The director’s obligation of loyalty in the sale of shares…

June 23rd 2015

The director’s obligation of loyalty in the sale of shares…the danger of parallel negotiations.

During a share transfer, it is not unusual for parallel negotiations to take place, in the presence of several transferors.

These multiple negotiations occur when the discussion gets around to the amount of the price of the transfer, which is different depending upon whether the seller is a majority or a minority shareholder.

As this is a sensitive issue, the parties, in some cases, prefer to maintain the confidentiality of their discussions; they engage in locked parallel negotiations.

The director of the company, whose shares are transferred, is generally informed of all the negotiations, either as a party or simply as a participant or a confidant.

In this case, it is worth reiterating that the director is bound by an obligation of loyalty, and therefore by a duty of information towards all the transferring shareholders.

The case law is well-established, albeit sensitive, on this obligation, considering that the director is bound by a duty of information as soon as he becomes aware of facts that may influence the transferor’s consent.

Therefore, the director’s awareness of negotiations on transfer prices that are different depending on the category of the shareholder is likely to influence the transferors’ decision. He must therefore disclose this information to all the shareholders.

The Cour de cassation (French Civil Supreme Court) specifically observed a default on the part of the director for failing to inform the transferor on the resale of his shares by the purchaser at an agreed higher price, as well as the existence of distributable profits of an amount greater than the transfer price in the company in which the shares are transferred.

Any default on the part of a director shall compel him to pay damages to the transferor-victim, but may also give rise to the cancellation of the transfer in question for malicious intent, based on lack of consent.

Unless collaborative efforts are revealed in terms of confidentiality, the transparency of negotiations is therefore highly recommended.

Philippe Delorme