Shareholders' Rights & Shareholder Activism 2019 Comparisons

Last Updated September 25, 2019

Law and Practice

Authors



Freshfields Bruckhaus Deringer LLP is a global law firm with 28 offices in 18 jurisdictions and a long-standing track record of successfully supporting leading national and multinational corporations, financial institutions and governments. With 120 lawyers in Paris, including 25 partners, Freshfields is one of the largest law firms in France. The Corporate/M&A team comprises eight partners, one counsel and 25 associates. Its expertise allows the firm to advise clients on all governance aspects of listed or non-listed companies in France, in the context of all types of M&A transactions and shareholders’ disputes. The team is supported by experts in litigation, international arbitration, tax, public law, employment, antitrust and merger control. Recent work includes advising Française des Jeux on its privatisation process, Saur Group in the context of EQT Infrastructure’s investment, Gefco on its proposed IPO and Getlink on the reorganisation of its corporate legal structure.

French corporate law provides for several most commonly found types of companies:

SARL (Société à Responsabilité Limitée)/EURL (Entreprise Unipersonnelle à Responsabilité Limitée)

An SARL is a limited liability company with no minimum capital requirement, which may have from one to 100 shareholders. When an SARL has only one shareholder, it is deemed incorporated as an EURL. The liability of the shareholder(s) is limited to the amount of share capital contributed to the company.

Both SARL's and EURL's are subject to rather simple incorporation and administration rules. They are managed by one or several managers (gérants), subject to decisions which may be taken only by shareholders.

Neither an SARL, nor an EURL, may be publicly listed.

There are no specific nationality, residence or status requirements in order to become shareholder of an SARL or EURL. There are no prohibitions or restrictions to becoming such shareholder. Therefore, any natural or legal person, including foreign residents and foreign citizens, can become an SARL or EURL shareholder, subject to general legal capacity requirements.

SAS (Société par Actions Simplifiée)/SASU (Société par Actions Simplifiée Unipersonnelle)

An SAS is a simplified joint-stock company with no minimum capital requirement, unless it operates certain regulated activities. An SAS should have at least one shareholder, in which case it is deemed incorporated as an SASU. There is no maximum number of shareholders imposed by law. The liability of the shareholder(s) is limited to the amount of share capital contributed to the company.

An SAS/SASU are managed by a president (Président) and are subject to flexible governance rules, which may be defined rather freely in corporate by-laws, subject to matters which are shareholders’ prerogative.

Neither an SAS nor an SASU may be publicly listed.

There are no specific nationality, residence, status requirements, nor prohibitions or incompatibilities to become shareholder of an SAS/SASU. Thus, any natural or legal person, including foreign residents and foreign citizens, can become a shareholder of an SAS/SASU, subject to general legal capacity requirements.

SA (Société Anonyme)

An SA is a public limited company with a minimum share capital amounting to EUR37,000. An SA may be a private or a publicly listed company. An SA has at least two shareholders, unless it is publicly listed, in which case its share capital shall be held by at least seven shareholders. The liability of the shareholder(s) is limited to the amount of share capital contributed to the company.

An SA is subject to rather rigid governance and management rules, which may be articulated as one of the following two options:

  • a board of directors (conseil d’administration) and a director general (directeur general), although the latter function may be exercised by the president of the board of directors (président du conseil d’administration); or
  • a supervisory board (conseil de surveillance) and a management board (directoire).

Respective powers of the management bodies and of the shareholders are defined by statute, regulation and company’s by-laws.

There are no specific nationality, residence or status requirements in order to become shareholder in an SA. There are no prohibitions or restrictions applicable. Thus, any person (including foreign residents and foreign citizens, whether natural or legal persons) can become an SA shareholder, provided that such person is legally capable.

SCA (Société en Commandite par Actions)

An SCA is a partnership limited by shares, which has two categories of shareholders: limited partners (commanditaires) with limited liability and general partners (commandités) with unlimited liability. An SCA must have at least three commanditaires and at least one commandité.

An SCA may be a private or a publicly listed company. It is subject to a EUR37,000 minimum share capital requirement.

An SCA is managed by one or several managers (gérants), who generally are chosen among general partners (commandités) but may also be third-parties. Limited partners (commanditaires) cannot exercise manager’s functions. An SCA is also managed by a supervisory board (conseil de surveillance), representing limited partners (commanditaires) and composed of at least three limited partners.

To become a general partner (commandité), in addition to compliance with potential competence requirements under the laws of the relevant foreign jurisdiction, a foreign national must fulfill specific obligations for running a business in France (eg, absence of prohibitions or incompatibilities with running a business, holding of a valid residence permit for non-EU nationals, etc). Whereas general partners (commandités) in an SCA have a specific tradesman status (commerçant), limited partners (commanditaires) are not subject to such status requirements.

General Partnerships

General partnerships may be created under multiple forms: an SNC (société en nom collectif), an SCS (société en commandite simple) and an SEP (société en participation).

