What are the primary sources of laws and regulations relating to shareholder activism and engagement? Who makes and enforces them?
The most notable sources of laws and regulations relating to shareholder activism include French legislation (for example, the French Commercial Code (including European Directives as transposed into French law)), European regulations and Autorité des marchés financiers (AMF) regulations. Domestically, the French parliament and the AMF promulgate relevant law and regulations, which may be enforced by civil parties or the public prosecutor before the French courts or by the AMF through the AMF sanctions commission.Shareholder activism
How frequent are activist campaigns in your jurisdiction and what are the chances of success?
Campaigns involving French-listed companies have remained fairly constant in recent years, with approximately five to 10 public activist campaigns per year.
However, the aggressiveness of such campaigns has increased over time. For example, there has been a significant increase from 2014 to 2017 in the number of external resolutions proposed by shareholders. In 2017, 73 external resolutions were proposed by shareholders in nine companies, compared with 45 external resolutions in 12 companies in 2016, 30 external resolutions proposed in nine companies in 2015 and 13 external resolutions proposed in eight companies in 2014. This number dropped significantly in 2018, down to only 20 external resolutions.
Based on a review of activist campaigns since 2013, it appears that nearly one third result in at least a partial satisfaction of activist demands. However, as with any data set, much depends on how success is measured. More aggressive tactics may be markedly less likely to succeed. For example, of the 73 external resolutions proposed by shareholders in 2017, only six were adopted (8 per cent). In 2018, none were approved by a majority of shareholder votes.
How is shareholder activism generally viewed in your jurisdiction by the legislature, regulators, institutional and retail shareholders and the general public? Are some industries more or less prone to shareholder activism? Why?
Popular consciousness of activism has increased considerably over the last decade.
The French legislature has promulgated several laws in recent years designed to limit the influence of short-term investors. For example, the government’s draft of the PACTE Law, a law that is expected to be passed in April or May of this year, would reinforce the corporate interest (an independent interest attributable to the entity itself, and conjoining the interest of all corporate stakeholders) so that, in addition to the corporate interest, corporate decisionmakers are also required to take into account the labour and environmental implications of the corporation’s activity. In addition, the new law would also introduce the possibility to include the corporate purpose, or the ‘raison d’être’, of the company in its articles of association. These reforms may in practice reinforce corporate defences against short-term objectives espoused by activists. The availability of double-voting rights for registered shareholders after two years is also designed to encourage a long-term vision.
French regulators have generally been tolerant - and at times sympathetic to - certain aspects of activism, particularly to the extent campaigns focus on good governance, rigorous disclosure and the interests of minority shareholders. However, this tolerance has not prevented the AMF from disciplining activist abuses, including insider trading, violations of disclosure obligations (for example, in the context of stake-building or misleading statements) and market manipulation. The AMF has done so even when the conduct at issue seeks to comply with the letter of the law.
Given the relatively small number of activist interventions in France, it is difficult to draw definitive conclusions about the industries most likely to be the targets of such attacks. French-listed targets have clearly grown larger in recent years (eg, Accor, Airbus, Carrefour, Danone, Safran and Vivendi). That being said, companies with a market capitalisation of between €500 million and €5 billion continue to be prime targets (eg, Euro Disney, Nexans, Rexel, SoLocal, Technicolor, XPO Logistics Europe, Scor and Pernod Ricard).
What are the typical characteristics of shareholder activists in your jurisdiction?
The key shareholder activists in recent campaigns in France include a number of well-known investors based in the United States, the United Kingdom and Europe such as Cevian Capital, Elliott Management, Knight Vinke, The Children’s Investment Fund Management (TCI) and Trian Fund Management.
French native activists include both financial and industrial concerns, including in the former category Amber Capital (UK-based but with founders with strong French ties), Charity Investment Asset Management (CIAM), Phitrust, SFAM and Wendel and, in the latter category, LVMH in its acquisition of a significant position in Hermès. French associations of minority shareholders such as the Association for the Defence of Minority Shareholders and SOS Small Holders, continue to play a role, including in litigation, sometimes in partnership with other activists.
In addition, there has been a growing trend of more traditional institutional investors taking a more active role in their portfolios to agitate change, sometimes in tandem with activists.
What are the main operational governance and sociopolitical areas that shareholder activism focuses on? Do any factors tend to attract shareholder activist attention?
As regards operations, activists may focus on cost-cutting and reorganisations. For governance, activists may agitate for changes in management or at the board, including seeking the nomination of activist representatives or, increasingly, independent directors proposed by the activist. Activists are focused on M&A as a creator of value, whether in opposing announced transactions with valuations that they disagree with, or seeking to trigger transactions (including divestments) if they believe it will unlock value. Activists may also work in favour of dismantling anti-takeover defences and limiting majority shareholder advantages or perceived self-dealing.
