In October 2010, the LVMH group, owner of famous brands such as Louis Vuitton and Dior, stunned the market and the French regulator by secretly increasing its interest in the share capital of Hermès, a family-owned company listed on the French regulated market. The president of the French securities regulator, the Autorité des Marchés Financiers (AMF), reacted by stating “very often, France remains the wildwest in terms of public takeovers and crossing of thresholds”. After much debate, the French legislature, aware of the weaknesses of the current legislation, finally tackled the problem by adopting Law 2012-387 on 22 March 2012, relative to the simplification of the law and of administrative procedures, known as the Warsmann law.
Directive 2004/109/EC of the European Parliament and of the Council dated 15 December 2004, known as the transparency directive, has been adopted in France under articles L. 233-7, L. 233-9 and L. 233-14 of the French commercial code. It provides that a shareholder of a company listed on the regulated market must notify the AMF and the company itself of the crossing— upwards or downwards—of the following thresholds: 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent, 30 per cent, one-third, 50 per cent, two-thirds, 90 per cent and 95 per cent of the shares or voting rights of the company.
A key element of the regulation is the scope of the changes that must be taken into account when determining whether there is an obligation to notify the AMF that a threshold has been crossed. Shares held directly by the shareholder must obviously be accounted for, but the French commercial code also provides that certain securities, agreements or financial instruments must be assimilated for the purpose of the calculation. In short, under the current legislation all the shares that are controlled, directly or indirectly, alone or in concert with a third party, or at the sole option of the shareholder (e.g., through call options, forwards, futures or exchangeable bonds) are included the calculation. The regulation excludes securities, agreements or financial instruments that do not give their holder a definitive right to acquire shares, most notably cash-settled derivatives, such as equity swaps or total return swaps that, theoretically, are settled in cash and not equity.
As shown by some high profile cases in France, the use of cash-settled derivatives can lead to serious disruption of the market.
In principle, cash-settled derivatives must be settled in cash. In practice, however, it is possible for the holder to obtain a settlement by physical delivery of the underlying shares, which the bank that sold the derivative has an obligation to hold until they reach maturity but usually does not wish to keep in its portfolio upon settlement. In the Hermès acquisition, a simple amendment to the cash equity swaps agreement allowed LVMH to obtain from the banks physical delivery of the Hermès shares they held. LVMH had no obligation to notify the AMF or Hermès that it was crossing a threshold at the time it purchased the equity swaps from the banks. It was only a few days later, when the equity swaps were settled in shares, that Hermès and the market suddenly found out that LVMH now owned 15 per cent of the share capital of Hermès.
Similar cases of secret stake-building have occurred before, in France and abroad. In October 2008 Porsche announced it had built up a stake in Volkswagen amounting to 72 per cent of its share capital, almost half of which had been acquired without triggering disclosure requirements. In 2005 the Fiat holding company was able to maintain its control of the group without triggering disclosure obligations and mandatory tender offer rules by amending a cash-settled derivative with underlying Fiat shares through physical settlement.
In October 2008, before LVMH’s acquisition of a minority interest in Hermès, a report prepared under the auspices of the AMF had already recommended the assimilation of all cash-settled derivatives for the purpose of the threshold-crossing calculation. Unfortunately, the French legislature chose another route at that time: the Ordinance of 30 January 2009 provided that cash-settled derivatives would be notified separately and consequently were excluded from the calculation of crossings of thresholds.
Since then, however, the legislature has changed direction. LVMH’s acquisition of Hermès exposed the weaknesses of French regulations and the risks of secret stakebuilding and market-disruption. In response, in an attempt to make the French securities market more transparent and attractive, the legislator looked at neighbouring European countries. Germany, Portugal, Switzerland and the United Kingdom have all adopted rules requiring cash-settled derivatives to be accounted for in the calculation of the thresholds. Finally, the European Commission published on 25 October 2011 a proposal for a Directive on transparency requirements for listed companies which, if it had been adopted, would have forced France to assimilate cash-settled derivatives to shares.
The Warsmann Law
The French legislature finally tackled the issue with the Warsmann law, which comes into force on 1 October 2012 and introduces a new regime.
It provides specifically that financial instruments that could be used to acquire an economic interest in a listed company (i.e., cash-settled derivatives) are assimilated as equity for the purpose of calculating whether a threshold has been crossed.
It also excludes cash-settled derivatives from the calculation of the threshold that triggers the obligation to make a public takeover (in France now 30 per cent of the share capital or voting rights). The rationale is that the rule on public takeovers is based on actual control, whereas cash-settled derivatives, until they are settled by physical delivery, do not contribute to their holder having control of the company.
There is a new requirement that the shareholder holding cash-settled derivatives must declare his intentions as to their settlement, i.e., whether he intends to settle in cash or otherwise.
Finally, it provides that the règlement général (general regulation) of the AMF should specify the conditions for the notification of a change in the ratio between equity and assimilated shares held by a shareholder. The AMF has not adopted these conditions to date.
It is interesting to note that, with the Warsmann law, the French legislature does not go as far as the draft bill urged. In particular, the legislature rejected the proposal to create an additional threshold at 3 per cent of share capital or voting rights, on the basis that this new threshold could flood the AMF with crossing notifications. Improved transparency is clearly still a work in progress.