General partnerships typically have no minimum capital requirement and shall be incorporated by at least two partners. Partners’ financial liability is not limited to the company’s assets. General partnerships may not be publicly listed and any disposal of their shares requires a unanimous decision of the shareholders. In practice, this type of company is becoming increasingly rare in France.

General partnerships are managed by one or several managers (gérants) and are subject to rather flexible governance rules.

In order to become a partner in a French general partnership, in addition to compliance with potential competence and capacity requirements under the laws of the relevant foreign jurisdiction, a foreign citizen typically needs to comply with a set of obligations for running a business in France (eg, no specific prohibitions or incompatibilities, holding of a valid residence permit for non-EU nationals, etc).

Companies most often issue ordinary shares (actions ordinaires) and/or preferred shares (actions de preference). Shares within the same category offer the same rights to their holders.

Ordinary shares entitle their holders to financial rights (eg, receive dividends, dispose of shares, subscribe to capital increases on a preferential basis, share profits or liquidation surplus) and non-financial rights (eg, receive information about the company, participate in shareholders’ meetings, take part in collective decisions and vote).

Companies can also issue preferred shares. Characteristics of these shares may be freely defined in by-laws, subject to certain legal restrictions. Preferred shares may bear any kind of rights and/or restrictions, whether permanent or temporary. For instance, preferred shares may entitle their holders to multiple voting rights or bear no voting rights at all. Preferred shares may entitle their holders to priority dividend rights or bear certain 'political' rights, such as enhanced information rights.

Primary sources of law and regulation relevant to shareholders’ rights are the French commercial code, the French civil code and the General Regulation of the French Financial Markets Authority (AMF). The laws of the European Union are also sources of shareholders’ rights.

Companies’ articles of association and by-laws are typically useful sources of shareholders’ rights.

Finally, the order number 2014-948, dated 20 August 2014, relates to governance and transactions of share capital of public companies and is a valuable source of shareholders' rights within public companies (sociétés à participation publique).

The main rights common to all shareholders may be split in two wide categories: financial rights and non-financial rights.

Financial rights are mainly rights to receive dividends, dispose of shares, subscribe to capital increases on a preferential basis, share profits or liquidation surplus.

Non-financial rights, also referred to as 'political' rights, are mainly rights to receive information about the company, participate in shareholders’ meetings, take part in collective decisions and vote.

Shareholders’ rights may be varied in constitutional documents such as companies’ by-laws, which must be approved by an extraordinary shareholders' meeting decision. Such variations of rights are enforceable against all shareholders.

Although shareholders’ agreements may also encompass variations or limitations to shareholders’ rights, such contractual provisions are only enforceable against the parties to such agreement (not against third-parties).

Although shareholders’ agreements entered into within privately held companies do not have to be publicly disclosed, certain provisions of the agreements concluded by shareholders of listed companies must be disclosed to the market. Within publicly listed companies, any clause providing for preferential terms and conditions to be applied to the sale and purchase of shares representing at least 0.5% of the share capital or voting rights of the issuer must be communicated to the company and to the AMF within five business days following its signing. Such information is then publicly disclosed. If the parties fail to comply with this disclosure requirement, the relevant clauses of the shareholders' agreement have their effect suspended.

Derogating from certain shareholders’ rights is prohibited by law. For instance, a shareholder cannot be totally deprived of the right to receive dividends.

Shareholders’ agreements and joint-venture agreements are enforceable and common practice in the French jurisdiction.

The enforceability of such agreements is subject to general rules of French contract law. For instance, shareholders’ agreements are binding only among parties to such agreements and, as a general matter, do not apply to third parties. Under certain conditions, specific provisions of shareholders’ agreements can however be opposed to third parties having specific knowledge of such agreements.

Certain rights are only exercisable by shareholders holding a certain percentage of shares in a company. For instance, in companies incorporated as an SA, each shareholder is entitled to submit a draft resolution to be deliberated upon at a shareholders’ meeting. These rights may be exercised if the shareholder owns at least 5% of the share capital, provided that the total share capital of the company is up to EUR750,000. This 5% threshold progressively decreases if the company's share capital is greater than EUR750,000. In an SARL, shareholders representing at least 5% of company’s shares are entitled to require additional points and/or resolutions to be included on a shareholders' meeting agenda.

Shareholders holding at least 10% of capital in an SARL can ask the court to appoint an expert to report on a specific management operation (expertise de gestion). In an SA, SCA and SAS, this right may be exercised by shareholders holding at least 5% of share capital.

Although shareholders have information rights in all types of companies, the specific rights vary from one company type to another.

In a company incorporated as an SA, shareholders are entitled to receive specific information from the company, including before ordinary and extraordinary shareholders meetings. For ordinary meetings, shareholders can receive documents such as financial statements, management reports, summary of the company's situation for the past fiscal year, statutory auditors' reports, proxy forms, etc. For an extraordinary meeting, the company may need to make available to the shareholders additional specific documents. Shareholders have an individual right to ask questions, which are then addressed by the board of directors (or by the management board) during a shareholders’ meeting. Questions must be sent to the company in writing four business days prior to the shareholders’ meeting, at the latest. A shareholders’ right to ask written questions is not subject to any shareholding threshold requirement.