Underperformance compared with peers, capital reallocation or return opportunities and M&A or break-up possibilities are key factors that may attract shareholder activist attention.
Shareholder activist strategiesStrategies
What common strategies do activist shareholders use to pursue their objectives?
At the highest level of abstraction, the classic activist intervention involves acquiring a minority stake in the target company by way of an economic interest (in the form of a direct acquisition of shares, through derivative instruments or even the acquisition of debt securities or other credit exposure) and attempting to pressure the board and management (including through the use of shareholder democracy) to seek to influence the company’s stock price.
Within this framework, common activist strategies vary considerably depending on circumstances, but may include:
- seeking to add items to the agenda of a shareholders’ meeting or propose new resolutions (Wyser-Pratte regarding Lagardère, TCI in Safran-Zodiac);
- criticising announced M&A transactions (TCI in Safran-Zodiac, Amber Capital as regards Gameloft SE);
- seeking board seats (Cevian in relation to Rexel, CIAM as regards Alès Group, Pardus Capital Management regarding Valeo, Pardus and Centaurus Capital in relation to Atos Origin, Financière de l’Echiquier and Sterling Strategic Value as regards Latécoère, Amber Capital as regards Lagardère, SFAM as regards FNAC Darty);
- seeking a court-appointed independent expert (Elliott in its countersuit against XPO);
- ‘no’ campaigns on executive compensation (the Hollande administration 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 in both APRR and XPO Logistics Europe);
- orchestrating a public relations campaign, including letter-writing (including lobbying individual board members or relevant regulators), press interviews and lobbying of proxy advisers; and
- in relatively rare cases, threatening (TCI in Safran-Zodiac) or actually initiating litigation (CIAM in Euro Disney, CIAM against Altice).
From a purely financial perspective, activists have had increasing recourse to equity collars in connection with their stakes. This structure is adopted as a matter of stake-building (to avoid disruption in the stock price) - however, in the longer term, this tool may also be used to limit the activist’s financial exposure to the target, disaligning the activist’s economic interests from those of other shareholders (eg, as has been reported regarding Elliott in its Telecom Italia investment).Processes and guidelines
What are the general processes and guidelines for shareholders’ proposals?
Shareholders that meet the applicable minimum shareholding threshold in a listed entity in France, as well as qualifying minority shareholder associations, may seek to add items for discussion to the agenda for any shareholder meeting or propose additional draft resolutions to be included in ‘proxy’ materials distributed to shareholders. The applicable minimum threshold depends on the share capital of the issuer and is calculated on a sliding scale. It cannot be more than 5 per cent; in the very largest companies, it may approach 0.50 per cent.
External shareholder resolutions may include, for example, major strategic or financial initiatives (such as an exceptional dividend, a share buyback or a spin-off), material governance changes (including a separation of the CEO and chairman roles or a resolution for a special committee of independent directors to be formed to undertake a strategic review of management’s performance, compensation or succession planning) or various other disruptive proposals (eg, the transformation of the corporate form into a takeover-friendly structure).
However, in accordance with the fundamental principle under French law regarding the proper competence of the respective decision-making organs of the corporation, some boards have resisted the proposal to include an item that does not fall within the competence of the shareholders’ meeting (eg, a change of strategic direction).
May shareholders nominate directors for election to the board and use the company’s proxy or shareholder circular infrastructure, at the company’s expense, to do so?
Yes. In France, upon proposal of any shareholder, and irrespective of a director’s term, any director may be removed and replaced at any shareholder meeting by a simple majority vote of the shareholders even if the matter is not on the meeting agenda. In addition, under the shareholder proposal right discussed above, a draft resolution proposing the removal and replacement of any director may be included in the company’s proxy materials circulated to shareholders in advance of a shareholder meeting.
May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?
Shareholders holding 5 per cent as well as certain minority shareholder associations may request the president of the commercial court to convene a shareholder meeting in the event that the company has failed to call the relevant meeting following a specific request. The court assesses whether the request is for legitimate purposes and in the corporate interest of the company, and not solely to satisfy the plaintiff’s personal interests. If the request is granted, the court sets the agenda and appoints an agent to convene the meeting.
Shareholders of French listed companies are not permitted to act by written consent in lieu of a meeting.Litigation
What are the main types of litigation shareholders in your jurisdiction may initiate against corporations and directors? May shareholders bring derivative actions on behalf of the corporation or class actions on behalf of all shareholders? Are there methods of obtaining access to company information?
