Shareholders' Rights and Shareholder Activism in France
Global shareholder activism has continued to grow in popularity despite recent challenges to finding investment sources. 2022 has been the busiest year for global activism since 2018, with the launch of 126 new shareholder activism campaigns, according to Lazard.
Public awareness of this phenomenon has also continued to increase in France. In 2021, around 6.2% of French-listed companies had been subject to an activist campaign over the previous five years. According to Alvarez & Marsal, more than 150 companies in Europe could be targeted within the next 18 months, 23 of which will be French companies.
This development prompted a public debate in 2019, concerning the improvement of market practices and the applicable regulatory framework. Simultaneously, a new form of shareholder activism has emerged, dedicated to ESG concerns, to become a decisive influence on the market.
Attempts to Regulate Shareholder Activism in France
During the first trimester of 2019, several working groups focused on potential improvements to the regulatory framework on shareholder activism. In collaboration with three ad hoc committees led by think tanks and professional organisations (Club des juristes, Association française des entreprises privées (AFEP) and Paris EUROPLACE), the finance committee of the French Parliament set up a committee dedicated to shareholder activism, which issued a report on 2 October 2019.
On 20 April 2020, the Autorité des Marchés Financiers (AMF – the French stock market regulator) contributed to this debate by issuing its own report. It started by underlining the benefits of activist intervention, stating 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.”
Despite the buzz that surrounded these debates, no significant reform was either suggested or implemented. Taking a pragmatic approach, the AMF solely recommended targeted amendments to regulate the excesses of some activist behaviour. After consulting its advisory commissions, the AMF eventually approved a few changes to its official non-binding doctrine on 17 March 2021, including some of the improvements examined in its previous communication.
Transparency on stake-building
One of the most significant amendments discussed by the various working groups concerned lowering the first legal threshold for the disclosure of stake holdings in the market. The threshold is currently set at 5% of the share capital or voting rights, which is the highest threshold allowed by the Transparency Directive (Directive 2004/109/EC).
Even though the President of the AMF had suggested lowering the threshold to 3% of the share capital or voting rights (in line with the legislation of the most comparable EU member states), this decision remained within the sole competence of the French legislator. The AMF did not incorporate this suggestion in its report of 20 April 2020, recalling that “activists readily disclose their acquisition of a stake in an issuer, whatever the level of their holding.” It also did not update its official doctrine on the matter, leaving it now up to the French legislator to take over.
From the issuer’s perspective, such an amendment would not have triggered any significant disruption, since the by-laws of most major French-listed companies already provide for lower disclosure thresholds, starting at 0.5% of the share capital or voting rights. From a more general perspective, however, the position of the AMF seems legitimate; disclosing the presence of an activist investor too early can put pressure on both the issuer and the investor to go public, or undermine informal shareholder dialogue, with a potential negative impact on relations between the parties and on the issuer’s share price.
The AMF had also suggested that issuers should publicly disclose on their websites any statutory holding notifications sent by shareholders, in line with their by-laws. On one occasion, it had considered imposing increased reporting obligations on activist investors in takeover situations, claiming that activists usually “played a significant role in the conduct of public offers.”
Even though the AMF finally refrained from expressly updating its official doctrine on these points, its official doctrine nonetheless echoes its will to improve transparency, as it now reminds investors in general terms to be “particularly vigilant” when carrying out their declarations in takeover situations. Investors should therefore expect the AMF to be more inclined to sanction late or wrong filings in the future, especially when made by activist investors.
Activist campaigns over previous years have revealed the need to improve shareholder dialogue. In order to tackle this issue, the AMF contemplated several amendments in its report of 20 April 2020, many of which resulted in an update of its official doctrine in 2021.
First, the AMF expressed the wish to continue promoting direct shareholder dialogue by encouraging issuers to set up dedicated shareholder dialogue platforms. Whilst the AMF did not include this recommendation in its official doctrine, it re-emphasised the importance of consistent investor dialogue throughout the year, and not only prior to annual general meetings. In that regard, it endorsed the recommendation provided in the non-binding corporate governance code, AFEP-MEDEF, that issuers should appoint a member of their board of directors to be specifically in charge of shareholder dialogue, with a duty to report to the board. It also incorporated in its doctrine a new request for activist shareholders to first attempt a dialogue with the issuer before launching a campaign.
