If 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 comprising professional hedge fund activists, including prominent activists from the United States and the United Kingdom. As in other major jurisdictions, it has also observed an increasing willingness of traditional investment funds to align themselves with activist funds or to even 'go activist' in certain cases. The amounts deployed by US and European activists against European targets fell in 2018 from the record-breaking amounts of 2017, but nonetheless reflected an ongoing significant increase compared with prior years.2
French and European laws and regulations furnish both the 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 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 Autorité des marchés financiers (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 0.5 per cent or more of the voting rights in a listed company incorporated in France must notify the issuer and the AMF no later than the second business day before a shareholders' meeting.4 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).5 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. Failure to adhere to these reporting obligations may result in significant sanctions.
Further, the disclosure obligations require any holder that comes to hold 10, 15, 20 or 25 per cent of the share capital or voting rights of an issuer 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.6 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.7 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 trading days of its signature.8
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.9 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 (e.g., a change of strategic direction or approval of certain transactions).10
Further, any director may be removed (and replaced) at any shareholders' meeting by a simple majority vote of the shareholders, upon the 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.11
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 if the company has failed to call the relevant meeting following a specific request.12 The same process can be used to appoint an independent expert to investigate one or more past or contemplated management decisions.13
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.14 In addition, all shareholders have the right to participate in the discussion of issues raised at a shareholders' meeting,15 in accordance with the topics set forth in the agenda for the meeting.16
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.17 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.18 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 if 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.19 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. If the ex ante vote is negative, the resolution fails and the previously approved principles and criteria remain applicable. 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. If the vote is negative, the variable and exceptional compensation is not payable. The first ex post shareholder votes under the new law occurred in 2018.
In 2018, the average approval rate for ex ante votes was 88.89 per cent and 88.53 per cent for ex post votes, but with significant variations in the level of approval.20 Only one negative vote was reported.21 Although the law does not sanction low approval rates, at least two proxy agencies have set 80 per cent as a threshold to consider that the shareholders' vote may not be deemed satisfactory from a corporate governance standpoint. If issuers do not react in a meaningful manner, agencies recommend voting against the re-election of the chair of the remuneration committee or other committee members the following year.22 As expected, activists have not hesitated to use say-on-pay provisions as a basis to orchestrate a no confidence vote in management.23
Double voting rights and takeover defences
French shareholders automatically benefit from double voting rights for shares that have been held for more than two years in registered form, unless the articles of the company expressly provide otherwise.24
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'.25 Some studies have suggested that this rule has favoured reference shareholders and decreased foreign institutional investment in companies that have not opted out.26
France has also opted out of the passivity rule, so that a board of directors may now take measures aimed at frustrating a hostile bid.27 This provides companies with greater flexibility to negotiate with a potential bidder or an alternative acquirer, or to refuse an offer they do not deem to be in the company's best interests. As expected, activists have increasingly sought to challenge directors' exercise of discretion in that respect.28
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.29 If 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.30
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 Code. The High Committee is also responsible for proposing amendments to the AFEP-MEDEF Code in light of changing practices, and recommendations made by the French market regulator or investors.
Depending on the activist's strategy, certain recurrent issues may expose it to potential liability. This includes insider trading, market manipulation31 and dissemination of false information,32 as well as potential violations relating to financial analysts and investment research.33 The year 2018 has seen the development in France of a new type of short activism with a heated debate on the distinction between market misconduct and activism.34
III KEY TRENDS IN SHAREHOLDER ACTIVISM
French native activists primarily comprise both financial and industrial perspectives, and include occasional as well as persistent activists. The former includes investment funds and individuals such as Amber Capital (UK-based but with founders with strong French ties), Charity Investment Asset Management (CIAM), 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. Finally, French associations of minority shareholders, such as the Defence Association of Minority Shareholders and SOS Small Holders, continue to play a role, including in litigation, sometimes in partnership with other activists.