While shareholder litigation is relatively unusual in France, shareholders recourse is available against corporations and directors. For instance, shareholder litigation can be commenced on the merits by way of derivative action (action sociale ut singuli). Derivative suits may not be pursued as a class action, as this procedure is not available under French law with respect to shareholder claims. The cost of the derivative suit is borne entirely by the shareholder, while any recovery is allocated to the company. A personal cause of action is also available; however, the plaintiff must demonstrate that the relevant loss is personal to him or her, and distinct from any loss incurred by the company or the other shareholders.
Other litigation, such as based on an abuse by majority shareholders, criticism of insider transactions, seeking the liability of managers or seeking redress for procedural failings, may also be available to activists.
There are also a variety of criminal actions available in France in connection with corporate conduct; however, such actions depend on the relevant authority exercising its prosecutorial discretion to elect to actively pursue the matter.
Shareholders have certain general information rights that generally only concern public documents and information that must in any event be publicly communicated. An additional and much broader right available generally under French civil procedure also permits ‘any interested party’ (including a minority shareholder) to seek, on an ex parte basis, the seizure of evidence that may be necessary for contemplated litigation.
Shareholders' dutiesFiduciary duties
Do shareholder activists owe fiduciary duties to the company?
Shareholders do not owe any fiduciary duties to the company per se but they have an obligation not to abuse their position by way of oppressive action (often, a hostile vote) or inaction (eg, abstention from a vote) wrongfully designed to benefit certain minority shareholders and that is contrary to the company’s corporate interest.Compensation
May directors accept compensation from shareholders who appoint them?
Although no French court has considered the question, it does not appear that such a compensation scheme would in and of itself violate any statutory provision of French law. However, such a scheme would clearly be problematic in practice to the extent it were to interfere with a director’s duty to act in good faith and to put the interest of the company ahead of any personal interest, as well as the director’s duty to take decisions with as sole consideration the company’s corporate interest. The director would also need to comply with applicable confidentiality obligations, significantly limiting his or her ability to communicate and coordinate with the activist fund. Such a compensation scheme could also have to be disclosed in the company’s annual report as well as potentially calling into question the director’s independence under applicable corporate governance codes.Mandatory bids
Are shareholders acting in concert subject to any mandatory bid requirements in your jurisdiction? When are shareholders deemed to be acting in concert?
In France, where a person, acting alone or in concert, comes to hold directly or indirectly more than 30 per cent of a company’s equity securities or voting rights, such a person is required, on its own initiative, to inform the AMF immediately and to file a proposed offer for all the company’s equity securities, as well as any securities giving the right to acquire its share capital or voting rights, on terms that have to be acceptable to the AMF. The same obligations apply to persons, acting alone or in concert, who directly or indirectly hold between 30 per cent and 50 per cent of the total number of equity securities or voting rights of a company and who, within a period of less than 12 consecutive months, increase such holding by at least 1 per cent. Exceptions and waivers to the obligation to file a proposed offer may apply in both cases.
Under French law, persons are deemed to act in concert if they enter into an agreement with a view to acquiring, selling or exercising voting rights, in order to implement a policy with respect to a company or to obtain control of the company. Circumstantial evidence tending to show a tacit or hidden agreement may be taken into account in assessing the existence of such an agreement.Disclosure rules
Must shareholders disclose significant shareholdings? If so, when? Must such disclosure include the shareholder’s intentions?
In accordance with primary disclosure obligations in France, any person acting alone or in concert with others that comes to hold more than 5, 10, 15, 20, 25, 30, 33 and a third, 50, 66 and two-thirds, 90 or 95 per cent of the share capital or voting rights in a publicly listed company is required to 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. In addition, persons holding temporary interests in 2 per cent or more of the voting rights in a publicly listed company must notify the issuer and the AMF of these holdings no less than three business days prior to any shareholders’ meeting at which those rights may be exercised.
More generally, persons preparing a financial transaction that may have a significant impact on the market price of public securities must disclose the transaction to the public as soon as possible.
The disclosure obligations also 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 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. To the extent any such statement of intentions becomes inaccurate, the holder in question is required to rapidly communicate its new intentions.
In addition to the legal thresholds, the company’s articles of incorporation may provide that shareholders must inform the AMF and the company of the crossing of additional ownership thresholds below 5 per cent in increments of no less than 0.5 per cent.
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.
Do the disclosure requirements apply to derivative instruments, acting in concert or short positions?