In companies listed on a regulated market, minority shareholders are, under certain conditions, entitled to group into shareholders’ associations. These associations represent their members and promote their rights (eg, raise questions to be answered by the management at shareholders’ meetings, ask for additional information about the issuer, require insertion of points and/or resolutions on the agenda of a shareholders’ meeting). As a general rule, shareholders’ associations may exercise rights similar to those granted to shareholders who hold at least 5% of issuer’s share capital.

In an SARL, shareholder may communicate written questions to the managing director(s), which are then addressed during the shareholders’ meeting.

In an SAS, company’s by-laws may freely elaborate shareholders’ information rights.

Certain matters require the approval of shareholders gathered into an ordinary or extraordinary shareholders’ meeting. As a general matter, an ordinary shareholders’ meeting deliberates on all the decisions which do not fall within the scope of competence of an extraordinary shareholders’ meeting.

Ordinary Shareholders’ Meetings

Ordinary shareholders' meetings are usually entitled to approve annual financial statements, allocate financial results and dividends, appoint and remove board members, managing officers and statutory officers, approve related-parties' agreements, ratify certain decisions taken by the board, approve of share buy-back programs, deliberate on 'say on pay' matters (mandatory in publicly listed companies), etc.

The AMF recommends that, in publicly listed companies, transfers of significant assets (ie, representing at least half of the company’s total assets) should be subject to ordinary shareholders meeting’s prior consultation. The outcome of such consultation is not binding, unless it has been agreed otherwise between parties to the contemplated asset transfer transaction.

Quorum and majority rules generally depend on the company’s legal structure. In an SA, for instance, ordinary shareholders’ meetings are subject to a quorum of 20% of shares having voting rights on first notice and to no assigned quorum on second notice. Decisions are passed by simple majority.

Extraordinary Shareholders’ Meetings

Extraordinary shareholders meetings generally vote any amendments to by-laws, approve share capital increases, share capital reductions and certain other transactions. In an SA, decisions made by extraordinary shareholders’ meetings are subject to a quorum of 25% of shares having voting rights on first notice and 20% of shares with voting rights upon second notice. Decisions are made at a two thirds majority.

Requirement for Unanimous Decisions

Certain matters must be approved by shareholders’ unanimous decisions (eg, change of company’s nationality, increase of shareholders’ commitments such as share capital increase through a rise of the nominal value of existing shares).

Shareholders do not have the general right to call a meeting of shareholders. However, under certain circumstances, shareholders may request the convening of a shareholders’ meeting.

In an SA, if a shareholders’ meeting has not been duly convened by the company’s board of directors or its management board, shareholder(s) holding at least 5% of share capital can request the shareholders’ meeting to be called by a court-appointed representative (mandataire désigné en justice). The president of the competent commercial tribunal apprises whether the shareholders’ request is motivated by the corporate interest and not simply to promote the applicants’ own interests.

Shareholders’ meeting may be called by majority shareholders upon completion of a public take-over bid or a public exchange offer, as well as after a controlling block sale. These shareholders’ prerogatives apply within publicly listed companies as well as in private companies.

In an SARL, shareholders holding 50% of share capital, or representing at least one tenth of shareholders and holding 10% of share capital are entitled to request the company’s manager (gérant) or its statutory auditor to call a shareholders’ meeting. In the event of a manager or statutory auditor’s refusal to call a meeting, SARL shareholders can request the convening of shareholders’ meeting by the president of the competent commercial court.

In an SAS, the rules to convene shareholders’ meetings may be freely set in by-laws, although in practice multiple SAS's tend to copy SA convening rules, as described above.

Any shareholder has the right to attend a shareholders’ meeting and to vote on resolutions set forth on the meeting’s agenda. One share generally gives right to one vote, however certain shares may bear no voting rights (ie, preferred shares) or bear double voting rights (ie, preferred shares; shares which have been held in nominative form for a minimum period of two years in certain publicly listed companies which have not excluded such principle in their by-laws).

In an SA, shareholders entitled to voting rights may generally vote by show of hands or by poll vote, depending on the choice made by the shareholders meeting’s bureau, unless a specific voting procedure is defined in company’s by-laws. Shareholders also have the right to vote remotely. In an SAS and SARL, by-laws may provide for the right to adopt written resolutions or written unanimous decisions. However, such voting procedures cannot be used in certain cases (eg, approval of financial statements) and cannot be put into place in certain types of companies (eg, SA's and SCA's).

As mentioned in 1.8 Shareholder Approval, quorum and majority rules vary from one corporate structure to another.Any shareholder, regardless of his or her shareholding in the company, is entitled to send written questions to the company prior to any shareholders meeting, which then need to be addressed by the management body during the meeting.