Foreign activists primarily comprise long financial activists, notably including in recent years Cevian Capital (Sweden), Elliott Management (US), Pardus Capital Management (US), the Children's Investment Fund (TCI) (UK), Third Point (US) and Trian (US). The US-based short seller Muddy Waters has also been active in France.
The number of campaigns in France held steady in 2018 with approximately 10 companies subject to public activist demands and seven new activist campaigns.35 Given the relatively small number of activist interventions in France (estimates are eight for 2017, and vary from seven to eight in 2016, and two to 10 in 2015), 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, Pernod Ricard, Safran, Scor, Suez Environnement, 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 as follows:
- seeking an exceptional dividend or spin-off (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 the break-up of the company);
- militating for improved performance (Carrefour, Nexans, Pernod-Ricard, Rexel);
- seeking to extract additional value or otherwise intervening in the context of an M&A transaction (Scor/Covéa, Safran/Zodiac, XPO/Norbert Dentressangle, Euro Disney, Etablissements Maurel & Prom/MPI); and
- abandoning takeover protections (Lagardère).
Tactics can take a variety of forms, evidently determined in light of the strategy and situation, typically involving implementing certain tools referred to in the preceding sections, including as follows:
- seeking to add items to the agenda of a shareholders' meeting or propose new resolutions (CIAM regarding Scor; Wyser-Pratte regarding Lagardère; TCI in Safran/Zodiac);
- seeking board seats (Amber regarding Lagardère; Cevian Capital in relation to Rexel; CIAM as regards Locindus and Alès Groupe; Pardus Capital Management regarding Valeo; Pardus Capital Management and Centaurus Capital in relation to Atos Origin; PhiTrust in relation to EssilorLuxottica; SFAM as regards FNAC Darty; Sterling Strategic Value and La Financière de l'Echiquier regarding Latécoère);
- seeking a court-appointed independent expert (Elliott in its countersuit against XPO);
- 'no' campaigns on executive compensation (CIAM regarding Scor; 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));
- blocking a squeeze-out (Elliott regarding APRR and XPO Logistics Europe);
- orchestrating a public relations campaign, including letter writing (including lobbying individual board members or relevant regulators), press interviews and, most crucially, the lobbying of proxy advisers; and
- in relatively rare cases, initiating litigation (CIAM regarding Euro Disney; CIAM against Altice).
In the authors' experience, a strong response to an activist by the board and management and their advisers often includes, among other things:
- advance planning, to deliver strong teamwork in a crisis by and among the board, management and advisers as well as other key internal constituencies;
- ongoing monitoring and rapid response to warning signs;
- in the event of a public attack, implementing communication that is coherent on all fronts;
- maintenance of dialogue with relevant regulators, proxy advisers and other key constituencies, including other significant shareholders;
- careful analysis of missteps by the activist or weaknesses in its approach;
- in certain cases, the seeking of regulatory intervention and even initiation of litigation; and
- avoidance of 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 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.
i Scor SE/CIAM (2018–2019)
After having acquired 0.77 per cent of the capital of French reinsurer Scor SE in September 2018, CIAM wrote a letter to Scor's chair and CEO, Denis Kessler, criticising the rejection by Scor of a takeover offer of €43 a share from Covéa, a French mutually owned insurance company. Arguing that Covéa's offer was neither compatible with Scor's strategy of independence nor adequately priced and reflecting the intrinsic value of Scor, Denis Kessler strongly rejected CIAM's accusations. After further public exchanges, CIAM campaigned against Scor's governance structure and sought to include the separation of the roles of chair and CEO in the agenda of the next shareholders' meeting. Scor's shareholders ultimately voted against CIAM's governance proposal (74.37 per cent) and in favour of the CEO's pay package and compensation policy by a small majority (54.46 per cent and 54.56 per cent).
ii Pernod Ricard/Elliott Management (2018–2019)
Elliott Management announced in December 2018 that it had acquired a 2.5 per cent stake in Pernod Ricard and issued a press release expressing dissatisfaction with the company's alleged material underperformance, disappointing M&A track record and inadequate governance. The company announced efforts to improve its corporate governance and created a new position of lead independent director. Following the disclosure of dialogue with Elliott Management, news reports also indicated that Pernod Ricard was considering selling its wine division. In April 2019, the company announced that it had agreed to buy premium gin brand Malfy and disclosed the adoption of a three-year plan to accelerate its growth and improve its profitability.
