Until March 2020, the prices on the market for acquisitions were quite expensive for investors and the COVID-19 pandemic marked a pause in a long bull market. The beginning of 2020 had already seen a slowdown in cross-border transactions and a move toward protectionist strategies. COVID-19 accelerated those trends.
After the first quarter the M&A market has been hit severely by the COVID-19 crisis. But in July and December 2020, the market was dynamic and the announced future wave of COVID-19 cases does not seem to have changed the positive trend.
Tender Offer Filings
Filing of tender offers in 2020 (43 filings) has increased compared to the last two previous years (30 in 2019 and 22 in 2018) coming back at a level in the average over the past ten years. Significant transactions were announced and closed such as and Capgemini’s offer for Altran Technologies (EUR3.6 billion) the price of which was challenged by minority shareholders, but the offer was reopened during the COVID-19 crisis and was thus a success allowing Capgemini to implement a squeeze-out.
It must also be mentioned the acquisition of a 29.9% stake by Veolia in Suez with the intent to file a tender offer in 2021 and the strong defence of Suez, including a crown jewel defence, the use of litigation, communication and other means to oppose the contemplated combination.
On the mid-market, different private equity funds have been looking at investment in public equity in 2020 despite the pandemic. For example, KKR has been active in that field in particular on the takeover bids filed on Mediawan or on Devoteam. Those transactions are an attractive option in the current market for PE investors because they can deploy capital without the exposure of owning the whole company and can typically acquire a stake at a very favorable price and have a clear path to exit.
On the private M&A side, strategic investors have significantly decreased their involvement in transactions, but private equity investors remained strong buyers and sellers. In 2020, it was announced multiple sales to private equity funds, including in particular the sale of Ceva Santé (EUR 4.8 billion), Elsan (EUR3.3 billion), Galileo Global Education (EUR2.3 billion), Colisée (EUR2.2 billion), Gerflor (EUR1.7 billion) or Babilou (around EUR1.5 billion).
During COVID-19, acquirers focused on the prevention of value erosion, acceleration of synergies and minimisation of transaction risks. The negotiation of deal terms has been impacted and in particular earn-outs and net working capital with the aim sometimes to bridge the valuation gap between the parties. Buyer are also focusing on the risk of overpaying and are mitigating that through new pricing structures. Past performances remain an important element in front of the future uncertainty to find a deal on the price.
In the past few years, the French market appeared to be very seller-friendly, but due to COVID-19 the market has turned less seller-friendly. In front of the dramatic decline in buy-side competition, buyers are requesting strong interim covenants and R&W. Buyers looking for increased need of security also try to negotiate most of the time a MAC or MAE clause.
The renegotiation of the transaction between LVMH and Tiffany (EUR14.7 billion) based in particular on the MAE clause (and the absence of any explicit mention of “pandemic” as an exception) will remain in every professional mind. Sellers try to remain strong to avoid warranty repetition and have extensive declaration on buyer’s awareness.
Although financing remain available, the financing commitment may be conditional upon new restrictions. Certainty of the fund and financing conditions are as usual key. With sellers focusing on execution risks, the buyer able to offer an unconditional deal will have a significant advantage.
COVID-19 Extraordinary Measures
The events of the COVID-19 leaded to extraordinary measures which significantly impacted the legal environment. On 18 March 2020, the French government published a legislative package of emergency measures aimed at tackling the COVID-19 crisis. This had consequences in all areas of law.
The increasing efforts to ensure that stakeholder’s interests and public interest are considered to have led to the adoption of several emblematic measures which impacted the market. After the introduction of a duty of vigilance for major companies with regard to the activities of their subsidiaries and subcontractors, French law now expressly requires that each company be managed in its best interests, "taking into consideration the social and environmental stakes of its activity". French companies can also adopt a sense of purpose (raison d’être) to define a purpose beyond profits.
According to the new law, a corporation can specify, in its by-laws or publicly announce a sense of purpose, the principles it gives to itself to guide its business and strategic decisions. As a result, M&A transactions were impacted and it has to be noted an increased emphasis by clients on ESG issues with particular emphasis on compliance issues, employees and the environment.
Activism strongly developed in France in 2019 and remained in 2020, in particular around Lagardère with shareholders pushing for new developments including, Amber, the Qatar fund, Vivendi or Agache. The Autorité des Marchés Financiers - the French markets Authority (AMF) - stated that the authority will make proposal of new law to regulate shareholder activism.
Protectionism continues to increase. As far as M&A is concerned, this trend is accelerating in foreign investment control in strategic sectors. The French government has introduced temporary measures during the pandemic period that have been extended in 2021, to avoid loss of control over critical infrastructure and the potential opportunistic acquisitions, especially by buyers affiliated with a foreign government. Even if the deal Couchetard-Carrefour did not wind the government’s blessing, such control should not be an obstacle per se, but foreign investors should bear this in mind as it provides more complexity for M&A transactions.
