France Amends Takeover Bid Regulations
The French Parliament adopted on 24 February 2014 the “Florange” act which aim is to give new perspectives to the real economy and industrial employment (the “Act”).
The Act substantially amends French law on takeover bids and listed companies with respect to the following matters:
− Reinforcing of the role played by works councils with the introduction of an information-consultation procedure (procédure d’information-consultation) in the event of a change of control (1);
− Introduction of an automatic minimum acceptance threshold (50%) for voluntary and mandatory takeover bids (2);
− Lowering the mandatory bid threshold governing accumulation of shares by shareholders holding between 30% and 50% of the share capital of a listed company (3);
− Introduction of an automatic double voting right for shares that have been held for more than two years (4); and
− Abandonment of the board neutrality principle during the offer period (5).
The provisions relating to the automatic minimum acceptance threshold (2) and to the automatic double voting right (4) will come into force the day after the Act is published in the Journal Officiel, i.e. within two or six weeks as from 24 February 2014, depending on whether the Act will be presented to the French Constitutional Council (Conseil Constitutionnel)1.
However, the provisions relating to the procedure for notifying and consulting the works council (1), to the “speeding ticket” rules (3) and to the abandonment of the board neutrality principle (5) will only come into force the first day of the fourth month following the promulgation of the Act so as to allow the French Autorité des marchés financiers (AMF) to determine the conditions of application of the new measures to be inserted in the "General Regulations" of the AMF.
1 The French Constitutional Council shall rule within 1 month as from the day the Act is submitted to it.
For further information, please
Raphaële François-Poncet +33 1 44 17 53 79 [email protected] bakermckenzie.com
François-Xavier Naime +33 1 44 17 53 31 [email protected] bakermckenzie.com
2 Client Alert, M&A Paris February 2014
1. Reinforcing the role played by works councils in takeover bids
Until now, the mandatory procedure for notifying and consulting the works council which applied in the event of a transaction resulting in a change of control (in particular, share deals or mergers) did not apply to takeover bids. Target employee representatives were only entitled to receive some information and the exercise of that right was subject to strict time limits2.
In essence, an initial meeting of the works council had to be called immediately after the draft offer had been filed with the AMF by the bidder to enable the works council to discuss the terms of the offer, declare whether the offer was friendly or hostile and decide whether or not to call a hearing with the bidder. A second meeting then had to be held within fifteen days following the publication of the offer document (note d’information) approved by the AMF, to review the final terms of the offer (in particular the information relating to the offer’s impact on the employees and the industrial organisation of the new group) and, as the case may be, hear the representatives of the bidder.
Absent any consultation process nor any serious constraints regarding the quality or relevance of the information supplied, the works councils could barely influence the terms of the proposed offer or the timetable, especially as the hearing with the bidder could only be held after the AMF’s approval decision (décision de conformité).
The Act significantly alters this principle and now requires the target to implement an information-consultation procedure with the works council in the event of a takeover bid3. Furthermore, to enable employees to assert their interests, the target’s board cannot deliver an opinion on the offer and the approval of the AMF cannot be issued until, in each case, the target’s works council has given its opinion.
More precisely, an initial meeting of the works council must take place very shortly after the draft offer is filed. At this meeting, the works council decides whether it wants to call a hearing with the bidder and whether it wants to seek the assistance of a qualified accountant, such designation being not subject to any specific criteria. The hearing with the bidder must take place within one week of the filing of the draft offer and the qualified accountant must deliver his report on the bidder’s industrial and financial policy and strategic plans as regards the target4 within three weeks of that same date.
In order to carry out his task, the accountant shall have access to all information deemed necessary to assess the scope of the transaction both from the bidder and the target. Should this information not be made available to the accountant, the works council may apply to the Président of the Tribunal de Grande instance (Regional Court), deliberating in summary proceedings and without the possibility of appeal, for an order that the
2 Article L2323-21 of the French Labour Code.
3 Indeed, these measures will not apply to takeover bids filed by bidders holding alone or in concert more than 50% of the share capital or voting rights when the draft offer is filed.
4 The report must also assess “the repercussions of implementing [the bidder’s industrial and financial policy and strategic plans] on all interests and on the employees, business sites and the localisation of decision-making centres”.
