In the event Brexit occurs, Paris will become the most significant securities market in the European Union.
France has a long-standing and vigorous tradition of activism. Historically, French activism has involved a variety of local actors, including financial investors but also industrial concerns. More recently, and consistent with worldwide trends, activist profiles have become increasingly international, generally comprised of professional hedge fund activists, including prominent activists from the United States and the United Kingdom. The amounts deployed by US and European activists against European targets in the first quarter of this year surpass 2017, opening up the possibility that European activism may set a new record in 2018.2
French and European law and regulation furnish both activist and the target company's board and management with a variety of tools. As discussed below, French shareholders enjoy significant rights, such as the right for holders of as little as 0.5 per cent of a company's shares to include proposed resolutions in the 'proxy' materials circulated by the company to shareholders. In addition, directors may be removed and replaced by a simple majority at any shareholders' meeting. For the defending company, French law provides stringent disclosure requirements on stake-building, and French law's expansive concept of a company's corporate interest may provide a strong basis for a board of directors and management to resist an activist's purely short-term financial strategy when appropriate.
II LEGAL AND REGULATORY FRAMEWORK
i Threshold crossing
The current primary disclosure obligations in France require that any person acting alone or in concert with others that comes to hold more than 5, 10, 15, 20, 25, 30, 33.3, 50, 66.6, 90 or 95 per cent of the share capital or voting rights in a listed company report the crossing of these ownership thresholds (in either direction) to the company and the AMF no later than the close of market on the fourth trading day following the date on which the threshold was crossed.3 In addition, persons holding temporary interests in 2 per cent or more of the voting rights in a listed company incorporated in France must notify the issuer and the AMF of these holdings. In addition, net short positions in shares must be reported to the AMF upon crossing the threshold of 0.2 per cent of issued share capital (and every 0.1 per cent above that), and disclosed to the public when they reach 0.5 per cent of issued share capital (and every 0.1 per cent above that).4 More generally, AMF regulations require that persons preparing a financial transaction that may have a significant impact on the market price of public securities must disclose the transaction as soon as possible. The failure to adhere to these reporting obligations may result in significant sanctions.
Further, the disclosure obligations require that any holder that comes to hold 10, 15, 20 or 25 per cent of the share capital or voting rights of an issuer is required to report to the AMF its intentions for the next six months with respect to the issuer and its shareholding, no later than the close of market on the fifth trading day following the crossing of the relevant threshold.5 In addition to the statutory thresholds, the company's articles of incorporation may provide that shareholders must declare to the company the crossing of additional ownership thresholds below 5 per cent in increments of no less than 0.5 per cent.6 Finally, any agreement that provides preferential rights with respect to the sale or purchase of shares representing at least 0.5 per cent of the share capital or voting rights of a publicly listed company must be reported to the AMF within five days of its signature.7
ii Shareholder rights
France has a strong legal tradition of vigorous shareholder rights, which continues to evolve.
Rights at shareholders' meetings
Shareholders enjoy significant rights in shareholders' meetings that can provide useful aids to an activist. For example, shareholders meeting the applicable minimum shareholding threshold in a French société anonyme (including a société européenne) or société en commandite par actions (the types of entities that may be listed in France), as well as qualifying minority shareholder associations, may add items for discussion to the agenda for any shareholders' meeting or propose additional draft resolutions to be included in 'proxy' materials distributed to shareholders. That said, the fundamental principle under French law of the proper competence of the respective organs of corporate governance may permit the board to resist proposing an item that does not fall within the competence of the shareholders' meeting (for example, a change of strategic direction or approval of certain transactions).8
Further, any director may be removed (and replaced) at any shareholders' meeting by a simple majority vote of the shareholders, upon proposal of any single shareholder, even if the subject is not on the agenda for the relevant shareholders' meeting and regardless of the term of office for which the director was originally appointed.9
In addition, shareholders holding 5 per cent as well as certain minority shareholder associations may request the president of the commercial court on an ex parte basis to convene a shareholders' meeting in the event that the company has failed to call the relevant meeting following a specific request.10 The same process can be used to appoint an independent expert to investigate one or more past or contemplated management decisions.
