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Corporate update France - June 2018: Enforcing limitations of legal representatives’ powers

  • France

    26-06-2018

    This article has been drafted in light of a recent decision on French law, giving third parties the right to annul legal proceedings brought against them on the grounds that the legal representative of the claimant is acting outside of its powers. This article will consider the background of legal representatives’ limitation of powers, the recent case law and our recommendations based upon this decision.

    Legal background

    Under French law, a legal representative of a company is entitled to manage the company on a daily basis, to act on its behalf and to bind it. Its powers are however subject to certain legal limitations such as, for instance the exclusive rights of the shareholders or the board of directors. Alongside these legal limitations, it is customary for a group of companies to set ‘additional’ limitations of powers. Generally, these limitations of powers are documented in the articles of association of a company and/or through a shareholders’ decision appointing the legal representative of a company. These documents are open to the public. An EU directive provides that these ‘additional’ limitations of powers (whether through articles of association or through a corporate body resolution) must not be relied on against third parties, even where disclosed. Therefore all jurisdictions in the EU should reflect this, as the aim of the directive is to harmonise the legislation on limitations of powers across the EU. The rationale behind this is to ensure the protection of third parties when entering into agreements with companies based in the EU by restricting the grounds on which agreements entered into in the name of a company are not valid. This is the legal position in France, with the law stating that these ‘additional’ limitations of powers of a legal representative of a company cannot be relied on by the company against third parties.

    Recent Decision

    Following a line of precedent, the “Cour de Cassation” recently emphasised the need to consider these ‘additional’ limitations of powers from an alternative perspective: whether third parties can themselves rely on these ‘additional’ limitations of powers to further their own interests and enforce these limitations against the company. In this particular situation, the contractor of a “SARL” (a legal form of company frequently used in France) asked for the annulment of the particulars of claim served by that company. The argument consisted of stating that (i) the shareholders had set limitations on the legal representative’s powers requiring it to obtain their approval before bringing legal proceedings on behalf of the company and (ii) the legal representative in question had not obtained such prior approval. The defendant argued that the legal representative was consequently acting outside of its powers and the particulars of claim should therefore be annulled. The “Cour de Cassation” ruled in favour of the defendant and considered that while ‘additional’ limitations of powers of a legal representative will remain unenforceable against third parties this will not prevent third parties from enforcing these limitations themselves. It is worth noting that according to some legal commentators, this decision applies only to legal proceedings, due to specific provisions of the French civil procedure code. This reasoning implies that this decision does not entitle third parties to rely on limitations of powers to further their own interests in other respects.

    Recommendations

    When powers of a legal representative are to be limited, it is key that such limitations are clearly defined and are tailored to the business needs of the company. This is all the more important when such limitations are included in the articles of association, which are made publically available and are therefore accessible to third parties. Given that certain circumstances may require a company to act promptly, it is also advisable to enable any authorisation required to be given to a legal representative subject to a limitation of powers to be granted within a short period of time. It is also key that legal representatives are regularly reminded of the scope of their powers and any limitation thereof. If there are any updates to the scope of their powers, legal representatives should be provided with a comprehensive update. Finally, where limitations of powers are included in the articles of association or in a shareholders’ decision, it should be stated that such limitations are ‘for internal purposes only’ and that neither the company nor third parties will be able to rely on them. According to certain case law, this should prevent third parties from relying on such limitations of powers against the company.

    Disclaimer

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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