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missing documents be provided by the bidder or the target5. Extending to the bidder the accountant’s right to obtain information may be misunderstood by bidders as, due to the public nature of the accountant’s report, it could conflict with trade secrecy, particularly if the bid is unsuccessful.
Following the hearing with the bidder and the delivery of the qualified accountant’s report, the works council must give an opinion on the offer. It must give its opinion within one month of the draft offer being filed6. If not, the works council will be deemed to have been consulted. This one-month period may, however, be extended by an express Court order, if an application is made to Court to settle a dispute regarding the availability of information required for the accountant’s report7. The works council’s opinion and the accountant’s report are made public in the response document (note en réponse) issued by the target.
Lastly, should the bid succeed, the bidder must report to the works council on the implementation of the declared intentions. If undertakings have been given during the hearings referred to above (relating to employees, the maintaining of business sites and the localisation of decision-making centres) the bidder shall have to demonstrate that they have been implemented. Three reports must be provided respectively during the sixth, twelfth and twenty-fourth months following the closing of the offer.
The aim of these new measures is obviously to increase the involvement of employees of French companies in the takeover bid process by arranging for better information to be provided to their representatives and enable the latter to defend interest of those they represent. In no case the Law implements a right of veto to the works council of the target. The success or the failure of a takeover bid remains in the hands of the shareholders.
However, by giving the opportunity to the works council to bring takeover bids to courts, these measures introduce additional uncertainties as regards the offer timetable and raise concerns among investors which usually will seek for regulations providing for expeditious takeover bid process.
2. Automatic minimum acceptance threshold for voluntary and mandatory takeover bids
Unlike the US and UK regimes, French law strictly limits conditions precedent in the event of a takeover bid according to the principle that bids must be irrevocable. No minimum acceptance threshold is imposed by the regulations and, whilst a bidder making a voluntary bid is authorized to make its bid conditional on reaching a threshold that is, in practice, between 50% and 66⅔% of the share capital or voting rights, this option is not available in respect of mandatory bids.
5 The court must rule within eight days.
6 Please note that the information-consultation procedure timeframe is now identical (i.e. a maximum of 1 month) in the event of a merger or a takeover bid; this alignment may help investors to forget notorious precedents such as Suez/GDF (a transaction, the implementation of which had been delayed more than 1 year as the works council refused to give an opinion on such transaction) and to pay more attention to the merits of the merger.
7 The court may not decide to extend the one-month period if the withholding of information is the target’s fault.
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As the result of two years’ thoughts on the subject8, the Act markedly changes this approach by introducing a mandatory minimum acceptance threshold of 50% for both voluntary and mandatory bids, thus bringing French rules into line with the UK example. Therefore, any bid as a result of which the bidder does not hold more than 50% of the target’s shares or voting rights will lapse.
As for voluntary bids, the introduction of a minimum acceptance threshold does not amount to a revolution as most of the voluntary bids filed in recent years were conditional on a successful threshold being reached. The mandatory nature of the minimum acceptance threshold will thwart strategies involving a voluntary bid being made at a low price on issuers with a dispersed shareholding structure in order to obtain de facto control without paying a control premium9. For that reason, the new measures have overall been well received by market players.
More controversially, the legislator has decided to extend this measure to mandatory takeover bids. The rationale of mandatory bids under French law is principally to provide minority shareholders with liquidity in the event of a change of control (generally following the transfer of a controlling block) of the company in which they hold shares. No condition precedent whatsoever was therefore accepted until now.
The Act goes back on this principle by introducing a mandatory minimum acceptance threshold for all mandatory takeover bids. The legislator thus wanted to avoid unscrupulous bidders using the mandatory bid regime to bypass the automatic minimum acceptance threshold for voluntary bids and thus avoid having to pay a control premium which is the underlying requirement of the 50% automatic minimum acceptance threshold10.
Should a mandatory bid lapse, a dissuasive regime will apply. On the one hand, voting rights attaching to shares acquired on the block disposal that led to the 30% threshold being exceeded will be suspended for the fraction in excess of the said threshold. On the other hand, if the bidder has exceeded the 30% threshold, it is no longer permitted to acquire any shares in the target (including via the “speeding ticket” mechanism11) unless it initiates a new offer. Voting rights attached to the shares held in excess of the 30% threshold will be reinstated only in the event that the new offer is successful (i.e., the 50% threshold being exceeded).