It can be expected that the event-driven downturn created by COVID-19 will recover more quickly than those caused by cyclical forces or structural problems. In the meantime, assets of particular interest have been in countercyclical industries and in industries likely to be less affected by the effects of COVID‑19, including financial services, renewable energy, infrastructure, technology and healthcare.
The current trends observed in 2020 should accelerate in 2021. examples include involuntary M&A deals, such as bankruptcy sales or forced asset sales to generate liquidity or interim transactions with interesting deal structure as a way to reduce transaction risks, and transactions to create growth, such as acquisitions of core and non-core businesses and cross-border transactions. The main remaining transactions are those needed to transform digitally, innovate new business models to reposition for post-COVID market realities or accelerate commercialisation.
Many transactions were put on hold in 2020 and, therefore, it can be expected that those deals will come back in 2021. Brexit will create opportunities for France and in different sector. PE investors will still be in the market with their “dry-powder”. It is expected that large companies will renew with M&A and create national and European champions, the Veolia-Suez announced transaction being a start. Of course, debt-to-equity swaps transactions are contemplated and should be an important part of distressed transactions. On public M&A, SPAC trends may rise in France if the markets continue to remain at a high level in 2021.
The most common means of acquiring a company in private M&A transactions is the use of a share deal, although asset deals also represent a significant proportion of private business combinations. For small businesses, mergers and contributions of assets are less frequently used in this context.
Public M&A transactions can be made in several ways. Takeover offers are usually employed when the target company is not closely held, or when there is no controlling shareholder. Voluntary takeovers are also employed in the case of hostile bids. Otherwise, because many French-listed companies are closely-held, many investors prefer to acquire a controlling interest first, resulting in a mandatory offer. A French listed company may also be acquired by a merger transaction.
Investors may acquire control of a company by a contribution of business or assets in exchange for shares. Contributions of business or assets follow similar rules to mergers.
Numerous regulators supervise M&A activity in specific sectors, such as banking and insurance (the Prudential Supervisory Authority – ACPR), energy (the Commission for Energy Regulation – CRE), telecommunications (the Regulatory Authority for Electronic Communications and Postal Services – ARCEP), broadcasting communication (the Independent Authority to Protect Audio-visual Communication Freedom – CSA) and data privacy (the Independent Authority on French Data Protection – CNIL).
More generally, the Competition Authority (Autorité de la Concurrence) is responsible for merger control and works to prevent illegal economic practices.
Public M&A are regulated by the AMF with the approval (visa) of the public documentation filed by a bidder.
French administration controls certain foreign investments in strategic sectors. This control has been strengthened in recent years, including in 2019 and 2020.
Foreign investments are subject to prior approval by the Ministry of Economy if falling in one of the enumerated strategic business sectors, including:
In 2020 a specific regime that has been extended in 2021 applies when the threshold of 10% of the voting rights of a French listed company is crossed by a foreign investor. The Ministry of Economy may authorise the foreign investment subject to certain conditions, including the carve out of strategic activity.
Where a concentration has an EU dimension, it will be governed by EU law and controlled by the European Commission; otherwise, French law will apply, under the control of the French Competition Authority. The concept of concentration is defined in the same way in European and French law (merger, takeover or creation of a joint-venture) and appraised in the same way by the Competition Authority and the European Commission.
If the concentration exceeds certain turnover thresholds, it will either be notified to the Competition Authority, to the European Commission, or will not be notified. The calculation of turnover is made in the same way as for European merger control. Some sectors (banking, insurance, retail, etc) are subject to special regulations.
Authorities closely monitor practices that could lead to gun-jumping. And, the French Competition Authority closely look at deals which are below the threshold but could lead to significant competition restriction in particular in tech sector.
French Labour Code provides that the works council of a company has to be informed and consulted about modifications to the economic or legal organisation of a company, including notably merger, sale, acquisition or sale of subsidiaries or investment in a company. The works council of companies taking part in a private M&A transaction must be informed and consulted in advance of the transaction.
The Works Council
Acquirers shall keep in mind that the works council must have sufficient time and information provided by legal representatives during this consultation period. In tender offers the information and consultation procedure by a bidder follows the public announcement of a deal. On the target side, the works council must state whether it recommends the offer within one month of its publication.
Nonetheless, works council’s role is merely advisory and it does not have any actual means to influence the decision of either the shareholders of the target or the bidder.
In the context of an asset deal with a sale of a business (fonds de commerce) or a share deal relating to the majority of a company's shares, employees must be informed of the possibility of making an offer. In companies with less than 50 employees, the transaction shall not occur prior to the end of a two month period during which the employees may present an offer; in companies with between 50 and 250 employees, this right to present and offer is in parallel of the information and consultation procedure set out above.
The seller does not have to accept the employees’ offer - if any - but the procedure must be followed, on pain of a fine of up to 2% of the sale price.
See 2.3 Restrictions on Foreign Investments.
French law now expressively requires that each company be "managed in its best interests, taking into consideration the social and environmental impact of its activity", ie, in the companies best interest. It was agreed for long that French company directors have to act in the company’s best interests. It is now explicitly provided by the law. In addition, while directors were already bound by mandatory rules for the protection of stakeholders (labour and environmental laws, of consumer interests, etc) they must now consider the social and environmental impact of the company's activity in each of their decisions.