Second, the AMF suggested facilitating a response by issuers to activist campaigns. To that end, it has now clarified its current doctrine on “quiet periods” in order to enable issuers to reply to public statements made by activist shareholders during such periods and to provide the market with any necessary information.
The AMF further updated its current policy on shareholder engagement in public campaigns: shareholders are required to immediately disclose to issuers and to the market the material information and arguments sent to other shareholders (white papers, letters to shareholders, etc).
Finally, the AMF indicated in 2020 that it would contact the European Securities and Markets Authority (ESMA) 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. The AMF, however, did not provide additional information on that topic at this stage.
Short-selling and regulation of securities lending
One of the most sensitive topics surrounding shareholder activism in France is short-selling. The 2019 working groups made several suggestions to amend the current legal framework, which mainly derived from Regulation (EU) No 236/2012.
Notably, the French Parliament’s dedicated committee recommended the introduction of a presumption of abnormal market functioning when the short-selling of a financial instrument exceeds certain limits, prompting an AMF-led investigation.
The AMF did not take up these recommendations in its publication of 20 April 2020, nor in its updated official doctrine, considering 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 to debt instruments (notably, bonds and credit-default swaps).
As for the regulation of securities lending, the AMF announced in its 2020 publication that it would reiterate, by way of recommendation, what constitutes good practice for fund managers to repatriate loaned securities before any general meeting and effectively exercise their voting rights. This recommendation was issued in its 2021 communication.
Powers of the AMF
In 2020, the AMF suggested amending several provisions of French legislation in order to strengthen its enforcement powers. Notably, it wishes to be able to impose fines following failures to comply with its administrative injunctions, and to order any investor financially exposed to the securities of a listed issuer to make corrective or supplementary publications if errors or omissions are identified in its public statement.
The AMF also indicated that it would enter into discussions with ESMA to suggest the publication of a "white list" of activist behaviours that may not, in and of themselves, lead to those shareholders being regarded as persons acting in concert. Shareholders considered to be acting in concert are ultimately obliged to file a tender offer on the remaining shares that the group does not hold and/or are deprived of voting rights if legal or statutory thresholds are 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 co-operation and acting in concert under the Takeover Bids Directive, ESMA/2013/1642). No updated information has been shared on this matter to date.
International investors would certainly welcome such a clarification, since it would reduce the uncertainty they face when taking part in an activist campaign, provided the "white list" remains a sufficiently comprehensive, but not too restrictive, list of typical examples of non-concert situations, since the qualification of an action in concert relies on very specific circumstances.
The Rise in ESG-related Activism
In parallel with the aforementioned developments, the last three proxy seasons witnessed the rise of ESG-related activism, which highlighted the need to clarify the current legal regime.
Instructive proxy seasons
At the 2020 annual general meeting of Vinci, the board of directors refused to add the draft environmental resolutions submitted by Meeschaert Asset Management and TCI to the agenda. Vinci indicated that such resolutions would “substantially modify the distribution of powers between the board of directors and the shareholders, to the detriment of the board.”
TotalEnergies applied similar reasoning at its 2020 annual general meeting when it refused to support a shareholder resolution (which was nonetheless added to the agenda) aimed at amending its by-laws in order to compel the board of directors to:
TotalEnergies argued that the resolution would interfere with management’s attributed competence “by seeking to specify in the Articles of Association of the Company the content of the Management Report”, since “the proposed resolution aims to have the General Meeting decide directly on a specific and quantitative strategy, which is the sole prerogative of the Board.”
That being said, the situation took an unexpected turn in 2021, when Vinci and TotalEnergies themselves (followed also by Atos in the same year) submitted resolutions to their shareholders aimed at enabling the general meeting to issue an advisory vote on the sustainability policy of the companies.
Despite these initiatives, the 2022 proxy season witnessed further interesting developments in relation to ESG-related activism.
