Changes to French takeover rules
09 April 2014
A new French law, the “Law to recapture the real economy” (“Loi visant à reconquérir l’économie réelle” or “Loi Florange”) (the Law), was made on 1 April 2014.
The Law makes good a promise, made by François Hollande in his 2012 presidential election campaign, to require companies employing more than 1,000 people in France or/and Europe and considering closing plants deemed still economically viable, to make best efforts to seek a buyer before the planned closure.
This e-alert, however, focuses on another set of amendments made by the Law which, though perhaps less symbolic than the new ‘best efforts to seek a possible buyer’ obligation, have significant consequences for takeovers and company law in France.
The Law introduces an automatic attribution of double voting rights for shares held for at least two years and significantly amends French takeover bid rules.
The takeover rules will now:
• require any bidder to provide for a minimum acceptance threshold equal to 50%+1 of the target shares or voting rights;
• reduce the rate at which a person can acquire between 30% and 50% of the shares or voting rights in a French listed company without triggering the obligation to make a mandatory bid;
• abandon the board neutrality principle during offer periods, giving boards discretion to take frustrating measures without prior shareholder approval; and
• reinforce target works councils’ powers through an information-consultation procedure before the opening of a takeover bid (in particular through the right to require the assistance of a qualified expert).
While these provisions came into force immediately, other changes will take effect on 1 August 2014, notably in order to allow the French Regulator (the AMF) to put in place the necessary implementing measures.
Automatic attribution of double voting rights
An exception which now becomes the rule
Prior to the changes made by the Law, double voting rights could be automatically attributed to a shareholder holding shares for two years or more only if provided for by a company’s articles of association. Many French companies (more than 50% of the CAC 40) have already included this mechanism in their articles of association. As a reminder, any transfer of shares to which a double voting right is attached causes the immediate loss of this right (as its attribution is associated with a permanent holding by the same person over a defined period of time (i.e. two years or more)).
The Law reverses this principle for companies listed on a regulated market, so that attribution of double voting rights becomes automatic by operation of law for any shares held in registered form by the same shareholder for two years (except if the articles of association expressly provide otherwise).
For companies which have not already included such double voting rights in their articles of association, the two year period will run from the date on which the Law came into force (i.e. 1 April 2014). As a result, issuers wishing to maintain the previous ‘one share-one vote’ rule will have two years to submit a draft resolution to an extraordinary meeting of their shareholders amending their articles of association.
Current provisions in articles of association and scope to provide for a longer holding period
For French companies listed on a regulated market whose articles of association already contain a double-voting rights mechanism, such provisions will remain applicable without change.
It is worth noting that not only will companies be able to depart from the principle of automatic attribution by providing for this in their articles of association, but it will also be possible to implement the double vote right principle but for shares held in excess of two years if they wish.
One consequence of the automatic attribution of a double voting right may be that some shareholders end up crossing the 30% mandatory bid threshold. Currently, the only way a shareholder in this situation can avoid having to make a mandatory offer is either to record an appropriate number of registered shares as bearer shares or to sell down part of its shareholding so as to remain below the 30% threshold.
The Law introduces a new safe-harbour under which the AMF will be entitled to grant a waiver to a shareholder which:
• was already above the 30% threshold at the enactment date of the Law (the Enactment Date);
• then decides to sell part of its shareholding interest and crosses downwards the 30% threshold; and
• two years after, crosses the 30% threshold upwards because of the attribution of double voting rights, but without exceeding its shareholding level as at the Enactment Date.
This safe-harbour seems notably tailor-made for the French State acting as shareholder, which accordingly will be entitled to sell part of a shareholding in a French listed company after the implementation of the Law. In doing so, it will be assured of recovering its previous voting rights position thanks to double voting rights attached to the shares it holds on to. The whole operation can be carried out without triggering a mandatory offer.
The new minimum acceptance threshold rule
The new provision
French takeover rules require that any offer be irrevocable and unconditional. However, there are a few exceptions to this principle. Among them, voluntary offers may be conditional on a certain level of acceptances being obtained.
Until the enactment of the Law, the nature of a condition was entirely a matter for the bidder (except in respect of mandatory offers, which may not be subject to conditions. Mandatory offers generally follow the transfer of a controlling block, and the primary purpose of the mandatory bid obligation is to provide an exit mechanism for minority shareholders where there has been a change of control).
The Law changes this approach by introducing a 50%+1 minimum acceptance condition for all bids (whether voluntary or mandatory), bringing the French rules into line with the UK rules. Consequently, in future, any bid as a result of which the bidder fails to obtain at least 50%+1 of the target will automatically lapse.
The new provision is intended to prevent unscrupulous bidders proposing a very low price with a view to obtaining de facto control without paying the premium likely to be required under a tender process.
If the offer is a mandatory one, lapsing of the offer will result in:
• voting rights exceeding the 30% threshold being suspended (consequently, a bidder holding 27% of the target shares which would have acquired, for instance, 8% more would be barred at 30% of the voting rights if it failed to obtain 50%+1 following its offer); and
• if the mandatory offer is triggered by the acquisition of more than 1% between 30% and 50% of the share capital or voting rights, voting rights exceeding the level of shares held before this acquisition (with a margin of 1%) will be suspended.