Any company can now specify its sense of purpose (raison d'être), distinct from its corporate purpose, "consisting of the principles with which the company is endowed and for the observance of which it intends to allocate resources in the conduct of its business". This provision appears to allow a company to assert and pursue a not exclusively profit-oriented goal. It should be pointed out that the specificity of a raison d'être is far from being neutral in terms of management and the potential liability of managers and the company, and that such raison d’être may be used either by activist shareholders but also by any interested person, including non-profit organisations “fighting for a better world”.
On 31 August, 2020, Veolia announced that it had sent Engie a EUR2.9 billion offer to buy 29.9% of Suez – Engie owns a total of 32% of the latter. Though Véolia displayed "friendly" intentions, Suez's managers immediately replied that they had never been approached before, finding the initiative "hostile". A communication battle ensued. At the beginning of October 2020, Engie sold 29.9% of Suez's capital to Veolia, triggering multiple legal offensives.
Suez first attacked Veolia over its failure to inform the employee representative bodies (instances representatives du personnel) (ERP). Suez won and a decision that suspended "the effects of the sale of the shares held by Engie to Veolia", requiring Veolia to provide Suez with "the information necessary to inform and consult its employee representative bodies". Veolia introduced an appeal and the decision was reversed considering that the control had not been taken by the acquisition of the stake of 29.9% which set an important precedent.
Veolia retaliated by suing Suez for having decided to house part of the control of its water business in a Dutch foundation, which would block a future takeover bid. Suez’s Board of Directors has indicated that for the next four years and unless Suez’s Board of Directors decides otherwise during that period, Suez Eau France, like its assets, will be inalienable in the absence of an agreement entered into by its shareholders. This foundation could constitute an obstacle blocking a takeover bid by Veolia. It is this poison pill that Veolia is trying to disarm in court in addition of other defences.
The Paris Commercial Court handed down an important decision in November 2020 concerning the obligations of a company’s board members (administrateurs). Scor accused Covea, one of its major shareholders, and its representative who sat on Scor's board of directors of various faults on the part of its member. Covéa’s representative was found guilty of misconduct "in breaching the commitments he had made" to Scor as a director, and "[the commitments] relating to conflicts of interest, confidentiality and loyalty". He had not informed Scor of his potential conflict of interest when joining the Strategic Committee despite his knowledge of the conflict and had not reported his proven general conflict of interest while still having access to the various minutes of the various committees and by refusing to resign for three months.
As a result, the board member was deemed to be in breach of his contractual obligations arising from the internal regulations and questionnaire but also his obligations as a board member as set out in the memorandum of the French Institute of Board Members (Institut Français des Administrateurs) and thus incurred his contractual liability. In addition to a breach of his duty of confidentiality, the court considered that the board member had breached his duty of loyalty by secretly seeking, in relation to Scor's board of directors, to oppose a possible merger between the latter and Partner Ré because this transaction was against Covéa's interest by removing external growth opportunities. Covéa was considered to be complicit in the faults committed by its representative as a board member of Scor in his personal capacity. This decision is being appealed.
Most takeover law rules have not changed since 2014.
Following a public consultation on proposed changes to its regulations, the AMF published, in January to February 2020, amendments to its General Regulations, Instructions and Recommendations with the aim to enhance the protection of minority shareholders and better ensuring the independence and transparency of fairness opinions.
The amendments changed the timetable of the tender offers, providing a process with more time for minority shareholders to comment and discuss with the board of the target after the offer is filed and before the board of the target takes its reasoned opinion on the offer. In addition, it increased the information published by the offeror and the target, for more transparency and a better understanding of the interest to tender or not in the offer, through the fairness opinion of the independent expert which provides its views on the financial terms of the offer.
Stakebuilding prior to launching an offer is not common, given the narrow markets with low trading volumes and the immediate impact on share prices; moreover, stakebuilding by cash-settled derivatives has to be disclosed.
In stake building strategies, AMF powers have to be taken into account in particular in case of rumours about a potential tender offer (eg, with "put up and shut up" procedure).
Any natural person or legal entity, acting alone or jointly, that comes into possession of a number of shares representing more than 5%, 10%, 15%, 20%, 25%, 30%, one-third, 50%, two-thirds, 90% or 95% of the share capital or voting rights of a company with its registered office in France and admitted to trading on a regulated market, has to meet disclosure requirements.
Shares or voting rights owned by:
must be taken into account (assimilated securities) when calculating the ownership of the shares, together with shares granting the use (usufruct) of shares lodged with the person (provided that he or she may exercise the voting rights attached as they choose in the absence of specific instructions from the shareholders), and voting rights which that person may freely exercise by virtue of a Power of Attorney in the absence of specific instructions from the shareholders concerned.
The person or entity crossing any of these thresholds must inform the company of the total number of shares and voting rights it holds within four trading days. The AMF must also be informed of the change within four trading days.