V REGULATORY DEVELOPMENTS
There have been a number of recent developments relevant to activism.
French law is becoming increasingly concerned with the promotion of a long-term approach to shareholder engagement and corporate conduct. As part of significant reforms implemented this year, directors and executives must comply with a statutory obligation to take into account the social and environmental aspects of corporate activities, and to abide by the corporation's purpose if one has been provided in the articles of association. Even though most of the legal implications of those statutory concepts are yet to be clarified by jurisprudence, the new law provides new grounds for corporate directors to defend against activist attacks and takeovers.36
As has been widely reported, the entry into force of MiFID II in January 2018 has resulted in a decrease in the extent and, in many cases, the quality of sell-side analyst coverage of equity securities in Europe. The decline of more neutral and objective coverage may increase the influence of activist analyses, whether long or short.
French law now requires asset management companies to develop and disclose a shareholder engagement policy in which they must describe how they account for their role as a shareholder of the companies they invest in.37
Proxy advisers are now subject to a comply or explain principle similar to the principle applicable to listed companies. Accordingly, proxy advisory firms have to elect for a professional code of conduct or explain why they do not do so.
To inform their clients about the exact extent and reliability of their activities, proxy advisers must publish annually the information on the preparation of their research, advice and voting recommendations. They must also inform their clients of their conflict of interest prevention policies and disclose any conflicts to their clients.
If current conditions and trends continue, activism appears poised to continue to play a vibrant role in France. Based on worldwide trends, a maturing of the international component of French activism may be expected, including as following:
- continuing major activist interventions in France;
- non-activist institutional investors becoming more 'active', ranging from supporting activists campaigns (Financière de l'Echiquier in its team-up with Sterling Strategic Value concerning Latécoère) to themselves opportunistically going activist (e.g., occasional activist P Schoenfeld Asset Management in its Vivendi campaign, and PhiTrust, Edmond de Rothschild, Fidelity International and Sycamore Partners regarding EssilorLuxottica);
- companies becoming the targets of distinct serial activist interventions (in addition to wolf packs);38 and
- more sophisticated39 and increasingly M&A-focused activist campaigns.40
We may also see an increase in activism against targets that had previously been sheltered by the French state as it reduces its exposure in certain listed companies.41 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.42 Elliott Management's victory in Telecom Italia43 may be a harbinger of a more aggressive approach regarding companies with reference shareholders that lack outright control (a shareholder structure that is relatively common in Europe),44 as evidenced by Elliott Management's more recent campaign at Pernod Ricard.45
1 Jean-Michel Darrois is the founding partner and Bertrand Cardi and Forrest G Alogna are partners at Darrois Villey Maillot Brochier. The authors wish to thank Martin Lodéon, an associate of the firm, for his assistance in preparing this chapter.
2 Lazard Shareholder Advisory Group, 2018 Review of Shareholder Activism, p. 12 (January 2019).
3 Commercial Code (C. com.) Articles L. 233-7 I-II and 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 C. com. Articles L. 225-126 and R. 225-85.
5 EU Regulation No. 236/2012 on short selling and certain aspects of credit default swaps, Articles 5 and 6 (14 March 2012).
6 C. com. Article L. 233-7 VII.
7 C. com. Article L. 233-7 III.
8 C. com. Article L. 233-11 al. 1.
9 C. com. Article L. 225-105.
10 See, e.g., Safran, Addendum to the Meeting, Ordinary and Extraordinary Shareholders' Meeting of Thursday, 15 June 2017, p. 9.