Right to responses to written questions and right to participate in shareholders' meetings
Any shareholder may timely present written questions to which the board of directors must respond during the shareholders' meeting or on the company's website.11 In addition, all shareholders have the right to participate in the discussion of issues raised at a shareholders' meeting,12 in accordance with the topics set forth in the agenda for the meeting.13
Proxies and concerted action
Under French law there is no prohibition on a shareholder soliciting proxies from other shareholders, and the requirements and restrictions on proxy solicitation (and the resulting expense) are relatively limited. All shareholders have a legal right to review the attendance sheets for shareholders' meetings for the prior three years.14 In practice, large scale proxy solicitation campaigns are rare in France, although, the influence of proxy adviser firms is growing.
An activist may find itself acting in concert with other shareholders who come to share its views.15 This may trigger disclosure obligations with respect to the concert's aggregate shareholding, as well as the obligation to make a mandatory tender offer for all the issuer's shares in the event the concert exceeds 30 per cent.
French law was modified in December 2016, and now imposes that shareholders annually approve the compensation of senior management in binding votes.16 This involves an ex ante vote regarding the principles and criteria for determining, allocating and paying fixed, variable and exceptional components of senior management's total compensation and any other benefits of any nature. In the event the ex ante vote is negative, the resolution fails and the previously approved principles and criteria remain applicable. In addition, variable and exceptional compensation must be conditioned upon an ex post shareholder vote. The ex ante vote is then followed by an ex post vote at the next annual meeting relating to the compensation of the same executives. This ex post vote is individualised, with distinct resolutions relating to the compensation of each relevant executive. In the event that the vote is negative, the variable and exceptional compensation is not payable. The first ex post shareholder votes under the new law will occur in 2018.
If the American and English experiences with say-on-pay are any guide, using say-on-pay provisions as a basis to orchestrate a no confidence vote may be a powerful tool in an activist's arsenal. That said, the 'no' vote against Carlos Ghosn (of Renault) in 2016 did not appear to have a meaningful immediate impact on his leadership or his relationships with his board. Notably, French public shareholders do not have the right to directly remove or appoint the CEO, which is the province of the board.17
Double-voting rights and the abandoning of the passivity rule
France also recently adopted the 'Florange' law, which introduced automatic double voting right for shares that have been held by a shareholder for more than two years in registered form.18 Prior to the Florange law, French issuers were able to provide in their articles of incorporation for double-voting rights for shareholders having held their shares in registered form for at least two years. The Florange law reversed this principle for listed companies, so that the attribution of double voting rights is automatic by operation of law except if the articles expressly provide otherwise.
The expressed goal of this change to the law was to free companies from 'demands –often focused on the short term – of the financial markets' and to 'favour' [shareholders] who play the long term'.19 It is unclear whether the impact of this reform will be consistent with these expressed intentions. Under certain circumstances, this provision may actually increase the influence of activist shareholders.
The Florange law also abandoned the board passivity rule during offer periods, changing the equilibrium for M&A-driven activism. As a result of the change, a board of directors is now able to take measures aimed at frustrating a hostile bid.20 Given its recent vintage, a conflict with an activist about the extent of the board's powers in this respect may raise novel issues.
Corporate governance code
France has adopted the 'comply or explain' framework with respect to corporate governance practices. French listed companies must either comply with the provisions of a corporate governance code prepared by a corporate association or provide an explanation in their annual report for any non-compliance.21 In the event that the company does adhere to such a corporate governance code, the annual report must also provide an explanation of the reason for failing to follow any provisions of that code.22
A significant percentage of French listed companies adhere to the AFEP-MEDEF governance code. Since 2013, the AFEP-MEDEF code has included a High Committee on Corporate Governance to assist in evaluating governance issues and monitoring the implementation of the AFEP-MEDEF governance code. The High Committee is also responsible for proposing amendments to the AFEP-MEDEF code in light of changing practices, recommendations made by the French market regulator or investors.
Depending on the activist's tack, certain recurrent issues may expose the activist to potential liability. This includes insider trading, market manipulation,23 dissemination of false information,24 as well as potential violations relating to financial analysts and investment research.25
III KEY TRENDS IN SHAREHOLDER ACTIVISM
French native activism has been complemented in recent years by an increase in interventions by foreign activists.