The Commercial Code mentions that a company's articles of association may provide for additional reporting obligations to a company, concerning the holding of other fractions of the share capital or voting rights, though these cannot be below 0.5% of the capital or voting rights of the company.
Additionally, other hurdles to stakebuilding are implemented by French law in connection with special regulations regarding specific sectors, especially investing in credit institutions and insurance institutions.
Dealing in derivatives is allowed but must be disclosed when it comes to calculating shareholding thresholds.
The person passing the threshold must account for issued shares covered by an agreement or cash-settled derivative having an economic effect that is equivalent to the ownership of these shares (calculation with the delta for cash settlement only). More precisely, the AMF general regulation indicates that it covers agreements or derivatives that are indexed, referenced or related to the shares of an issuer, and gives a long position on the shares of the person required to make the notification. In particular, this applies to contracts for difference or any financial instrument exposed to a basket or an index of shares of several issuers, unless they are sufficiently diversified. However, derivatives are not considered when calculating the mandatory offer threshold.
The European Market Infrastructure Regulation (EMIR) has required transparency regarding derivatives contracts negotiated on the regulated markets or over-the-counter. EMIR created an obligation to report all transactions in derivatives to trade repositories. This obliges the reporting of new contracts with a trade repository registered with the European Securities and Markets Authority.
In addition, a European regulation on short selling aimed at establishing a new European-level harmonised framework and greater transparency came into force in November 2012. Pursuant to this regulation, any person holding a short position equal to or higher than 0.2% (lowered temporally to 0.1% during the COVID-19 period) of the share capital of a company admitted to trade on a French regulated market must notify the AMF of this position within one trading day. Then, this obligation applies when one of the successive supplementary thresholds set by 0.1% steps is crossed, either upwards or downwards. When the net short position is equal to or higher than 0.5% of the share capital, the AMF releases this information to the market.
Any person or entity crossing the 10%, 15%, 20% and 25% thresholds of a company admitted to trading on a regulated market is required to file a detailed declaration of intent within five trading days.
French regulations contain a general disclosure obligation, which states that any person preparing a financial transaction liable to have a significant impact on the market price of a financial instrument, or on the financial position and rights of holders of that financial instrument, must disclose the characteristics of the transaction to the public as soon as possible.
However, the AMF provides that this person may assume responsibility for deferring disclosure of those characteristics if confidentiality is temporarily necessary to carry out the transaction, and if this person is able to ensure such confidentiality. Thus, discussions between a potential bidder and the shareholders of the target may remain confidential if the utmost secrecy can be maintained. Most of the time the deal is disclosed when agreements are signed. If the deal is announced after a first approach it is usually in the case of hostile bids.
A "put up and shut up" mechanism has also been implemented, which aims to oblige potential offerors to anticipate the disclosure of their intent to launch an offer or not. The AMF’s decision to launch such a mechanism is discretionary and can occur, for instance, if there are large swings in the stocks of the target, market rumours or articles in the press.
The request for disclosure by the AMF may lead to two eventualities: either the suspected bidder confirms their intention to file an offer, which leads the AMF to set a deadline by which the offer itself must be made; or the suspected bidder announces that they have no such intent, which results in a six-month period during which they cannot file an offer concerning this company, and it has the obligation to disclose any purchase representing at least a 2% increase of its prior holding of the company’s securities.
Market practice on timing does not differ from legal requirements. Nevertheless, new EU regulations on the publication of privileged/price-sensitive information, which significantly reinforce the level of information that an issuer has to disclose when it has decided to delay the relevant information, could lead to room for interpretation and thus specific market practice.
Under such regulations, an issuer may still, on its own responsibility, delay disclosure to the public of inside information provided that all of the following conditions are met:
However, the issuer must then inform the AMF that the disclosure of privileged/price-sensitive information has been delayed and provide, if requested, a written explanation of how the above-mentioned conditions were met, immediately after the information is disclosed to the public.
Basic and fundamental information (annual accounts and auditor reports) can usually be found on public websites or are available with other information directly on a company’s website (which usually discloses the accounts for the last five years). Public registers hold basic information on bylaws, patents & trademarks or real estate.
However, in the context of private M&As, it may be difficult to obtain financial information about companies that refuse to disclose such information, since French regulations do not compel a company to do so.
Regarding the scope of information disclosed in data room procedures in connection with takeover situations, potential buyers may access details that could influence a company’s share price. Thus, for public M&As, the AMF recommends that the procedure be restricted to the sale of significant shareholdings, as the case may be, covered by confidentiality agreements and restricted to persons evidencing serious intent.
In the event of the sale of a significant shareholding followed by a tender offer, the offer document registered with the AMF must ensure that investors have equal access to all the material facts they need to give their opinion. If the sale of a significant shareholding is not followed by a tender offer, the AMF recommends informing the market of the price and the terms communicated by the interested parties and specifying that a data room is put in place for the purposes of the transaction. Additionally, a company should make public any material and potentially price-sensitive facts that it had undertaken not to disclose but were made available in the data room.