Should an offer lapse (voluntary or mandatory), the bidder will therefore not be able to increase its shareholding, except if it launches a new offer which succeeds (because it will be prohibited from acquiring even one more share without launching a new bid).
Mandatory bids: acquisitions between 30% and 50%
Under previous law, any person, acting alone or in concert, owning between 30% and 50% of the share capital or voting rights of a French listed company on a regulated market was required to make a mandatory bid if it increased the number of shares or voting rights it held by more than 2% over a twelve-month rolling period. The new provisions lower this threshold to 1% and so will significantly reduce the rate at which shares or voting rights can be acquired without triggering a mandatory bid.
Transitional provisions provide that a person increasing its holding between 1% and 2% over the twelve-month period before the Law comes into force, would not be required to file a mandatory offer.
After the Law comes into force, a person may only increase its holding by 1% over the previous twelve months.
Frustrating action: abandonment of the passivity rule
Reversal of the previous position
The Law reverses the position adopted in 2006 to implement the ‘opt-in rules’ under the Takeovers Directive. Then:
• transposition of Article 9 meant that any action aimed at frustrating a hostile bid (other than seeking a white knight) would need prior approval of the target shareholders, even if the target’s boards of directors had previously been authorised to take frustrating action. Thus, for example, authorities to increase a target’s share capital were suspended during a takeover bid; and
• to provide for a level playing field, transposition of Article 11 allowed French companies legally subject to the neutrality principle to free themselves from this obligation if a bidder was not itself subject to an equivalent requirement (the so called reciprocity rule).
With a view to protecting French companies from unsolicited offers, the Law abandons this position. The board of a French listed target subject to a hostile offer will now be able to take frustrating action without prior approval of its shareholders to the extent that: (i) from a legal perspective the actions do not fall within the exclusive authority of shareholders’ meetings and (ii) any measures taken are not contrary to the target’s corporate benefit.
As a result, so called BSAs Breton (equivalent to share warrants inspired by US-style rights plans) authorised in advance of a potential hostile offer can now be used in a hostile offer period without being once again authorised by the target’s shareholders during the offer period.
The downside of this reversal is that a French bidder wishing to make a hostile offer for a listed company registered in another EU Member State risks being faced with defensive measures adopted by the potential target without being entitled to challenge them. Indeed, a majority of EU Member States have adopted the opt-in rules and, accordingly, companies subject to their takeover rules are entitled to rely on the reciprocity principles.
Ability to ‘re-implement’ the neutrality and reciprocity rules through the articles of association
However, a French listed company may still maintain the principle of board neutrality during a bid process through provisions in its articles of association. Such ‘contractual renunciation’ may be, for example, the result of: (i) institutional shareholders’ insistence on compliance with corporate governance best practice guidance or (ii) the board’s desire to benefit from the reciprocity exemption. Boards may also prefer not to incur the potential liabilities of taking frustrating action at their own discretion and consequently want to be bound by a neutrality obligation.
Articles of association may also provide for:
• suspension of any previous authority granted by the shareholders’ meeting prior to an offer period which is likely to frustrate the bid (including a prior authorisation to issue a BSA Breton), other than one confirmed by the shareholders’ meeting during an offer period; and
• the neutrality rule to be subject to the reciprocity rule, which gives flexibility for the target to suspend application of the neutrality rule if a takeover bid is filed by at least one bidder which is not subject to the same passivity requirement ('equivalent measures') or which is controlled by an entity which does not apply this rule.
Increased powers for works councils
New consultation process
A target’s works council (WC) already has the right to give an opinion regarding an offer resulting in a change of control and may demand a hearing with representatives of the bidder.
Although works councils’ powers remain limited, the Law reinforces their role on several fronts:
• First, the target board cannot deliver its opinion on the offer, and the AMF cannot therefore issue a clearance decision, unless the WC has given its own opinion.
• Secondly, if requested by the WC, a hearing with a bidder representative must take place within one week of the date of filing of the draft offer. The bidder’s representative must present the planned industrial and financial strategy and the consequences of the offer for the target’s employees, business sites and decision-making centre. The WC is now also entitled to appoint a qualified expert in order to assist it.
• Thirdly, once this hearing has taken placed, the appointed expert must deliver within three weeks a report assessing the bidder’s industrial policy, its strategy and, amongst other things, the consequences of the offer for the employees.
• Finally, on the basis of the expert’s report, the WC must deliver its opinion within a one-month period running from the date of filing of the draft offer. In the absence of an opinion, the WC is deemed to have been consulted. The expert’s report and the WC’s opinion are included in the offer document drafted by the target company.
If the WC considers it does not have access to sufficient information, the one-month period may be extended by a court order (obtained in summary proceedings). The court may refuse the WC’s request if difficulties to obtain this information are due to a clear willingness of the target to withold it.
The new process of consultation applies only to offers resulting in a change of control of the target. It is more burdensome than the previous process and is likely to extend bid timetables, in particular for recommended offers.
In order to save time, the WC consultation process may be started on announcement (rather than filing) of the draft offer, subject to the accuracy of all information provided at that time and there being no changes in information given after the filing (if there is a change, the process must be restarted).
New reporting obligation
A successful bidder must also report to the target’s WC regarding fulfilment of commitments made (if any) and the implementation of announced measures (employment, location of business sites etc.) during an offer period, six, twelve and 24 months following the closing of the offer period.