Thus, an investor who has irrevocably acquired a controlling interest of 40% may therefore find itself trapped with voting rights capped at 30% and unable to increase its shareholding without filing a new offer in the event that the mandatory bid following the controlling interest transfer has failed to reach the 50% threshold. In the light of this example, one can well imagine that the common practice of block transfers, which is particularly suited to French companies that often have a stable core of shareholders with no de jure
8 AMF public consultation on proposals to change certain provisions of its General Regulations relating to takeover bids (December 2011).
9 Please see the SiegCo/Valtech (2009) and Axel Springer/Seloger.com (2010) precedents.
10 To the extent that the rule of the minimum price for the mandatory bid corresponding to the highest price paid by the bidder during the twelve months prior to the filing of the bid could prove to provide less protection than the requirement for a market price which underlying the 50% automatic minimum acceptance threshold.
11 Please see section 3 below.
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majority, and which allows real flexibility with respect to conditions precedent unlike the voluntary bid process, risks being abandoned for any disposal of an interest representing less than 50% of the shares or voting rights.
3. Mandatory bid: the “speeding ticket” threshold lowered to 1% for shareholders with holdings between 30% and 50%
Until now, the French law on mandatory takeover bids required a bid to be filed when: (i) a shareholder’s holding exceeded, directly or indirectly, alone or in concert, the threshold of 30% of the shares or voting rights; or (ii) a shareholder holding between 30% and 50% of the shares or voting rights, alone or in concert, acquired 2% or more of the shares or voting rights in the company over a twelve-month rolling period (a mechanism known as the “excès de vitesse d’acquisition” or “speeding ticket” mechanism)12.
In order to discourage creeping takeovers, the initial bill intended to lower the first mandatory bid threshold from 30% to 25% to avoid any further changes of control achieved by the creation of an interest just below such mandatory bid threshold.
However, because of the risks to alter the competitiveness of the Paris market place and the need to maintain a minimum of consistency with laws in other EU Member States (which all provide for a mandatory bid threshold between 30% and 50%13), the legislator has eventually decided to do an about-turn, especially as such an amendment would have required the adoption of particularly complex transitional measures.
There is another, less well-known, reason for this change in strategy: in order to truly protect the rights of minority shareholders, the new regime would actually have needed to lower the mandatory bid threshold to 20% rather than 25%, given how the shareholding of French public companies is structured, which was unimaginable in the current European landscape.
As a compromise, the “speeding ticket” threshold has been lowered, from 2% to 1% of the shares or voting rights, to force investors with de facto control to file a takeover bid should they wish to significantly increase their holding in the company within a reasonable timeframe. This reform appears to have been well received by market players, in particular since the new rule remains more liberal than its UK equivalent which prohibits any acquisitions for shareholders with a stake between 30% and 50%.
4. Automatic double voting right for shares held for more than two years
Unique in the European Union so far as we are aware, French law allows issuers to provide in their articles of association for a double voting right for shareholders who have held their shares in registered form for at least two years14.
12 Article L433-3 of the French Monetary and Financial Code.
13 Except Croatia (Report of Mrs. Clotilde Valter regarding the Act dated 17 July 2013).
14 Article L225-123 of the French Commercial Code.
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What makes the double voting right unique is that it is not attached to the share but to the shareholder. The double voting right disappears in the event of a transfer, other than through inheritance. The double voting right mechanism is therefore very different from the categories of shares with multiple voting rights that are authorised in certain EU Member States.
The minimum holding period required to qualify for the double voting right is generally between two and four years although the articles of association of some issuers provide for longer periods15.
Even if approximately 60% of the CAC 40 companies have adopted this double voting right mechanism, it has always been optional under French law and to date it required approval at an EGM.
The Act has overturned this principle by introducing an automatic double voting right for shares held for over two years. The exception has therefore become the rule. After a period of two years from the date the Act comes into force, shareholders of French companies (the securities of which are listed on a regulated market) who have held their shares in registered form continuously during this period will therefore have a double voting right.
