Unauthorized Related-Party Agreements: Corporate Officers’ Liability Becomes Automatic

The framework governing related-party agreements (conventions réglementées) is a cornerstone of French corporate law. Its purpose is to prevent conflicts of interest that may arise when corporate officers enter into agreements, directly or through an intermediary, with the company they manage.

 

Until recently, case law had consistently held that a corporate officer could invoke good faith as a defense: the mere failure to obtain prior authorization was not sufficient, in itself, to give rise to liability, unless concealment or fraudulent conduct was established.

 

A decision of the Cour de Cassation (French Supreme Court) dated September 17, 2025[1]  overturned this traditional approach.

 

Pursuant to Article L.225-38 of the French Commercial Code, a related-party agreement is defined as any agreement entered into, directly or indirectly, between a company and one of the members of its management board or supervisory board, or a shareholder holding more than 10% of the voting rights.

 

A strict procedure that must be followed

 

In public limited companies (sociétés anonymes), Article L.225-86 of the French Commercial Code subjects related-party agreements to a two-step authorization process:

·      prior authorization from the supervisory board (or the board of directors, depending on the corporate structure);

·      subsequent approval by the shareholders’ general meeting.

Failure to comply with the procedure applicable to related-party agreements may give rise to several sanctions.

First, the civil liability of the relevant officer may be incurred in order to obtain compensation for the damage suffered by the company and/or its shareholders. In addition, and without prejudice to such liability, the agreement itself may be annulled where it has had adverse consequences for the company (Article L.225-90 of the French Commercial Code).

 

However, the last paragraph of this Article provides that such nullity may be remedied by a vote of the shareholders’ general meeting, acting on the basis of a special report prepared by the statutory auditors or, failing that, by the chairman of the board of directors or of the supervisory board, setting out the reasons why the authorization procedure was not complied with.

 

Finally, the civil liability of the corporate officer may also be incurred under Article L.225-251 of the French Commercial Code where a breach of statutory provisions or mismanagement (faute de gestion) is established.

 

   

The September 17, 2025 case

 

In this case, the chairman of the management board of a public limited company, who was also employed by the company under an employment contract, had implemented a time savings account accruing benefits to himself, without obtaining prior authorization from the supervisory board. Upon his retirement, the company brought legal action for restitution and damages, arguing that the arrangement constituted an unauthorized related-party agreement.

 

The Lyon Court of Appeal initially dismissed the claim against the corporate officer, holding that the absence of prior authorization did not constitute mismanagement, in the absence of fraud or concealment.

 

For the first time, in a landmark decision marking a clear departure from previously established case law, the Commercial Chamber of the Cour de Cassation overturned this reasoning, holding that failure to comply with the authorization procedure constituted per se mismanagement, regardless of any fraudulent intent or personal benefit.

 

A now objective form of liability

 

The decision, therefore, enshrines a strict approach to the formal requirements applicable to related-party agreements, as the corporate officer’s misconduct is now established solely by the failure to comply with the statutory procedure. As a result, neither the corporate officer’s intent nor their good faith can shield them from liability.

 

Accordingly, compliance with procedural rules can no longer be viewed as a mere formality; it has become a core governance requirement, essential to ensuring the validity of corporate actions and the protection of the company’s interests.

 

In other words, a corporate officer’s liability now becomes automatic whenever the statutory procedure is not complied with.

 

Practical implications for companies

 

This development requires companies and their corporate officers to strengthen their vigilance and internal controls, in particular by:

·      accurately identifying any situation likely to give rise to a personal interest for a corporate officer;

·      strictly securing the related-party agreements authorization process;

·      anticipating the risks associated with omissions or overly flexible interpretations of the applicable rules.

Observance of the formal requirements governing related-party agreements is no longer a mere legal constraint: it is now a pillar of corporate governance and compliance.