French native activists primarily comprise both financial and industrial perspectives, and include occasional as well as persistent activists. The former include investment funds and individuals such as Amber Capital (UK-based but with founders with strong French ties), CIAM (Charity Investment Asset Management), SFAM, Wendel and Guy Wyser-Pratte (based in New York, but born in France). An example of the latter is LVMH in its acquisition of a significant position in Hermès. Certain commentators have on occasion characterised the French state as an activist, for example under the Hollande administration voting against management compensation in say-on-pay and golden parachute votes, or in the defence of double-voting rights at Renault.26 Finally, French associations of minority shareholders such as the Defence Association of Minority Shareholders (ADAM) and SOS Small Holders, continue to play a role, including in litigation, sometimes in partnership with other activists.
Foreign activists are primarily comprised of long financial activists, notably including in recent years Cevian (Sweden), Elliott Management (US), Pardus Capital Management (US), TCI (UK), Third Point (US) and Trian (US). The US-based short-seller Muddy Waters has also been active in France.
Given the relatively small number of activist interventions in France (estimates are eight for 2017,27 and vary from seven to eight in 2016 and two to 10 in 2015),28 it is difficult to draw definitive conclusions about the profiles of French companies most likely to be targeted by activists. Consistent with worldwide trends, French-listed targets have clearly grown larger in recent years (e.g., Accor, Airbus, Carrefour, Danone, Lagardère, Safran, Vivendi). That being said, companies with a market capitalisation between €500 million and €5 billion continue to be prime targets (e.g., Euro Disney, Fnac Darty, Groupe Latécoère, Nexans, Rexel, SoLocal, Technicolor, XPO Logistics Europe), as well as companies with lower capitalisations.
Activists' strategies and objectives in France are typically a function of the relevant situation, and commonly include:
a seeking an exceptional dividend or spinoff (Airbus as regards its stake in Dassault, Nestlé as regards its stake in the French company L'Oréal, Vivendi as regards an exceptional dividend and the sale of Universal Music, Altamir Amboise as regards a significantly improved dividend, Technicolor as regards a break-up of the company);
b militating for improved performance (Nexans, Rexel, Carrefour);
c seeking to extract additional value or otherwise intervening in the context of an M&A transaction (Safran-Zodiac, XPO-Norbert Dentressangle, Euro Disney, Etablissements Maurel & Prom-MPI); and
d abandoning takeover protections (Lagardère).
Tactics can take a variety of forms, evidently determined in light of the strategy and situation, typically involving implementing certain of the tools referred to in the preceding sections, including:
a seeking to add items to the agenda of a shareholders' meeting or propose new resolutions29 (Wyser-Pratte regarding Lagardère, TCI in Safran-Zodiac);
b seeking board seats30 (Cevian in relation to Rexel, CIAM as regards Alès Group, Pardus Capital Management regarding Valeo, Pardus and Centaurus Capital in relation to Atos Origin, SFAM as regards FNAC Darty);
c seeking a court-appointed independent expert (Elliott in its countersuit against XPO);
d 'no' campaigns on executive compensation (the French state in relation to Alstom, Renault and Safran (resulting in 'no' votes in 2016 against the compensation of Carlos Ghosn and Patrick Kron, the CEOs of Renault and Alstom respectively));
e blocking a squeeze-out (Elliott in both APRR and XPO Logistics Europe);
f orchestrating a public relations campaign, including letter-writing (including lobbying individual board members or relevant regulators), press interviews and most crucially, lobbying of proxy advisers; and
g in relatively rare cases, initiating litigation (CIAM in Euro Disney, CIAM against Altice).
In our experience, a strong response to an activist by the board and management and their advisers often includes, among other things:
a advance planning, to deliver strong teamwork in a crisis by and among the board, management and advisers as well as other key internal constituencies;
b ongoing monitoring and rapid response to warning signs;
c in the event of a public attack, implementing communication that is coherent on all fronts;
d maintaining dialogue with relevant regulators, proxy advisers and other key constituencies, including other significant shareholders;
e careful analysis of missteps by the activist or weaknesses in its approach;
f in certain cases seeking regulatory intervention and even initiating litigation; and
g avoiding legal or other missteps that will be seized upon by the activist or others (including the AMF) at a time of heightened focus upon the company and its conduct.