As indicated above, the disclosure requirements apply to persons acting alone or in concert. In addition, for the purposes of calculating the thresholds described above, the ‘share capital or voting rights’ include, in addition to ordinary share holdings, all derivative products entitling the reporting person at its sole option to acquire existing shares (or corresponding voting rights) and cash-settled or physically-settled derivative instruments providing an economic exposure equivalent to a long position in the underlying shares. The disclosure obligations also require that net short positions in shares 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).Insider trading
Do insider trading rules apply to activist activity?
Activists can be, and have been, found guilty in France of insider trading.
Under French rules, insider trading consists of using ‘privileged’ information by acquiring or selling, or attempting to acquire or sell financial instruments to which that information relates. ‘Privileged’ information is defined under French law as any information of a precise nature that has not been made public and that, if it were made public, would be likely to have a significant effect on the price of the relevant financial instruments or on the prices of related financial instruments. The AMF considers information to be precise when such information is sufficiently detailed and complete to permit the information to be used by an investor as the basis for an investment decision.
It should be emphasised that the information need not be ‘inside’ information, and that there is accordingly no need under French law to demonstrate the violation of any duty, whether in relation to the company or some third party.
Company response strategiesPreparation
What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?
As previously discussed, a defining duty of directors in France is to act in accordance with the corporate interest of the company.
There is no different standard applicable to activist proposals.
What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?
Appropriate planning for an activist attack includes laying the groundwork for strong teamwork in a crisis by and among the board, management and advisers as well as other key internal constituencies. Maintaining strong relationships and lines of communication with external constituencies, notably including significant shareholders, is essential.
Companies should engage in ongoing monitoring and be ready to respond to early warning signs, particularly during vulnerable periods (eg, active M&A operation under way, results or other metrics remain below those of peers, enduring criticism of governance or leadership, etc). Continuously assessing corporate strategy to ensure that it is rigorously defensible becomes paramount in the event that the business underperforms compared with peers. Maintaining good governance, and a relationship of trust with regulators, are also worthwhile investments.
Shareholder activism and engagement has been a subject of increasing focus in French boardrooms in recent years, with a significant uptick in awareness in the past 12 months.Defences
What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?
In the event an activist does emerge, a strong response by the company often includes rallying the company’s financial, legal and communications advisers at short notice and making sure that any public communications by the company are coherent and disciplined across all key constituencies. The board and management should redouble efforts to maintain strong cohesion. Individualised outreach may be appropriate to key shareholders. In addition, ongoing monitoring should be maintained to ensure the company can rapidly respond to any additional tag-along attacks or related activity. An open line of communication should typically be maintained with the relevant authorities such as the AMF, as well as proxy advisers and other key constituencies, including other significant shareholders. Given the likely heightened focus on the company and its conduct during the time of the attack, a particular effort should be made to avoid legal or other missteps that will be seized upon by the activist or others (including the AMF). Likewise, the activist’s actions and statements should be carefully reviewed for missteps or weaknesses in its strategy. In certain cases, seeking regulatory intervention or even initiating litigation against the activist may be appropriate.Reports on proxy votes
Do companies receive daily or periodic reports of proxy votes during the voting period?
In France, the record date for shareholder voting is legally set at two trading days prior to the meeting. Many companies listed in Paris outsource their share registrar (including the management of voting at shareholders’ meetings) to external service providers. These service providers may keep issuers apprised of the general tendency of votes received as from the date of the initial notice of the meeting but, in any event, the bulk of the voting returns are not available until the last few days preceding the shareholders’ meeting.
As background, French public companies must provide their proxy voting guidelines in a notice that must be made at least 35 days prior to the meeting. Shareholders must be provided with a supplemental notice of meeting no less than 15 days prior to the meeting. Both notices must specify, among other details, the deadline for the return of proxy forms.
Shareholders may choose between one of the three following options of participation:
- attend the general meeting in person;
- grant proxy to the chairman of the shareholder’s meeting or to any individual or legal entity of their choice or;
- vote by post (or electronically if permitted).
Under the relevant legislation, the proxy forms must be provided by mail to the company at least three days prior to the meeting, except if a shorter period is permitted under the company’s bylaws, or if to be provided electronically, the proxy forms must be received by the company no later than 3pm on the day prior to the meeting.Private settlements
Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?
Formal settlements with activists are relatively rare; however, there are precedents, including Valeo and Saint Gobain. It may be necessary to disclose the main terms of such agreements under AMF rules.
These agreements may include board representation, an undertaking not to vote in favour of resolutions that do not have board approval, a cap on voting rights or a standstill and pre-emption rights.