See 1.6 Rights Dependant Upon Percentage of Shares for share capital thresholds and associated rights.

Shareholders have no general right to participate in the management of a company or to sit on a company’s board of directors. However, in practice, shareholders with significant shareholdings often request board representation. In an SA, shareholders use their right to propose candidates for the board of directors (or the supervisory board, as the case may be). Candidates are appointed (and dismissed) by resolutions voted in ordinary shareholders meetings.

Shareholders do not have an individual right to appoint or dismiss directors sitting on the board of a company, however, they can propose candidates for appointment, as well as request their dismissal. The general right of appointment or dismissal of directors lies with the shareholders’ meeting.

The exact appointment and dismissal rules differ from one legal form to another.

In an SA, board members (administrateurs) and supervisory board members (membres du conseil de surveillance) may be appointed and dismissed by shareholders’ ordinary decision. The duration of a director’s office cannot exceed six years.

In an SARL, the manager (gérant) is appointed by shareholders’ decision, passed at a simple majority of issued shares upon first call and at a simple majority of votes cast upon second call. Although the manager may be freely removed by the shareholders, a removal without cause may entitle the dismissed manager to damages.

In an SAS, shareholders have the right to appoint and freely remove the president (Président). Such rights may be customised in company’s by-laws (eg, removal of the president may be subject to reasonable motives).

Shareholders have the right to challenge decisions of the board of directors and of the company’s CEO in the event of a violation of a legal provision. There is no minimum capital requirement in order to challenge a board or CEO decision. Any person concerned by a board directors’ or CEO’s faulty decision (including a shareholder) may request the competent court to null and void these decisions.

Company’s statutory auditors are approved by the shareholders’ meeting for a six-year term (or a 3-year term in case of voluntary appointment).

Legal statute number 2019-486, dated 22 May 2019, relating to growth and transformation of companies (loi PACTE) set forth the following harmonised statutory auditors’ appointment thresholds for all non-listed companies:

  • EUR4 million of balance-sheet total;
  • EUR8 million of revenues; and
  • 50 employees.

If a non-listed company fulfils two out of three of the above criteria, it must appoint a statutory auditor.

Publicly listed companies must appoint a statutory auditor regardless of any thresholds.

A shareholders’ meeting does not have the right to remove company’s auditors. Removal of an auditor before the relevant term is subject to a specific procedure, requiring authorisation from the commercial court upon examination of reasons for removal.

In publicly listed companies, each shareholder crossing upwards or downwards thresholds of 5%, 10%, 15%, 20%, 25%, 30%, one third, 50%, two thirds, 90% and 95% of share capital or voting rights must report such threshold crossing to the AMF and to the issuer within four trading days. In addition, shareholders crossing upwards the 10%, 15% 20% and 25% thresholds shall also declare their objectives for the six coming months.

The by-laws of a publicly listed company may also provide for additional notification requirements (ie, crossing of incremental thresholds between 0.5% and 5%). Such information does not need to be communicated to the AMF or the market, but to the issuer only as it is meant to enable the company to closely monitor its shareholding structure.

Privately held companies incorporated in France must maintain accurate and up-to-date information on their beneficial owners (bénéficiaires effectifs). A beneficial owner is the individual who ultimately controls, directly or indirectly, a given company (ie, by holding at least 25% of its share capital or voting rights, or by controlling the company through any other means). Information on beneficial owner(s) must be filed with the clerk of the commercial court which records it within a specific register.

In stock companies (sociétés par actions) shares are freely transferable, thus such companies’ shareholders are generally free to dispose of or grant security interests over their shares.

By exception, SAS by-laws can provide for a non-transferability period, which may not exceed ten years. As another exception, and as a matter of law, disposal of SARL shares to third parties or grant of security interests (pledges) over SARL shares by a shareholder must be approved by the relevant majority of other shareholders of the SARL.

Restrictions to the transferability of shares may be created by way of agreement, in company’s by-laws and/or via shareholders’ agreements. Restrictions to transferability may be created through lock-up or inalienability provisions, pre-emption rights or prior approval procedures of share transfers. Restrictions to share transferability encompassed in shareholders’ agreements are binding and enforceable upon parties to the agreements, but generally do not apply to third parties.

In the event a company cannot meet its liabilities with its available assets, it is deemed to have reached the state of suspended payments (état de cessation des paiements). Such insolvent company may be subject to a judicial insolvency procedure (procédure de redressement judiciaire) or a judicial liquidation procedure (procédure de liquidation judiciaire).

Under judicial insolvency procedure, shareholders’ rights are dependent upon the powers granted by the competent jurisdiction (generally, the commercial court at the company headquarters’ location) to the bankruptcy judge (juge-commissaire) and to the insolvency administrator (administrateur judiciaire). Consequently, shareholders’ involvement in the administration of a judicial insolvency procedure varies from one case to another. Shareholders meetings may be held to deliberate on certain internal decisions (eg, approval of annual financial statements, appointment or dismissal of members of administration bodies), however the shareholders are not entitled to deliberate on the insolvency procedure itself.

