director must be published in a legal notice bulletin, filed with the office of the commercial court, registered with the trade and companies register and notified through the official bulletin of civil and commercial notices. 

A chairman and managing director must comply with strict rules as to the number of offices they can hold. Managing directors may hold a second office in a controlled company and a third one in a non-listed company. 

In principle the chairman and the managing director are liable in the same way as directors. However, their liability is likely to be invoked more often since they are in charge of day-to-day management.

A SA with a “Directoire” and “Conseil de surveillance” has two collegial bodies: a managing board which has the power to carry out the corporate object of the company in all circumstances and to act in the name of the company, except in relation to such matters as are expressly reserved to the general shareholders’ meeting or to the supervisory board; and a supervisory board which has a permanent supervisory role to control management of the managing board. It therefore has specific powers such as the power to carry out any useful verification at any time, such as verification of the annual accounts.

The managing board may comprise no more than five members, or seven if the company is a listed company. They must be individuals, but not necessarily shareholders of the company. They are appointed by the supervisory board. 

The supervisory board must comprise at least three, but not more than eighteen, members (without taking into account members elected by employees). The eligibility requirements for members of the supervisory board are effectively the same as those required to be a director of a SA with a board of directors.

Members of the managing board may be dismissed by the general shareholders’ meeting or, if it is provided for in the articles of association of the company, by the supervisory board. Members of the supervisory board may be dismissed at any time by the ordinary general shareholders’ meeting.

Finally, in a SAS, the shareholders’ meeting is considered to be a supervising body, mostly as they approve the annual accounts.

The articles of association of a SAS may also provide for the appointment of a supervising body. In such a case, the articles of association provide for its composition and working rules. As in the case of a SA, certain SASs are subject to supervision by one or more statutory auditors.

Solvency

The cash situation is probably the main concern of companies today. Managers and directors (“directors”) must anticipate cash requirements. This involves a specific monitoring of cash levels and assessment of needs as well as timing of cash falls. As the situation is moving fast, directors must pay particular attention to the availability of up-to-date financial information. Furthermore, directors must consider various scenarios including, in certain cases, insolvency proceedings. In this regard, in addition to the various mechanisms enabling a company to defer payment of particular debts, to benefit from various financial supports including a state guarantee to obtain a bank loan (“Prêt garanti par l’État”), the assessment of the French notion of “cessation of payments” has been adapted and insolvency proceedings have evolved to allow a wider use of conciliation procedures. 

Risk

The current situation impacted by COVID-19 is a challenging time for directors since they have to make important decisions in a crisis environment. Companies may become more or less vulnerable, depending on the economic sectors considered. The challenge is both short and medium term. The urgency is to preserve activity and anticipate the restart. This leads to decisions being made in a wide variety of areas (cash management, internal communication, safety of employees, financial publications, etc.). Even if companies are not themselves threatened, their customers and other business partners may be in difficult situations. For these reasons, the increased commercial effort required to maintain the company’s business, meet its expenses and keep its employees must be reconciled with the exceptional circumstances of travel, meetings and communication. All the while, companies must obviously ensure the safety of employees within their premises and respect specific safety measures such as social distancing. For the medium term, directors must review business plans and consider adaptation of or changes to the strategy of the company. The current crisis could also be an opportunity for the company to evolve.

Logistics

Directors must take into account the logistical constraints related to confinement and social distancing measures. Supply and distribution chains must be reviewed accordingly. More broadly, the entire organisation of the company must be rethought and the necessary adaptations made. Directors have a duty to consider all the possibilities offered by technologies in terms of dematerialisation, electronic communication, teleworking and, more generally, solutions that avoid physical contact. For instance, specific provisions have been implemented in order to adapt the holding of meetings of collegial management bodies or shareholders’ meetings to comply with social distancing (virtual meetings, written resolutions, electronic communications, etc.). Directors also have the option to postpone 2020 annual meetings.

In order to enable companies to get through the period of the health emergency and the resulting economic crisis, a whole series of measures are offered to companies which shall be considered by directors. In France, the most relevant measures for companies include:

• deferral of tax and social security charges
• reinforcement and simplification of the partial unemployment measures deferral of certain debts (rents, water, gas and electricity)financial supports for companies meeting certain conditions
• state guarantee to obtain a bank loan, and
• extension of time limits.

The general principles governing the liability of directors of French companies have not been directly modified with the emergence of the COVID-19 crisis, nor have the rules of governance provided for by the codes of good conduct. 

Directors must comply with a set of new laws, regulations and guidances which have been specifically implemented. These new rules, which are numerous and cover various matters, must be understood and applied by managers within a short period of time. Of course, and in considering the issues noted above, the very special situation triggered by the crisis requires particular precautions for directors in the performance of their functions.