Shareholder communication and engagementRules on communication
Is it common to have organised shareholder engagement efforts as a matter of course? What do outreach efforts typically entail?
Companies may adopt a variety of different organised shareholder engagement efforts including communication via the company website, shareholder newsletters, shareholder guides, shareholder clubs, consultative committees, meetings with shareholders and educational outreach, and preferred dividends and loyalty shares.
Are directors commonly involved in shareholder engagement efforts?
Promoting direct dialogue between directors and shareholders has been a subject of increased focus in France, notably in response to growing pressure from institutional investors. In this respect, the AFEP-MEDEF governance code (as applied by the majority of the CAC 40) was amended in June 2018 and introduced the concept of the chairman of the board of directors, or a ‘lead’ director, being entrusted with shareholder relations, in particular with regard to corporate governance, although other subjects are not excluded.
Must companies disclose shareholder engagement efforts or how shareholders may communicate directly with the board? Must companies avoid selective or unequal disclosure? When companies disclose shareholder engagement efforts, what form does the disclosure take?
Subject to certain exceptions, French law imposes on issuers an ongoing obligation to disclose any inside information directly concerning the issuer as soon as possible. The issuer is responsible for ensuring the effective and complete disclosure of the inside information; among other things, this requires that the issuer promptly post such information on its website. Thus, for example, in the event that non-public information is inadvertently shared with the activist, that information must generally be promptly disclosed to the market.
What are the primary rules relating to communications to obtain support from other shareholders? How do companies solicit votes from shareholders? Are there systems enabling the company to identify or facilitating direct communication with its shareholders?
Under French law, shareholders are permitted to solicit proxies from other shareholders, with limited requirements and restrictions as compared to other jurisdictions. In this respect, any person who actively solicits proxies must present its voting policy on its website. Such a person may also publicise its intentions as to any draft resolutions that may be before the shareholders, in which case the person soliciting proxies is required to vote consistently with the intentions that it has publicised. A person who represents others at a shareholder meeting may also under certain circumstances be subject to other disclosure requirements.
Proxy solicitation may lead to a risk of acting in concert with other shareholders who come to share the activist’s views, which may be the case either in the context of true proxy solicitation or in the context of more general efforts to persuade and coordinate with other shareholders. In addition, it is a criminal offence to agree to any payment or other benefit in exchange for voting or abstaining from voting at a shareholders’ meeting.
As part of the shareholder engagement efforts described above, management is in a position to communicate its views on the best direction for the company. In addition, the draft resolutions provided to shareholders in the notice of meeting will typically include the board of directors’ recommendations on how shareholders should vote for each resolution.
Must companies, generally or at a shareholder’s request, provide a list of registered shareholders or a list of beneficial ownership, or submit to their shareholders information prepared by a requesting shareholder? How may this request be resisted?
Any shareholder may request a list of the nominal shareholders (including the number of shares held) as of the date 16 days prior to the shareholders’ meeting from the company at any time during the 15 days that precede the meeting. Shareholders may also request at any time the shareholder attendance sheets for the shareholders’ meetings of the prior three years. However, only the company may seek out the identity of the ultimate beneficial shareholders, and even the company may only do so in the event that its bylaws specifically so provide. In any event, as discussed above, beneficial shareholders holding in excess of 5 per cent of the share capital or voting rights are required to disclose this (and various other thresholds) to the company and the AMF, and the AMF provides these disclosures to the public on its website.
Update and trendsRecent developments
What are the current hot topics in shareholder activism and engagement?
Notable recent activist campaigns includes TCI’s acquisition of a 4 per cent stake in Safran following Safran’s announcement of its intention to acquire Zodiac Aerospace in 2017. TCI sought the cancelation of the takeover based on its view that the price was too high and that the structure of the transaction would effectively disenfranchise Safran shareholders. TCI publicly lobbied the AMF to intervene, threatened Safran board members with litigation and sought to add a resolution regarding the transaction to the agenda of Safran’s annual meeting. Following significant underperformance by Zodiac, a revised, lower, transaction price was announced. 90 per cent of Safran shareholders voted in support of the revised offer.
More recently, Elliott Management disclosed a stake in Pernod Ricard and has made public calls for the company to launch a new operational improvement plan and improve its corporate governance.
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:
- more major activist interventions in France;
- non-activist institutional 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 (eg, occasional activist PSAM in its Vivendi campaign);
- companies becoming the targets of distinct serial activist interventions (in addition to wolf packs); and
- more sophisticated and increasingly M&A focused activist campaigns.
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. 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. It remains to be seen whether Elliott Management’s victory in Telecom Italia 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.