Judicial liquidation procedure is fully managed by a judicial liquidator (liquidateur judiciaire) appointed by the competent court. Although shareholders are deprived from most of their rights and powers under this procedure, they are entitled to receive any remaining liquidation surplus or assets upon completion of the liquidation procedure.

At any time, shareholders can collectively decide to proceed with an early winding-up of the company (dissolution anticipée). Such decision is made pursuant to majority rules applicable to by-laws’ modifications.

Each individual shareholder is entitled to launch a judicial request before the competent commercial court for the company to be wound up. This right stems from public policy provisions and cannot be voided or restricted in company’s by-laws. For such judicial winding-up request to succeed, the shareholder must bring evidence of proper grounds (justes motifs) for the winding-up (eg, major dissent between shareholders, total block of the company’s functioning, impossibility for shareholders to make decisions). Commercial court has wide discretion while evaluating motives and evidence intended to demonstrate proper grounds for winding-up.

Over the years, and partially due to the influence of the European regulation, the governance rights of shareholders of publicly listed companies have increased in France. These rights, which may be found in the French Commercial Code, the French Civil Code, the French Monetary and Financial Code, as well as in the General Regulation and the doctrine of the French Financial Markets Authority and in European regulation, are especially targeted towards long-term shareholders. Nonetheless, they offer a favourable regime for, and can be used by, activists.

Such prerogatives comprise notably:

  • rights of the shareholders to submit points of discussions and draft resolutions to shareholders’ meetings;
  • ability to ask questions to the board which have to be answered during shareholders’ meetings or published on the company’s website;
  • provision of expanded information to shareholders;
  • rather easy proxy solicitation process (even if proxy fights are not common in France for the time being);
  • say on pay;
  • vote of the shareholders on significant acquisitions and disposals recommended by the French Financial Markets Authority; and
  • the existence and ability to appeal to minority shareholders associations.

The development of shareholders’ rights is also supported by the anchorage of corporate governance codes (AFEP-MEDEF Code, MiddleNext Code, etc) in the French regulatory framework and their influence on corporate governance practices of listed companies, which constitute bases of demands for activists.

The French legal and regulatory environment also comprises measures which, without specifically targeting shareholder activism, provide tools to supervise it. In fact, French (and European) regimes have increased the transparency due by investors (major holding disclosures, statements of intents, disclosure of short net positions, disclosure of acquisitions and disposals of shares during takeover offers, etc) allowing the issuers to monitor their shareholders base. They also comprise other provisions in principle primarily beneficial to the issuers, including exceptions to the one share/one vote rule and market abuse regulation (for example, rules regarding the communication by activist funds which should constitute neither market manipulation nor unlawful recommendations).

Recently, the law on business growth and transformation (loi PACTE - Loi relative à la croissance et la transformation des entreprises dated 22 May 2019) transposed directly part of the Directive (EU) 2017/828 of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement (the Shareholders Rights Directive), the main objectives of which are to encourage long-term shareholder engagement and to enhance transparency between companies and investors and introduced several other measures which will likely impact shareholder activism in France.

Among those transposed provisions and new measures:

  • asset managers and institutional investors are required to be more transparent and publish their approach to shareholder engagement and the actual implementation of the policy thereof;
  • proxy advisers which, given the influence they have on the voting behaviour of institutional and asset managers, have emerged as indirect actors of shareholder activism in France, are required to publish their code of conduct (on a comply or explain basis), to disclose certain key information relating to the preparation of their research, advice and voting recommendations as well as conflicts of interests or business;
  • threshold required to implement a squeeze out following a take-over bid has been lowered to 90%. This will certainly render more difficult and onerous the strategy of event-driven activists which are now required to invest more in the target of a takeover bid in order to acquire a blocking stake (it being noted that minority shareholders holding 5% of the share capital would still prevent the setting up of a tax consolidation between the bidder and the target); and
  • finally, French Civil Code now enshrines the company’s own corporate interest; the directors must take into consideration labour and environmental issues of the company’s activity; the companies are now able to include a raison d’être in their by-laws and they can adopt a new corporate form, the 'société à mission' (commercial companies that have a raison d’être and are required to pursue social and environmental objectives). It remains to be seen whether these changes will, in practice, reinforce corporate defences against short-term objectives pursued by activists or if it will, on the contrary, foster the development of an emerging ESG-based activism (environment, social and governance).

While the above-mentioned provisions do not expressly target shareholder activism, the French Minister of Economy announced in April 2019 that the French government was preparing measures (new national instruments) to prevent activist funds from 'destabilising' French companies. In May 2019, the French National Assembly launched a mission to analyse shareholder activism in France.

The number of French listed companies targeted by public campaigns or demands from shareholder activists has remained quite stable in France within the last years, with approximately ten to 12 public campaigns from activists per year since 2015. If the number is stable, the perceived impact of activist action has increased as the profile of activists (with the increased presence of US funds) and the approach taken by them (which tends to be more public) has changed.