Exclusivity is more common than standstills in the French M&A market. Usually, French-listed companies are closely held, so that any potential acquirer wishing to engage in a friendly takeover will negotiate directly with the core shareholders, since the free float for trading is restricted. Thus, the few shareholders holding the company accept exclusivity. Although it is not a rule, it is usual practice. In the event that an open bid takes place, exclusivity is usual in the last step of the process after the selection of the final bidder.
French regulation allows tender offers to be documented in a definitive agreement.
French listed companies are frequently owned by a small number of shareholders holding the majority of shares, so potential bidders wishing to obtain control of the targets get in touch with core shareholders to agree on a share purchase agreement, eventually resulting in a voluntary tender offer, intending to take control of the target company. Two situations can arise from this offer:
To ensure success of an offer it is more and more common that a target company enters into an agreement with a bidder, such as a merger agreement.
In private M&As, the length of the process is determined by whether a potential acquirer is familiar with the business, requires due diligence or, in the case of financial buyers, financing, and whether the sales process is structured as an auction. Thus, the process could be completed within weeks or months.
In public M&As, the tender offer process and timelines are regulated. In public M&As relating to a Paris stock exchange-listed target business, the AMF, after a period of review that generally lasts from either 20 trading days after the filing of an offer or up until one month and two days after consultation of the works council, can approve the offer. It can then allow its opening for a period of a minimum of ten trading days in simplified cash tender offers, or 25 trading days in voluntary tender offers.
The review period can be much longer when the transaction is suspended until it is approved by the antitrust authorities, and in the case of a judicial recourse filed against an AMF decision on compliance of an offer, when this challenged decision is suspended by a court decision.
For the Euronext Paris market, the stock exchange market law requires the filing of a mandatory offer in two situations:
If a target company holds 30% or more of the share capital and voting rights of a subsidiary, which is an essential asset of the target, and is also listed on a regulated market, then the mandatory offer is extended to the subsidiary. However, the AMF may grant an exemption to a mandatory offer in certain situations listed in its General Regulations.
On the French M&A market, cash is a more common form of consideration than shares. Exchange offers represent between 5% and 10% of the market depending on the year. It is important to note that if, in the twelve months before an offer is filed, the offeror (acting alone or in concert) has purchased cash securities giving it more than 5% of the shares or voting rights of a target company, the offer must include a cash option.
In any case, whether the consideration is composed of cash or shares, the cash offer, or the valuation of the securities, has to meet the minimum price requirements in connection with mandatory or voluntary offers aimed at control.
A tender offer must generally be unconditional, although some exceptions exist.
The 2014 takeover law reforms introduced a new obsolescence threshold in takeover bids (whether voluntary or compulsory), according to which an offer becomes null and void at the expiry of an offer period if a bidder fails to acquire at least 50% plus one share of the shares or voting rights tendered in an offer.
However, the AMF has proposed to adopt a list of situations where the application of the obsolescence threshold may be waived, and it intends to reserve for itself the power to either lower the 50% plus one share threshold or exempt offerors from its application in certain cases.
Persons or entities wishing to take control of a company must pass the 50% threshold of voting rights. This threshold, apart from giving control to a shareholder (whether acting alone or in concert), provides the majority during the ordinary general meetings, the decisions of which concern numerous aspects of the life of a company. An ordinary general meeting has the ability to vote on subjects, such as the approval of accounts, but also on decisions concerning common operations for a company (eg, agreements between a company and a director, authorisation prior to the conclusion of certain transactions by directors, purchase by a company of its own shares, etc).
Most importantly, the OGM is the assembly that can appoint or replace members of the board. Consequently, a bidder acquiring at least 50% of the voting rights of a target will have the capacity to recall the board and replace all management after a merger or an acquisition. In practice, depending on the shareholding structure of the capital, a percentage of less than 50% of voting rights can give control of a target.
Controlling an Extraordinary General Meeting
Another essential control threshold relates to the majority necessary to control an extraordinary general meeting, for which purpose a shareholder must hold at least two thirds of voting rights. Indeed, the extraordinary general meeting can modify the bylaws of a company, which includes the modification of the corporate purpose, changing the name of the company, the transfer of registered offices and, most importantly, the decision to increase or decrease capital. For all these operations, a shareholder must own at least two thirds of voting rights, subsequently giving it control of both an OGM and an EGM.
Voting Rights and Share Capital Thresholds
The 90% threshold of voting rights is also relevant since the market rules of Euronext Paris as well as Euronext Growth provide for a case of simple delisting. According to such rules, a controlling shareholder may request the delisting of shares of a controlled issuer from the stock exchange following a simplified tender offer if certain specific requirements are met.
In addition, since 2019, this level allows core shareholders to launch a squeeze-out procedure and eventually to obtain control of 100% of the share capital.
The 95% threshold of share capital and voting rights should also be noted, as combined with other conditions, the ownership of 95% of the share capital of a subsidiary allows a holding company to avail itself of tax consolidation and to gain a strong advantage in the tax field.