Outcomes may vary significantly depending on the strategy and tactics of the activist, and the target's response. Most shareholder resolutions are rejected,31 and the vast majority of company resolutions are approved. But, victory is not counted in votes alone, and shareholders may also exert discipline in other ways. Key variables include: the size of the activist position, whether the issue is ultimately submitted to a shareholder vote, the presence and preferences of any reference shareholders, the recommendations of proxy advisers and the substance of the critique and the company's response, as well as the effectiveness of communication.
IV RECENT SHAREHOLDER ACTIVISM CAMPAIGNS
This section provides a few examples of recent activist campaigns that provide insight into current trends in French activism.
Vivendi P Schoenfield Asset Management (PSAM) (2014–2015)
After having acquired 0.8 per cent of the capital of Vivendi in December 2014, PSAM, a global asset manager based in New York and London, requested the sale of Universal Music and then, in the spring of 2015, the distribution of a €9 billion exceptional dividend. To counter PSAM and ensure rejection of the resolutions proposed by PSAM to Vivendi's AGM of April 2015, Vincent Bolloré, chairman of the board and biggest shareholder of Vivendi increased his participation in the capital of the media group from 5.15 to 14.52 per cent in March and April 2015. Shortly after Vivendi's management obtained the support of a large proxy advisery firm for its proposed resolutions at the AGM, PSAM and Vivendi settled the matter, with Vivendi agreeing to raise its exceptional dividend from €5.7 billion to €6.75 billion and PSAM withdrawing its proposed resolutions for the AGM. A shareholder proposal by Phitrust to avoid the Florange law default double-voting regime did not prevail, but received significant shareholder support.
Euro Disney SCA
CIAM (Charity Investment Asset Management) (2015–2017). In late 2014, Euro Disney SCA announced receipt of an offer from Walt Disney agreeing to bail out the company from its debt commitments and bid for the 60 per cent of shares that it did not already own, including offering €1.25 per share to minority shareholders. In opposition to the offer, CIAM, a French asset manager, as holder of a 1.4 per cent stake in Euro Disney SCA, engaged in battle on multiple fronts including the commencement of civil and criminal legal proceedings, contacting other shareholders and directly agitating the board. In February 2017, Walt Disney increased its offer to minority shareholders to €2 per share, but CIAM rejected this offer as still too low and at the time of writing it is still continuing to make demands to the board for a minimum price of €2.50 to be offered per share.
Rexel SA – Cevian Capital AB (2016–2017)
Rexel, a French electronics service provider, has been under scrutiny by Cevian, a Swedish activist investment firm. Cevian began as a holder of a 5.44 per cent in Rexel in February 2016 and built its stake up to 10.47 per cent by July 2016. Cevian's campaign has been swift with multiple changes to the board and governance structure occurring since Cevian disclosed its stake in Rexel. For example, in June 2016, there was the adoption of a new governance structure and split of the duties of Chairman and CEO, with the then Chairman and CEO Rudy Provoost stepping down. There have been further changes to the composition of the board following Cevian's intervention, most notably in May 2017 Rexel appointing a partner of Cevian, Marcus Alexanderson as a board director.
V REGULATORY DEVELOPMENTS
As discussed above, there have been a number of recent developments in France that provide further rights to shareholders, such as the institution of a legal 'say on pay' requirement and a default regime of double-voting rights.
Looking forward, a variety of factors are putting increasing pressure on institutional investors in Europe to actively exercise voting rights within their control. French law requires asset management companies to affirmatively inform their investors in the event that the asset manager fails to exercise voting rights, as well as more generally to exercise such voting rights in the sole interest of their investors. More recently, the Council of the EU adopted significant amendments to the Shareholder Rights Directive earlier this year. Relevant provisions include:
a providing further transparency regarding the identity of shareholders;
b a say-on-pay provision relating to the policy for director compensation;
c a comply or explain requirement for institutional investors and asset managers to develop and disclose a shareholder engagement policy (including among other things policies to manage conflicts of interests between the investor or manager and the target company);
d new transparency requirements for proxy advisers (as well as a code of ethics); and
e ensuring that material transactions with related parties are approved by shareholders or by the administrative or supervisory body of the company pursuant to procedures that prevent the related party from taking advantage of its position and provide adequate protection for the interests of the company and of other shareholders.