Additionally, the above figures do not fully reflect the actual level of shareholder activism in France. In fact, behind-the-scenes, confidential discussions and activists' negotiations with the board and the management are not taken into account, and they are a widespread practice in France. In fact, many public hostile campaigns are at first confidential and collaborative.

Types of Activism

Activist action takes many forms, although three main profiles can be identified.

'Strategic' activists take a minority stake in the capital of companies they consider undervalued and encourage a change in the strategy, the business operation or the corporate governance of the company. The aim of those activists is often short-term. They seek to increase the value of the company to create an opportunity to sell their stake in the company at a premium. Short-term activists also often focus on M&A topics by opposing or - vice-versa – pressuring companies to undertake M&A transactions. Some strategic activists are more long-term focused.

Event-driven activists acquire strategic stakes in listed companies (either directly or through derivatives) in the context of M&A situations, especially in public take-over bids and leverage that stake to agitate for a higher price or better terms on the basis that they may otherwise seek to block the deal. An example of event-driven activism in France is the investment of Elliot in Norbert Dentressangle (now XPO Logistics Europe) in the context of the takeover offer from XPO Logistics (July 2015). The takeover bid was completed but XPO Logistics only held 86.25% of the share capital and 86.52% of the voting rights at closing of the offer, preventing it to implement a squeeze out of XPO Logistics Europe’s minority shareholders and the delisting of the shares. Elliott’s strategy towards XPO has now moved to 'strategic' activist. Very present on the French market, Elliott has recently taken a long position on ALTRAN TECHNOLOGIES in the context of the contemplated takeover by Capgemini and has so far stated that “based on their analysis of the information currently available, Elliott’s intention is not to tender the ALTRAN TECHNOLOGIES shares they may acquire in the future” (July 2019 - ongoing).

Short selling activists consider that the company they target is overvalued and take net short positions on the capital of said company and pressure for a notable deterioration in its share price. They usually use well-prepared public campaigns, usually alleging fraudulent actions. The prominent example in France is the campaign launched by Muddy Waters against the retailer Casino and its parent company Rallye (2015 – ongoing).

Agenda Pursued by Activist Shareholders

Activists have varying agenda but usually focus on four items:

  • portfolio strategy: activists usually focus on M&A transactions either advocating for or opposing the terms of proposed sales or mergers or advocating for divesture or spin-offs of non-core businesses or assets (a recent example is Amber Capital, advocating for a 'leaner Suez' and requesting a portfolio review to rotate out of mature assets and use proceeds to reinvest, deleverage and buyback shares (July 2019 - ongoing campaign) or TCI, which strongly opposed the terms of the takeover of Zodiac by Safran (February - May 2017));
  • financial strategy: activists seek for more dividends distributions or buy backs or to optimise the capital structure (increase leverage) of the target (Elliott requesting dividends to be distributed by XPO Logistics Europe (2018 AGM), P. Schoenfeld Asset Management (PSAM) seeking the distribution of an exceptional dividend from Vivendi (March 2015));
  • business strategy and operational performance: activists seek to weigh in the business or operational strategy of the company (Elliott recommending to Pernod Ricard to launch a more ambitious operational improvement plan to close the profitability gap with competitors (December 2018 and February 2019 – ongoing campaign);
  • corporate governance: activists may challenge the compensation of executives, promote change in the composition of the board (it is more and more usual to have activists calling for a greater number of independent directors within the board), seek to gain seats at the board, seek a change in the CEO/management or call for the abandonment of anti-takeover mechanisms (Sterling Strategic Value, acting in concert with Financière de l’Echiquier, requesting the appointment of two independent directors at Latecoère’s board (2018 AGM); Elliott, asking Pernod Ricard to align its corporate governance with best-in-class peers (December 2018) and to address the necessary enhancements to the company’s board and corporate governance (February 2019) (ongoing campaign)). Those objectives often support more economic-based demands.

Approaches and Strategies of Activist Shareholders

Approaches vary but pressure usually starts in private following the acquisition of the stake and may ratchet up to hostile public campaigns.

The arsenal available and used by activists includes:

  • exercising their shareholder rights, including, inter alia:
    1. submitting additional discussion items or resolution proposals to the general assembly (provided that they meet the applicable minimum shareholding threshold);
    2. submitting written questions to the board in relation to the information provided to shareholders prior to a general shareholders’ meeting - the board is required to answer these questions during the shareholders’ meeting or on the company’s website;
    3. requesting the president of the commercial court to appoint an independent expert to investigate one or more past or contemplated management decisions, provided they hold at least 5% of the share capital (individually or collectively) or act through a shareholders’ association (with respect to listed companies);
  • soliciting proxies from other shareholders (requirements and restrictions on proxy solicitation are relatively limited in French law);
  • lobbying towards the members of the board;
  • using public relations campaign to advertise their positions: public letters addressed to the board or management, 'white papers', dedicated website;
  • soliciting support from proxy advisers;
  • rallying institutional investors and sell-side research analysts to support the activist’s arguments; this has become very important in a context of passive management of their funds by institutional investors (investment decisions are based on index and algorithmic criteria);
  • seeking to gain seats at the board or to have independent directors appointed (it being noted that under French corporate law there is no right for a shareholder to obtain a seat on the board of directors solely because it owns a certain stake in the share capital);
  • blocking a squeeze-out (Elliott/XPO Logistics/Norbert Dentressangle); (PACTE law has rendered this strategy more onerous by increasing the blocking stake for a squeeze out);
  • writing directly to the French regulator, the AMF; and
  • on some occasions, initiating litigation (derivative action launched by Elliott against XPO Logistics Europe’s management, CIAM against Altice, CIAM in relation with Euro Disney).

Since 2015, companies involved in a variety of sectors including healthcare, financial, services, consumer goods, technology, industrial goods and basic materials have been targeted by public demands from shareholder activists in France. More than specific sectors or industries, activists are prone to target specific governance or structural issues of a company.

Consistent with the worldwide trend, no French company is beyond activists’ reach. Companies with a market capitalisation of over EUR1 billion appear to be the primary targets of activist shareholders in France. In 2018 (1 January to 30 September 2018 – Activist Insight), 75% of the French targets had a market capitalisation between USD2 billion and USD10 billion. Even though they were less targeted in 2018, CAC 40 companies (the French listed companies with the highest market capitalisation) are far from being immune to activists’ action. However, given the (US) activists’ appetite and the relatively small amount of large cap French companies, a growing number of public campaigns target French companies with a lower market capitalisation.

Consistent with a worldwide phenomenon, well-known US-based funds such as Elliott Management (Elliott) or Wyser-Pratte Management now play a major role in the French activism landscape and impose their practices. Their French counterparts, such as Charity Investment Asset Management (CIAM), are also very important actors in the French market and are involved in many public campaigns targeting French companies. UK-based Amber Capital (European-focused) and The Children’s Investment Fund Management (TCI) also count amongst active players on the French market.

Shareholder associations such as the Association de Défense des Actionnaires Minoritaires (ADAM) have historically been, and continue to be, very active in France, initiating or supporting many public activist campaigns.

Additionally, short selling activism has recently emerged as a new type of activism in France (public campaign initiated by Muddy Waters against Casino).

However, more than a category of shareholders, activism has become a behaviour. Strategic investors become more vocal, alone or by teaming up occasionally with activists (for example, Financière de l’Echiquier acting in concert with Sterling Strategic Value in 2018 to challenge Latecoere’s governance).

Recent years have also seen the increasing importance of proxy advisers. They have more and more influence on the voting behaviour of institutional and asset managers and have thus emerged as important indirect actors of shareholder activism in France.

Campaigns launched by activists in 2018 were, to a large extent, unsuccessful or are still ongoing. For example, the attempt of Sterling Strategic Value and Financière de l’Echiquier, acting in concert, to have two new members of Latecoere’s board of independent directors appointed was rejected by the general meeting held in 2018. The requests of Elliott to have dividends distributed and to be represented at the supervisory board of XPO Logistics Europe were partially answered. XPO Logistics Europe decided to propose the distribution of dividends (although at a lower amount than what Elliott requested). The proposed appointment of a member of the supervisory board was rejected.

However, if it is true that most resolutions proposed by shareholders are rejected, this instrument alone is not sufficient to measure the success of an activist campaign. Issuers taking into account some aspects of the demands of activists in their strategy (to a certain extent, Pernod Ricard), revised prices in the context of takeover offers (Safran/Zodiac) and other less measurable items must be taken into account when measuring activists’ success.

Preparedness

From the company’s perspective, the best form of defence against shareholder activism is being prepared. To that end, a company may:

  • proceed with regular vulnerability studies by considering the company’s situation from the perspective of an external investor, the management should become aware of the company’s vulnerabilities and prepare a rebuttal strategy for each identified vulnerability item. Typical 'vulnerabilities' attacked by activist investors include corporate governance issues, low revenue growth and/or dividend yields, significant cash reserves, multiple business segments (potential for divestment or spin off), lack of clear business strategy or corporate social responsibility issues;
  • engage in consistent and clear dialogue with shareholders and proxy advisers on the company’s strategic vision;
  • monitor early warning signs that an activist has taken an interest in them and make a full use of the legal instruments available to French companies to monitor shares, options and other financial instruments: major holding disclosures, net short positions disclosure, implementation of a continued and regular reporting of registered shareholders, use of the procedure for identifiable bearer shares, identification of the actual non-resident holders of open of securities accounts with a registered intermediary;
  • track peer performance and activist involvement at peers or similar industries; and
  • implement a response team (including advisers) able to form a response strategy and manage the relationship with stakeholders.