11 C. com. Articles L. 225-18 and L. 225-105.
12 C. com. Article L. 225-103 II 2.
13 C. com. Article L. 225-231.
14 C. com. Article L. 225-108.
15 Civil Code 1844 alin. 1; C. com. L.242-9 alin. 1er (€9,000 fine for blocking a shareholder from participating in a shareholders' meeting).
16 C. com. Article L. 225-105, al. 3.
17 C. com. Article L. 225-117.
18 C. com. Article L. 233-10.
19 C. com Articles L. 225-37-2 and L. 225-100.
20 Report of the High Committee for Corporate Governance, p. 22 (October 2018).
21 Since the implementation of the statutory say-on-pay framework, only one negative vote was reported with 34 per cent of the shareholders of CGG approving the package of the company's CEO.
22 Proxinvest and Glass Lewis voting policies.
23 e.g., this was the strategy of CIAM in its challenge to Scor's decision to reject Covea's bid in 2018.
24 C. com. Article. L. 225-123. Shares may be registered with the issuer itself or with a broker.
25 Opinion from the social affairs commission of Parliament, quoting the Gallois report on competitiveness of the French industry (submitted to the French prime minister on 5 November 2012).
26 'Loi Florange: les droits de vote double découragent les grands fonds étrangers', available at: www.lesechos.fr/finance-marches/marches-financiers/loi-florange-les-droits-de-vote-double-decouragent-les-grands-fonds-etrangers-963563
27 C. com. Article L. 233-32. 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.
28 This was the strategy of CIAM in its challenge to Scor's decision to reject Covea's bid in 2018.
29 C. com. Article L. 225-37.
31 European laws and regulations prohibit transactions or trading orders that (1) are likely to or actually give 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.
32 This includes disseminating information that gives or may give false, imprecise or misleading signals as to French securities, including spreading rumours, although the person knew, or should have known that the information was false or misleading.
33 This includes the following requirements: (1) that 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 non-factual matters (interpretations, estimates, opinions, etc.).
34 See, e.g., the Casino case and the AMF warnings: 'L'AMF met en garde les fonds vendeurs à découvert au sujet de Casino', available at: https://investir.lesechos.fr/actions/actualites/repete-l-amf-met-en-garde-les-fonds-vendeurs-a-decouvert-au-sujet-de-casino-1805329.php
35 Activist Insight.
36 'L'intérêt social joue un rôle déterminant dans les possibilités de défense de la société lors d'une OPA hostile', available at https://business.lesechos.fr/directions-juridiques/droit-des-affaires/statuts-des-societes/0301936235752-interet-social-et-raison-d-etre-en-defense-d-opa-322735.php
37 Monetary and Financial Code Et fin. Article L.533-22.
38 See, e.g., Alon Brav et al., Robert H Smith School Research Paper No. RHS 2529230; European Corporate Governance Institute, 'Wolf Pack Activism' (1 April 2017), available at SSRN: https://ssrn.com/abstract=2529230
39 'Vivendi locks horns with Elliott over equity derivatives', available at https://www.ft.com/content/95e64656-344f-11e9-bb0c-42459962a812
40 See generally JP Morgan, 'The 2017 Proxy Season Globalization and a new normal for shareholder activism' (July 2017).
41 Renault, Air France, Engie, among others.
42 id., (discussing high activity of smaller first-time activists in the United States in 2017).
43 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 Management's slate of 10 board members, leaving Vivendi with just five seats).
44 See, e.g., Sahil Mahtani, 'Groupe Bolloré and Elliott go head-to-head over Telecom Italia', Financial Times Alphaville (3 May 2018).
45 See details of the 2019 campaign in Section IV.ii. The Ricard family remains the largest shareholder of Pernod Ricard.