Member States will have up to two years to incorporate the new provisions into domestic law.
Other expected developments in France include the proposed reduction of the squeeze-out threshold from 95 per cent to 90 per cent, consistent with a limited number of other European jurisdictions.32 This would render more difficult the activist hold-out strategy of blocking a squeeze-out unless it is paid a premium over the takeover offer price. In the context of the same legislative project, the government commissioned a report on the notion of intérêt social (the corporate interest). The concept of corporate interest arises in a variety of contexts in French law, and management's failure to pursue the corporation's corporate interest can result in significant civil and criminal penalties. The report raises a number of proposals designed to foster a longer-term perspective among shareholders, including by memorialising in statute the duty of boards and managers to manage the corporation primarily in the corporation's own interest, taking into account employee and environmental interests.33
If current conditions and trends continue, activism appears poised to continue to play a vibrant role in France. Based on worldwide trends, we may expect a maturing of the international component of French activism, including:
a more major activist interventions in France;
b nonactivist institutional becoming more 'active', ranging from supporting activists campaigns (Financière de l'Echiquier in its team-up with Sterling Strategic Value (SSV) concerning Latécoère) to themselves opportunistically going activist (e.g., occasional activist PSAM in its Vivendi campaign);
c companies becoming the targets of distinct serial activist interventions (in addition to wolf packs);34 and
d more sophisticated and increasingly M&A-focused activist campaigns.35
We may also see an increase in activism against targets that had previously been sheltered by the French state as the French state reduces its exposure in certain listed companies;36 In addition, as activism becomes commodified, an increase in local activism may occur, as a new generation of smaller European and French players join the fray.37 It remains to be seen whether Elliott Management's victory in Telecom Italia38 may encourage activists to become more aggressive vis-à-vis companies with reference shareholders that lack outright control (a shareholder structure that is relatively common in Europe), or whether that matter will remain an outlier based on its very specific circumstances.39
1 Jean-Michel Darrois is the founding partner and Bertrand Cardi and Forrest G Alogna are partners at Darrois Villey Maillot Brochier. The authors and their partners have served as counsel in a majority of significant activist matters in France in recent years. The authors wish to thank Olivia Goudal, a foreign associate of the firm, for her assistance in preparing the present chapter.
2 Lazard Shareholder Advisory Group, Review of Shareholder Activism 1Q 2018, pp. 1, 2 (April 2018).
3 C. com. Article L. 233-7 I-II; C. com. Article R. 233-1; AMF Règlement général, Article 223-14 I. 'Share capital or voting rights' include among other things cash-settled or physically-settled derivative instruments providing an economic exposure equivalent to a long position in the underlying shares. C. com. Article L.233.-9 I 4 bis; AMF Règlement général, Article 223-11 III.
4 EU Regulation No. 236/2012 on short selling and certain aspects of credit default swaps, Articles 5 and 6 (14 March 2012).
5 C. com. Article R. 233-1-1.
6 C. com. Article L. 233-7 III.
7 C. com. Article L. 233-11 Paragraph 1.
8 See, e.g., Safran, Addendum to the Meeting, Ordinary and Extraordinary Shareholders' Meeting of Thursday, 15 June 2017, p. 9.
9 C. com. Articles L. 225-18; L. 225-105.
10 C. com. Article L. 225-103 II 2.
11 C. com. Article L. 225-108.
13 C. com. Article L. 225-105, al. 3.
14 C. com. Article L. 225-117.
15 See C. com. Article L. 233-10.
16 C. com Art. L. 225-37-2.
17 C. com. L. 225-51-1 et seq.
18 As opposed to bearer form. Shares may be registered with the issuer itself or with a broker.
19 Opinion from the social affairs commission of the Parliament, quoting the Gallois report on competitiveness of the French industry (submitted to the French prime minister on 5 November 2012).
20 The board's exercise of its discretion is subject to the principles of the AMF takeover regime, the articles of incorporation and the limits of the powers granted by the shareholders' general meeting, as well as of the corporate interest of the company. For more background regarding the new French takeover regime, please refer to our 2 March 2015 memorandum, 'Recent Legal Developments Affecting French Tender Offers', available at http://xbma.org/forum/french-update-recent-legal-developments-affecting-french-tender-offers/.