However, issuers are able to continue to adhere to the “one share – one vote” principle. To do so, they must arrange for an EGM to adopt a resolution that the articles of association include a departure from this new rule. This resolution must be adopted within two years of the Act coming into force, failing which the double voting right shall automatically apply until the resolution is suitably approved.
Lastly, for issuers that have already adopted a mechanism in their articles of association for a double voting right for shares held for over two years (or more), the applicable mechanism remains the same.
This systematisation of the double voting right, intended to encourage long-term investment and avoid creeping takeovers, could in the end prove to be counter-productive for some issuers with a dispersed shareholding structure as it may give activist funds the tools to artificially influence decisions at general meetings.
5. Abandoning the board neutrality
When the Takeover Bids Directive16 was transposed in 2006, France chose to establish a principle of board neutrality during the bid process, pursuant to which no measure that could frustrate a bid (other than seeking alternative bids) could be taken by the board of directors or general management without the prior consent of the shareholders in a general meeting17.
The majority of EU Member States (including the UK) have adopted the same position as France (opt-in). However, some (such as Germany), using the freedom given by the Takeover Bids Directive on this point18, have
15 The articles of association of Pernod Ricard provide for a holding period of 10 years.
16 Directive 2004/25/EC dated 21 April 2004 regarding takeover bids.
17 Article L233-32 of the French Commercial Code.
18 Article 12 of the Takeover Bids Directive.
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preferred to give boards a free hand, according to a different idea of how capitalism should be regulated (opt-out).
So that there is a level playing field for all European players, the Takeover Bids Directive permits EU Member States that adopt the principle of neutrality to qualify it with a “reciprocity” rule exempting companies that are the subject of a hostile bid from any requirement of neutrality where the bidder is not itself subject to such a requirement. Logically, France introduced the “reciprocity rule” into its positive law at the same time as establishing the principle of board neutrality19.
Lastly, to complete the rules governing anti-takeover defences, France, inspired by the same liberal philosophy, had imposed to neutralize “advance” defensive measures, by providing that any authorization granted to the board of directors by shareholders' general meetings and which could jeopardize the bid would automatically be suspended during a takeover bid.
In order to promote the "real economy" and to combat hostile bids that are regarded as detrimental to employment, the Act now revises the choice made in 2006 by using the opt-out right set out in the Takeover Bids Directive. The desire to protect leading French companies against hostile takeovers is probably behind this about-face.
Thus, pursuant to the Act, boards20 will now have the right to take any measure they wish to frustrate an unsolicited bid, provided that this is not contrary to the company’s corporate interest (which could raise a number of concerns regarding the liability of its members) and the powers expressly given to general meetings of shareholders.
In practice, this means that, when faced with a hostile bid, the board of an issuer may now decide, without the prior approval of the general meeting of shareholders, to sell or acquire strategic assets, sell a block of treasury stocks to a "white knight" or arrange a counter-offer.
For consistency purposes with the new framework, the Act also abandons the rule which suspended the authorizations granted to the board by shareholders once a bid was announced as well as the reciprocity exemption which no longer has any raison d’être with the new measures. Most probably, this new framework will enable “bons d’offre” (takeover warrants) to come back into fashion, the development of which had been held back by the suspension of the issuance authorisation in the event of a hostile bid, subject to the reciprocity rule.
However, the new flexibility granted by the Act to the target boards with respect to anti-takeover defences may somewhat be limited at two levels.
From a legal perspective, apart from the company’s corporate interest and matters that remain the responsibility of shareholders in general meetings, directors will have to ensure that they comply, when they implement anti-takeover defence measures, with the guiding principles governing takeover bids which impose inter alia a free interplay of offers and counter-offers and fairness of competition21.
19 Article L233-33 of the French Commercial Code.
20 The Management Board (Directoire), with prior authorisation from the Supervisory Board (Conseil de Surveillance), as part of a two-tiered structure.
21 Article 231-3 of the AMF’s General Regulations.
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From a corporate governance standpoint, it is not unlikely that shareholders, particularly proxy advisors, of companies with a dispersed shareholding structure, makes the principle of neutrality during a bid a key issue of corporate governance and subject their board to insistent demands to have it provided in the company’s articles of association.
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