Public awareness regarding shareholder activism increased significantly in France in 2019. This was a direct consequence of major French companies being targeted by activist shareholders in 2018 (Pernod Ricard, Suez, Scor, Lagardère, Latécoère) – a phenomenon which initially emerged in the early 2000s.
During the first trimester of 2019, several working groups focused on potential improvements to the regulatory framework and market practices regarding shareholder activism. Besides three ad hoc committees led by think tanks and professional organisations (Club des juristes, AFEP and Paris EUROPLACE), the finance committee of the French parliament set up a dedicated mission on the topic and issued its report on 2 October 2019.
More recently, on 20 April 2020, the Autorité des Marchés Financiers (AMF), the French stock market regulator, contributed to this debate by issuing its own report, starting by underlining the benefits of activist intervention. For instance, the AMF states that: “[A]ctivist investors may contribute to proper price formation in markets, and to an improvement in the corporate governance and management of the issuers” and that “on the academic level, several studies have highlighted the positive effects of activist behaviour, in both the United States and Europe”. Taking a pragmatic approach in its report, the AMF does not call for major changes to the current legal framework but recommends targeted amendments – drawing on the conclusions of the above-mentioned reports.
Transparency on Stake Building
One of the amendments discussed by all these working groups consists in lowering the first legal threshold for disclosure of stake holdings to the market. Currently, this threshold is set at 5% of the share capital or voting rights – which is the highest threshold allowed by the Transparency directive (Directive 2004/109/EC).
Whilst the president of the AMF suggested in a personal statement that the disclosure threshold should be set at 3% of the share capital or voting rights – in line with the legislation of most comparable member states of the European Union (eg, the UK, Germany, Italy) – the AMF's report does not propose a specific figure, recalling that “activists readily disclose their acquisition of a stake in an issuer, whatever the level of their holding”.
From the issuer’s perspective, such amendment would not trigger any significant disruption since the by-laws of most of the major French-listed companies already provide for lower disclosure thresholds, starting at 0.5% of the share capital or voting rights. However, from a more general perspective, disclosing the presence of an activist investor too early on is likely to create pressure on both the issuer and the investor to go public (ie, in reaction to questions from analysts or the press, forcing each party to take a formal position on the subjects raised by the activist campaign). A lowered threshold could undermine informal shareholder dialogue with a potential impact on relations between the parties and on the issuer’s share price.
In the same vein, the AMF suggested in its report that issuers should publicly disclose on their websites any statutory holding notifications sent by shareholders according to their by-laws. This proposal would be an interesting step towards reducing the imbalance of information between the issuer and the market regarding the capital structure of the issuer – a key element when shareholders have added resolutions to the agenda ahead of general meetings. In addition, from the issuer’s perspective, this would solve the complex issue of determining whether the crossing of a statutory threshold by an activist investor qualifies as insider information. This proposal has, however, the same downsides as lowering the first legal threshold for disclosure of stake holdings (ie, a potentially adverse effect on early-stage informal shareholder dialogue).
Activist campaigns over the past three years have revealed the need to improve shareholder dialogue.
The 2018 “campaign season” has already triggered some changes. For example, since 2018, the non-binding corporate governance code of listed corporations published by AFEP and MEDEF, the largest employer federation in France, has recommended that the issuers appoint a member of their board of directors to be specifically in charge of shareholder dialogue, with the duty to report to the board.
Furthering that trend, the AMF is contemplating several amendments to the policy outlined in its report of 20 April 2020.
Firstly, the AMF wishes to keep promoting direct shareholder dialogue by encouraging issuers to set up dedicated shareholder dialogue platforms. The main precedent of such platforms is the UK Investor Forum, which enables shareholders to collectively reach out to management and present joint requests through a member of the Investor Forum, who acts as a trusted facilitator.
The success of such a platform would depend on the active participation of all stakeholders, including institutional shareholders, whose voting decisions generally rely on the recommendations of proxy advisers and seldom involve direct action.
Secondly, the AMF wishes to facilitate a response by issuers to activist campaigns. To that end, the AMF indicated that it would clarify its current policy on “quiet periods” explicitly in order to enable issuers to reply to public statements made by shareholders during such periods and to provide the market with any necessary information. In the same vein, the AMF stated that it would amend its current policy in order to require shareholders engaging in public campaigns to immediately disclose to issuers the material information that they are sending to other shareholders (eg, white papers, letters to shareholders, etc).