21 C. com. Article L. 225-37.
23 French law and regulation prohibits transactions or trading orders that (1) are likely to or actually gives false or misleading signals as to the market for or price of public securities, (2) have the effect of setting or maintaining an artificial price for public securities, or (3) involve fictitious or deceptive devices or methods.
24 This includes disseminating information that gives or may give false, imprecise or misleading signals as to French securities, including spreading rumors, although the person knew, or should have known that the information was false or misleading.
25 This includes requirements that (1) reasonable diligence be exercised to ensure that information is presented in an objective manner, (2) the obligation to expressly disclose possible conflicts of interest, as well as (3) the obligation to clearly distinguish between factual and nonfactual matters (interpretations, estimates, opinions, etc.).
26 Jean-Baptiste Jacquin, 'Renault: l'Etat “activiste”, pour quoi faire ?', Le Monde (16 April 2015) available at www.lemonde.fr/economie/article/2015/04/16/renault-l-etat-activiste-pour-quoi-faire_4617225_3234.html.
27 Lazard Shareholder Advisory, European Shareholder Activism: 2017 in Review, at 2.
28 Compare FTI Consulting, global shareholder activism map (for France, estimating 10 campaigns in 2015 and eight campaigns in 2016) available at http://fti.digital/global-shareholder-activism-map/countries/france/ and Activistmonitor, Activism in Europe 2016 (2017) (for France, estimating two campaigns in 2015 and seven campaigns in 2016). This can be compared with an estimated 645 campaigns in the United States in 2016. AFP, L'Europe nouvelle cible des fonds activistes américains, Capital.fr (30 June 2017).
29 There has been a steady increase from 2014 to 2016 in the number of external resolutions being proposed by shareholders. In 2016, 45 external resolutions in 12 companies were proposed by shareholders, compared to 2015 where 30 external resolutions were proposed in nine companies and 2014 where 13 external resolutions were proposed in eight companies. Proxinvest, Assemblées Générales et Activisme Actionnarial saison 2016-Tome 1, Section 2.3.2.
30 In 2016, 67 per cent of activist projects in France involved affecting the composition of the board of directors or the supervisory board (an increase from 54 per cent in 2015). Id.
31 Id. (in 2016, of 45 external resolutions, 30 were rejected and eight adopted with the remainder either unavailable or otherwise distinct).
32 Other EU jurisdictions with 90 per cent squeeze-out thresholds include Austria, Denmark, Germany (only for mergers), Hungary, Ireland, Poland, Spain, Sweden and the UK.
33 Nicole Notat et Jean-Dominique Senard, L'entreprise, objet d'intérêt collectif (9 March 2018). Cf. Lynn Stout, The Shareholder Value Myth (2012).
34 See, e.g., Alon Brav et al., Robert H Smith School Research Paper No. RHS 2529230; European Corporate Governance Institute (ECGI), Wolf Pack Activism (1 April 2017) available at SSRN: https://ssrn.com/abstract=2529230.
35 See generally JP Morgan, 'The 2017 Proxy Season Globalization and a new normal for shareholder activism' (July 2017).
36 Cf. Hélène Fouquet, 'Macron's Unfinished Job at Renault Heralds Future Assets Sales', Bloomberg (20 June 2017) accessible at www.bloomberg.com/news/articles/2017-06-19/macron-s-ministers-meet-
37 Id. (discussing high activity of smaller first-time activists in the United States in 2017).
38 Elsa Bembaron, Le fonds Elliott prive Vivendi du contrôle de l'opérateur Telecom Italia, Le Figaro (5 May 2018) (discussing the victory of Elliott Management – a 9 per cent shareholder – over Vivendi – a 23.9 per cent shareholder – in Telecom Italia's shareholder meeting, in which shareholders voted in favour of Elliott's slate of 10 board members, leaving Vivendi with just five seats).
39 See, e.g., Sahil Mahtani, Groupe Bolloré and Elliott go head-to-head over Telecom Italia, Financial Times Alphaville (3 May 2018).