In particular, at TotalEnergies’ 2022 AGM, a group of 11 shareholders submitted a draft resolution to the agenda aimed at requiring the company to frame its climate strategy “to align its activities with the objectives of the Paris Agreement.” As in 2020, TotalEnergies’ board of directors decided not to include this draft resolution on the agenda, claiming that it was not admissible notably because it “encroaches on the public policy competence of the Board of Directors to define the Company’s strategy.” However, TotalEnergies invited the shareholders to express their opinion on its Sustainability & Climate Progress Report 2022 through an advisory vote at the shareholders’ meeting – trying this way to balance the necessary dialogue with shareholders against the exclusive powers of the board of directors.
Interestingly, five of the shareholders who supported the draft resolution challenged TotalEnergies’ decision by urging the AMF to force the board of directors to add the draft climate resolution to the agenda. The AMF refused to intervene and its President explained that the AMF had no power to issue such an injunction, which is the sole prerogative of the commercial court.
These developments highlight the fact that ESG-related shareholder activism reawakened a long-standing debate in French corporate law on the prerogatives of the board of directors and the limits of shareholder initiatives.
This debate is based on Article L. 225-35 of the French Commercial Code, which states in its current version that “the board of directors determines the orientations of the company's activity and ensures their implementation, in accordance with its corporate interest, taking into consideration the social and environmental challenges of its activity.” Issuers targeted by activist investors tend to waive this provision and argue that shareholders have absolutely no say on strategic decisions. This argument is usually backed by the Motte ruling dated 4 June 1946, pursuant to which the French Cour de cassation stated that “it is not ... the responsibility of the general meeting to encroach on the board's on matters related to management.”
As illustrated above, applying this analysis on ESG-related initiatives led by shareholders has major consequences, since these initiatives intrinsically relate to the strategic decisions of the company. In particular, draft shareholder resolutions requiring the board of directors to implement a specific environmental policy could be considered to fall within the exclusive powers of the board and therefore never be put to a shareholder vote.
This is exactly the non-binding conclusion reached by the Association Nationale des Sociétés par Actions (ANSA), which stated in March 2021 that, “as the law stands, a request by shareholders to submit a draft resolution on the agenda, requiring the board of directors, the general management or the directorate to submit their sustainable development strategy to a vote of the general meeting, necessarily disregards the principle of hierarchy and the independence of the corporate bodies in that it encroaches on the powers and attributions legally devolved to them.”
However, things may change in the future with a nascent public debate on the necessity of implementing a dedicated regime applicable to the "Say on Climate" debate.
In its 2020 report on corporate governance and executive compensation in listed companies, the AMF stated that “a clarification of the current state of the law, as the case may be through legislative amendment, could contribute to legal security in that field, for the issuers and shareholders, who should be able to express their view on ESG topics.” The AMF reiterated its position in 2021, acknowledging that the "Say on Climate" debate was a marketplace debate.
In addition, in November 2021 the French Minister of the Economy, Mr Bruno Le Maire, entrusted Mr Yves Perrier, the President of Amundi, with the task of issuing a report providing guidelines to Paris financial centre operators on how to bring their actions into line with the targets set by the Paris Agreement. The resulting report, entitled “Making the Paris Financial Centre a reference for climate transition: a framework for action”, was issued in March 2022. It notably states that “the requirements for filing climate resolutions at shareholder meetings must also be clarified with the public authorities and made more flexible.” In that regard, the report entails a clear recommendation to “formalise an automatic say on climate requirement, the monitoring and sharing of best practice and commitment coalitions.”
Finally, the French government sought an expert report clarifying the applicable legal framework of advisory shareholder votes on the environmental policies of listed companies. A report should be issued during the second half of 2022.
It remains to be seen if and how these reports will trigger a substantial reform of French corporate law, leading to a new "Say on Climate" mechanism.
In all likelihood, it seems that no major legislative or regulatory amendments will be put forward, leaving the rules on "Say on Climate" to the AMF or to recommendations in non-binding corporate codes. This would be in line with the position taken by the AMF on regulating shareholder activism – it recently stated that “[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.”
In any event, given the similar trends currently existing in neighbouring member states and the increasing preponderance of ESG issues, a wider reform at the EU level might be relevant and meaningful.
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