In practice, this amendment would not trigger major changes, since activist investors generally already publish such material on their websites or on dedicated platforms during a campaign. By contrast, one of the working groups mentioned here (Club des juristes) suggested that shareholders engaging in campaigns should be required to send their materials to the issuer prior to launching a campaign, in order to enable the issuer to respond and correct any errors. Such a measure would bring a much more significant change to the current practice, even though its benefits are not obvious. Indeed, it appears that, in practice, before publishing any materials, activist investors undertake thorough research on the basis of publicly available information. The risk that such materials contain significant mistakes is therefore not that likely. In addition, an activist campaign usually comes as a second step, following informal meetings with the management of the issuer, during which both parties have the opportunity to exchange their respective views and propositions. The issuer is therefore seldom caught off-guard by the later publications of the investor.
Finally, the AMF indicated that it would contact the European Securities and Markets Authority and the European Commission to ask for clarification regarding the applicability of the current regulation on investment recommendations (Commission Delegated Regulation (EU) 2016/958 of 9 March 2016) to public statements of activist investors.
This is a welcome initiative, which could clarify and secure the framework of activist campaigns, to the benefit of both issuers and shareholders.
One of the most sensitive topics surrounding shareholder activism in France is short-selling. In particular, the campaign led by US hedge fund Muddy Waters against French retailer Casino in 2016 and the subsequent increase of short-sellers on Casino’s share capital, attracted significant media attention.
Following this precedent, the working groups mentioned earlier made several suggestions to amend the current legal framework, which mainly derives from Regulation (EU) No 236/2012. Notably, the dedicated mission of the finance committee of the French parliament recommended introducing a presumption of abnormal market functioning when short-selling of a financial instrument exceeds certain limits, which would lead to the opening of an investigation by the AMF.
The AMF did not take these recommendations in its report and stated that: “[T]he existing framework already enables the regulator to respond in the event of exceptional circumstances and market dysfunctions. As a result, it does not seem advisable, as things stand, to recommend a radical change in the regulations applicable in this area”. The AMF merely indicated that it would support proposals made at the EU level to request short-selling investors to disclose their exposure in debt instruments (notably bonds and credit default swaps).
The February 2019 development in the Wirecard affair – where the German stock exchange regulator enacted a temporary ban on short-selling the company’s stock – questions the common perception of short-selling investors and whether it is justifiable to overregulate their activities.
Powers of the AMF
Finally, the AMF suggested amending several provisions of French legislation in order to strengthen its enforcement powers. Notably, the AMF wishes to be able to impose fines with regard to its administrative injunctions and to be empowered to order any investor financially exposed to the securities of a listed issuer to make corrective or supplementary publications if errors or omissions have been identified in its public statement.
The AMF also indicated that it would engage in discussions with the European Securities and Markets Authority (ESMA) in order to suggest the publication of a “white list” of activist behaviours which may not, in and of themselves, lead to those shareholders being regarded as persons acting in concert – which otherwise could ultimately put those shareholders under the obligation to file a tender offer on the remaining shares that the group does not hold and/or being deprived of the voting rights if legal or statutory thresholds have been crossed by the group without adequate notification. This list would follow the precedent of the white list already published by ESMA with regard to the Takeover Directive (ESMA, 12 November 2013, Information on shareholder cooperation and acting in concert under the Takeover Bids Directive, ESMA/2013/1642).
International investors would certainly welcome such a clarification since it would reduce the uncertainty they face when taking part in an activist campaign – as long as the “white list” remains a sufficiently comprehensive list of typical examples of non-concert situations and is not too restrictive, since the qualification of an action in concert relies on very specific circumstances.
In contrast to the wide public attention which the development of shareholder activism has attracted during the past 18 months, the proposals made by the AMF and most of the other working groups are limited in number and balanced in their substance. As the AMF puts it: “[A]ny additional regulations specific to the Paris marketplace, notably regulations significantly increasing the obligations incumbent on all the market participants, including investors, might have undesirable effects, especially concerning its attractiveness”.
It now remains to be seen if and how the French legislator will enact these proposals, with shareholder activism expected to continue to grow in the coming years.