In a private M&A transaction, a financing condition can be implemented in an offer provided by a prospective acquirer. In a public deal, pursuant to French regulation, a takeover offer made to a company whose equity securities are admitted to trading on a regulated market cannot be conditional on a bidder obtaining financing. Indeed, a draft offer has to be filed with the AMF by one or more investment service providers (banking institutions) authorised to act as underwriter(s), and acting on behalf of an offeror.
The filing is made by means of a letter addressed to the AMF guaranteeing the irrevocable nature of the commitments made by an offeror. It must be signed by at least one of the sponsoring institutions. Thus, these banks themselves guarantee that a bidder has the financing, which is why the filing of a takeover offer cannot rely on this condition.
Break-up fees are not prohibited under French regulation, and they appear to have been used increasingly frequently in recent years, in particular in private deals. In tender offers, break-up fees can take two forms, depending on whether they are agreed to by the core shareholders or with a target company itself.
If agreed to by core shareholders, they are included in the shareholders' irrevocable commitment to tender their shares. These agreements have been challenged by the French courts, when they have been found to hinder the concept of the free play of offers and counter-offers. French law provides that, to make a counter-offer competitive with an initial offer, a new bidder has to propose a share price that is at least 2% higher than the first price.
If break-up fees are agreed with the target business, care must be taken that they cannot be interpreted as contrary to the corporate interest of the company, as in this case the agreement will not be authorised. Furthermore, break-up fees may prevent any counter-offer that would not be attractive for the shareholders, ie, all offers that do not allow the fees to be absorbed, and which de facto automatically raise the minimum price of a counter-offer. For this reason, the AMF is very careful about break-up fees. Sometimes reverse break-up fees are contemplated to avoid the bidder quitting a deal.
When filing the offer, there is an obligation to disclose any break-up fees and other deal protection measures taken by a listed company or its shareholders to the public and the AMF.
Non-solicitation provisions are quite common between an offeror and core shareholders – although not between an offeror and the board of a target. The action open to the board of a target is to search for a "white knight" (friendly investor).
Bidders have a formal obligation, when filing a tender offer, to apply for 100% of the share capital, apart from specific simplified offers where they can seek only 10% of the capital.
As long as a bidder does not cross the 30% mandatory offer threshold, it has the option to enter into a range of agreements (including shareholder agreements) that provide it with additional governance rights. The most common agreements are shareholder agreements on all kinds of subjects, including providing a bidder with specific rights with regards to the board.
Shareholder voting by proxy is allowed in France. The French Commercial Code provides that shareholders may be represented at shareholders’ meetings either by another shareholder or by their spouse.
More generally, following a European directive, the French Commercial Code provides that in the case of publicly listed companies, or companies listed on an organised Multilateral Trading Facility, shareholders may be represented by any natural or legal person.
The mandatory acquisition of minority shareholdings, or squeeze-out mechanisms, can take place in two distinct situations:
Squeeze-Out Following a Tender Offer
To be entitled to carry out a squeeze-out connected to a tender offer, an offeror has to hold at least 90% of the share capital and voting rights of a target at the end of an offer. The AMF requires the offered price to be at least equal to the price offered in the previous offer if the offer was made in cash. This is the case whether an offer followed the normal offer procedure (without the intervention of an independent expert valuation) or followed the simplified procedure (in which case the AMF can review the price of an offer considering an independent expert valuation for a squeeze-out).
Where an offer follows the normal procedure and is voluntary, the AMF does not have to review the subsequent squeeze-out, which is automatic. Otherwise, the squeeze-out and its price have to be cleared by the AMF in the original decision of compliance or in a new decision.
Squeeze-Out Following a Buyout Offer
The rules are quite similar for a squeeze-out after a buyout offer. A shareholder wishing to launch a squeeze-out procedure must hold, alone or in concert, at least 90% of the share capital and voting rights at the end of the buyout offer.
If the bidder did not make it clear during the filing of a buyout offer that he or she intends to start an automatic squeeze-out procedure after the buyout, the AMF must be informed within ten trading days and the squeeze-out and its price have to be cleared by the AMF in a new decision.
French regulations allow the execution of irrevocable commitments to tender the shares of a target company (engagements d’apport). However, the principle of the free play of offers and counter-offers is violated if the first bidder obtains advance commitments from shareholders, in the form of presentation promises or promises of sale, which ensure the success of its offer. Thus, these commitments are strictly controlled by the AMF, which tends to interpret provisions contained in such agreements in favour of shareholders, for the purpose of offering them an exit if a better offer is made.
However, in a case involving Accor, an appeals court decided that such irrevocable commitments were lawful if there was no decisive advantage contradicting the principle of free play of offers and counter-offers given to the first bidder.
Nevertheless, irrevocable commitments are not commonly implemented, since prospective offerors would rather obtain the control of a block of shares in the first place, bought from a core shareholder, which would allow much stronger security for a bidder and which may be a prerequisite for making either a voluntary or a mandatory offer.
Negotiations for an irrevocable commitment to tender the shares or for the acquisition of a key shareholding are mostly undertaken before an offer is filed.