In order to avoid an immediate disadvantage of the company through giving the 'wrong' response or through losing time because there is no clear process and the responsibilities are not allocated, it has proven to be effective to have a manual at hand that provides initial guidance by setting out the initial steps to be taken immediately after the company has been approached by an activist.

Live activism situations

Once an activist has begun a campaign, it is essential that the target:

  • has a unified and comprehensive response;
  • finds supporters within the investor base and other stakeholders;
  • reviews all possible legal actions; and
  • prepares well for external communication around annual shareholders’ meeting or extraordinary shareholders' meeting.

Companies incorporated and registered with the Trade and Companies Register benefit from the legal personality. They are separate legal entities from their shareholder(s).

Shareholders (acting in such capacity) may bring an action for liability against the company if they suffered a personal loss as a result of the company’s negligent or wrongful acts. A shareholder of a French listed company may, for example, bring an action against the company for the personal loss it suffered due to the dissemination of false or misleading information by said company. Shareholders may also, under certain conditions, request the competent court to declare null and void some corporate decisions.

Directors may be liable to shareholders. In fact, a shareholder (without any restriction with respect to the stake it holds in the company) may bring an individual action against the company’s directors if it suffered a personal loss distinct from that suffered by the company itself as a result of the directors’ actions or omissions.

Shareholders may also bring a derivative action against the company’s (former) directors on behalf of the company (see 3.6 Derivative Actions).

On the basis of the French general contractual liability regime, if the relevant shareholders entered into a shareholders’ agreement, the parties can be held liable to each other in the case of breach or non-performance of the shareholders’ agreement.

Shareholders may also initiate disputes against other shareholders based on the wrongful exercise of their voting rights. If the majority shareholder exercises its rights in a way that could be considered as being cumulatively contrary to the company’s corporate interest and in the sole interest of the majority shareholder to the detriment of the other shareholders, the decision may be cancelled as wrongful exercise of voting rights (abus de majorité). Minority shareholders may also request damages against the relevant majority shareholder(s) in this respect. A minority shareholder may also be held liable for wrongful exercise of its minority rights.

Shareholders (without any restriction with respect to the stake they hold in the company), having suffered a personal loss distinct from that suffered by the company itself as a result of auditor negligence or wrongful acts, may bring an individual action against the company’s auditor(s).

Any derivative action brought by shareholders against the company’s auditor(s) on behalf of the company is, in principle, excluded. Yet, shareholders benefit from an autonomous capacity for action to contribute to the quality of the statutory audit. In fact, one or several shareholders representing at least 5% of the share capital of commercial companies may request the courts to remove a statutory auditor (récusation pour justes motifs) or dismiss a statutory auditor in the case of fault or incapacity to perform its work.

In SARL and stock companies (SA, SAS, SCA), shareholders holding at least 5% of the share capital (or less in an SA depending on the amount of the share capital), individually or collectively (as the case may be, through a shareholders association), may seek indemnification, on behalf of the company, from the company’s CEO or directors to compensate the company for the losses it suffered as a result of mismanagement by the company’s CEO or members of the board in the fulfilment of their duties. This derivative action is known as the ut singuli action. In this case, the damages awarded by the court are paid to the company itself (whereas the legal action is brought at shareholders’ expense). This type of action remains quite rare in France. However, recent increase in US-style shareholder activism may reinvigorate such practice. In fact, Elliott filed an ut singuli action against some executives of XPO Logistics Europe (2015–ongoing dispute).

Shareholders typically consider the following factors when seeking to litigate to obtain remedies in France:

  • duration of the proceedings;
  • litigation costs;
  • ability to share costs by joining forces; under certain conditions, and usually when they are required to hold a certain minimum stake in the share capital of the company to launch an action, shareholders may bring an action collectively or through a shareholders’ association. However, in France, they are not entitled to bring securities class actions on behalf of all shareholders;
  • possibility to obtain interim reliefs; and
  • ability to block a specific corporate transaction.

They would also consider the state of French case law with respect to a given dispute.

Freshfields Bruckhaus Deringer LLP

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75008 Paris

+33 1 44 56 44 56

Imogen.COLE@freshfields.com www.freshfields.com
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Law and Practice in France

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Freshfields Bruckhaus Deringer LLP is a global law firm with 28 offices in 18 jurisdictions and a long-standing track record of successfully supporting leading national and multinational corporations, financial institutions and governments. With 120 lawyers in Paris, including 25 partners, Freshfields is one of the largest law firms in France. The Corporate/M&A team comprises eight partners, one counsel and 25 associates. Its expertise allows the firm to advise clients on all governance aspects of listed or non-listed companies in France, in the context of all types of M&A transactions and shareholders’ disputes. The team is supported by experts in litigation, international arbitration, tax, public law, employment, antitrust and merger control. Recent work includes advising Française des Jeux on its privatisation process, Saur Group in the context of EQT Infrastructure’s investment, Gefco on its proposed IPO and Getlink on the reorganisation of its corporate legal structure.