A tender offer can be made either under a voluntary or a mandatory procedure if a bidder crosses one of the mandatory offer thresholds. If an offeror makes a voluntary tender offer, the bid is made public before the filing of an offer with the AMF. For this purpose, the bidder must post its draft offer on its website, and is obliged to issue a press release stating the main provisions of its offer and indicating that the offer is subject to the AMF’s approval.
In the case of a mandatory tender offer, the bid must be made public immediately after the event triggering the mandatory offer occurs – most usually, the crossing of the 30% threshold, but also a 1% increase in holdings of between 30% and 50%. In this situation, the announcement of the bid must be made by publication on its website and in a press release.
A bidder has to produce an offer document (note d’information) to be filed with the AMF as a draft, to which a target replies with a draft response document (note de réponse).
In most cases, the response document contains a report from an independent expert. The key points for shareholders are the conditions under which the board reached a reasoned opinion regarding the merits or risks of an offer for a target company, its shareholders and its employees. Any board member who disagrees with the board's opinion may request that the dissident opinion be disclosed.
In addition, the intentions of the members of the board to tender their shares or to keep them are also disclosed to the market. Further points of interest include, if they are available and different from the reasoned opinion of the board and comments by the works council, staff representatives or staff members including the report of the independent expert of the works council, if any.
Where all or part of an offer is to be settled in securities, no formal prospectus is required, but disclosure equivalent to a prospectus is needed. An offeror must prepare a full presentation, with reference to the relevant Annex of the EU Regulation.
The impact of the offer on the offeror's main accounting results and consolidated accounts is usually presented if this impact will be significant. The information is set out in a table that indicates the main parts of the financial statements or key financial parameters.
Currently, there are no transaction documents that have to be disclosed in full. Only their main provisions have to be disclosed.
A director's main duty is to act in the company’s best interest. Recent legal developments confirmed the prevailing conception that the “best interest” should be understood as that of the company itself, considered as an autonomous legal entity and pursuing its own ends, aimed to ensure the prosperity and continuity of the company.
In addition, since directors must consider stakeholders’ interests, which may be contradictory at times, they have to keep in mind the fact that the quality of an offer is not always entirely linked to the price offered per share. The intentions of a bidder must be analysed, and quite often its intent towards strategy is crucial when deciding whether to accept or reject its offer.
There is no obligation in France to establish ad hoc committees to analyse business combinations. However, they are very common in cases of conflict of interest that arise when the board faces an offer. In these situations, an ad hoc committee is organised to investigate, from an independent point of view, the benefits of the transaction.
The ad hoc committee’s duty is to assist the work of the board and bring clarifications to the board, which still bears all liability and makes decisions. Most of the time, a member of the board of a French company has the right to vote during a meeting of the board – even in cases of conflict of interest. French law does not prohibit voting by a director even if an ad hoc committee is established.
Unlike in other jurisdictions, the board keeps all its powers and liabilities towards the shareholders even if an ad hoc committee is created.
Since 2014, the scope of the board passivity rule has been reduced drastically as the board of directors of a target company now has the power to take all decisions likely to have the effect of making the bid fail, subject to the prerogatives explicitly reserved to shareholders in their general meetings limited to the interest of the company.
The board of directors must continue to act in accordance with the interest of the company, even in adopting defence measures in the context of a takeover. This is the one point upon which a court can rely and possibly condemn in the event of litigation.
Moreover, companies who wish to opt out of this new regulation can continue to refer to the old board passivity rule subject to reciprocity or not in their articles of incorporation.
It is common to have lawyers and financial advisers appointed by each party involved, by a target company and by the board and/or the ad hoc committee of the board in case of a risk of conflict of interest. It is also common in France to appoint an independent expert to assess the fairness of terms offered to shareholders of a target company (this can even be mandatory, for instance in the case of a conflict of interest within the board of a target).
The report produced by the expert usually contains a description of the research carried out by that person and a fairness opinion, which has to conclude on the fairness of the price and possible disagreements with the offeror and its financial advisers. In some cases, strategic advisers are also used.
The French Commercial Code on related party transactions provides that any agreement between a company and one of its directors or executive directors, one of its managers, one of its shareholders holding a fraction of the voting rights exceeding 10%, or, in the case of a corporate shareholder, the controlling company, must be subject to the prior approval of the board.
Also subject to prior authorisation of the board is any agreement between two companies if a director, executive director or manager of the first company is an owner, partner with unlimited liability, manager, director or member of the supervisory board of the second company.
The control of related party transactions is carried out in different steps, including prior approval of the board and the vote by the shareholders' meeting (as the case may be, the related party shall not vote).
Hostile takeovers are permitted in France, but unsolicited tender offers are the exception rather than the rule. Likewise, defensive measures are rare. This is partly because under stock exchange regulations directors have to be objective when facing a tender offer and, until recently, they could not take any defensive measures.
However, in practice, preventive defence mechanisms were sometimes implemented to avoid or lower the risk of an unsolicited tender offer.
One widely used preventive defence is the concentration of power among specific – friendly – shareholders and the use of shareholder agreements. Some of the techniques employed in accordance with these mechanisms are:
Identification mechanisms are also considered to be preventive defence measures, since they allow companies to learn about third parties to the share capital. The most frequent identification mechanisms are:
France allows directors to use defensive measures as set forth in 9.3 Common Defensive Measures.
So far, the most efficient active defence measure under French law has been the use of free subscription warrants (Bons Breton). An EGM with special rules for voting may decide to propose these subscription warrants giving access to equity at a strong discount to existing shareholders before the offer period ends, thus provoking a dilution of a bidder’s shares in the total share capital. If such a decision is taken, the general regulations of the AMF could allow an offeror to withdraw his or her offer if the substance of a company is modified (this analysis, though commonly accepted, cannot be confirmed or refuted with certainty). This defensive measure seems to be used as a threat against potential hostile offers; there is no precedent in which it has actually been implemented.
Moreover, the most common defensive measure when facing a hostile offer is the search for an alternative bid or combination. Some combinations do, however, compel a board to obtain authorisation from shareholders, which may be lengthy and difficult to put in place in listed companies.
Negative statements regarding the strategy to be implemented by an offeror or regarding the consequences of this strategy, made by a board of directors are also frequently used, encouraging the free float to resist the offer. With this regard, the Pacte Act may give a new ground to the management of target companies.
Directors must not only act according to the best interests of society, but also take into consideration the social and environmental stakes of the company’s activity (see 3.1 Significant Court Decisions or Legal Developments). The management of a company targeted by a hostile tender offers could therefore try to defend itself by arguing that the bidder's offer is in contradiction with the company’s or the stakeholder’s interests, or even that the company's raison d'être is incompatible with the offer. More simply, French listed companies, since they are often closely held, rely on a friendly controlling shareholding – usually reinforced with shareholding agreements and double-voting rights granted to long-standing shareholders.
Directors have a permanent duty to act in the company’s best interest, irrespective of the fact that the board passivity rule has been abolished. Company’s best interest prevents directors from making decisions that would not be for the benefit of the company.
Moreover, compelling takeover principles of free competition between offers continues to limit, in practice, a management’s capacity. The most significant of these principles are equality of treatment between shareholders, transparency and loyalty.
The so-called "Nancy Reagan defence" is seldom used in practice in France. Management prefers to obtain support, either formal or informal, from key shareholders. A decision by directors to coalesce and "just say no" on their own initiative is considered very risky.
Except in hostile public offers, where litigation is a substantive part of the process, neither litigation nor arbitration related to M&A are common in France. The most frequent subject of M&A litigation lies in earn-out provisions and warranty claims, mostly in private M&A. Additionally, litigation linked to sales and acquisitions has sharply increased and, to a lesser extent, litigation related to mergers. This can be partly explained by the high number of financial targets in distress.
In France, litigation is much more common in private M&A than in public M&A. The most frequent lawsuits involving listed companies concern the decision of the AMF to declare an offer compliant or to authorise a squeeze-out (which happens to be implemented after takeovers). The minority shareholders who underwent the squeeze-out procedure sometimes go to court to challenge AMF decisions and obtain compensation for their shares.
The AMF can launch an investigation, either upon request from minority shareholders or at its own discretion, and make sure that the regulations were followed as they should be. In such cases, there are many different causes of disputes, including the avoidance of a mandatory offer after a threshold was crossed and bid prices that are deemed too low.
Generally, litigation happens once private M&A transactions are completed, and usually concerns either earn-out provisions or warranty claims. In public M&A, litigation is rare, except in hostile takeovers where used as a weapon by all parties involved, and usually involves court review after AMF approval.
The acquisition of the Bermudan reinsurer Partner Re by Covéa signed on 3 March 2020 for USD9 billion was abandoned in May given the economic circumstances and the uncertainty caused by the COVID-19 health crisis. Covéa wanted to renegotiate the purchase price initially set but Partner Re refused.
Shareholder activism is now an important trend in the French M&A market, and an increasingly relevant consideration for corporate boards to bear in mind, notably regarding governance issues.
Activism is favoured in France by a tendency of pro-minority shareholder regulations (eg, the rise of the "say on pay"). Such activism tends to protect minority shareholders in disciplining management in order to implement value creation. Shareholder activism is expanding, especially for companies listed on a regulated market.
As well as the classic financial and political considerations (higher dividends and board seats notably), activists can also focus on environmental, social and governance issues and are now be in a position to use the company’s raison d'être as a lever on management (see 3.1 Significant Court Decisions or Legal Developments).
However, after several high-profile cases, the AMF Chairman announced that the AMF was "paying close attention to the smooth operation of markets, to which activism can contribute but to which it can also disrupt in some cases" and was going to change its doctrine on activism.
Activists sometimes encourage companies to enter either into transactions, reorganisations or major divestitures. They sometimes question the relevance of the management, the governance, the strategy or a transaction on its general or financial terms. The final aim is of course to have a better valuation of the stock of the company.
Most of the time, as soon as a transaction is announced, activists actively use the press to put pressure on a deal and seek to influence the transaction. The aim is usually to gain time to try to find a better offer, with better price/better financial conditions.
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