French Update – Recent Legal Developments Affecting French Tender Offers
Executive Summary: 2014 witnessed significant changes to the laws and regulations governing public tender offers in France. Among the more notable changes were:
- “passivity rule”: the reversal of France’s 2006 opt-in to the Takeover Directive’s version of the English “passivity rule”;
- double voting rights: the default rule for listed companies now provides double voting rights for all shares held by a shareholder in registered form for more than two years, unless the bylaws provide otherwise (previously, companies “opted-in” to double voting rights rather than “opting-out”);
- employee consultation rights: significant changes to consultation and information rights available to employees in connection with M&A transactions;
- mandatory minimum tender condition: a new requirement for bidders to acquire (in principle) at least 50% of the share capital or voting rights of the target, short of which their bid will fail;
- mandatory offer threshold: the “acquisition speed limit” threshold has been reduced to 1% from 2%; any shareholder holding between 30% and 50% of the share capital or voting rights of a listed company who increases its ownership by 1% in any 12-month period is required to file a tender offer to acquire all the company’s shares;
- limitation of delays in connection with takeover-related litigation:
- court appeals against AMF decisions relating to public offers must be decided within five months;
- the AMF recently allowed an offer to close notwithstanding an ongoing legal challenge to its decision. This new approach departs from the AMF’s longstanding practice of deferring the closing of the offer period pending resolution of legal challenges and will be followed unless the President of the Paris Court of Appeal considers that such closing would have “manifestly excessive consequences.”
A detailed study of all of these changes is beyond the scope of this short note. What is clear is that the full implications of many of these changes will be tested in practice, and before the courts and the AMF, in the years to come.
The main article reviews some of the questions raised by the first, and arguably most far-reaching, of these changes, the reversal of France’s 2006 opt-in to the Takeover Directive’s version of the English “passivity rule.”
In 2006, France opted in to Article 9 of the Takeover Directive. This is the Takeover Directive’s version of the English “passivity rule,” prohibiting a target’s board and management from adopting any defensive measure against an offer during the offer period without having first obtained shareholder approval.
France’s original decision to opt in to the passivity rule was in part based on the widely-held view that the ability of the board and management to adopt defensive measures without shareholder approval was largely “theoretical” under existing French law. Like most other countries in Europe, for purposes of the passivity rule, France opted for the Takeover Directive regime that was most similar to its existing law.
In 2014, France reversed the 2006 opt-in, thereby effectively opting out of the passivity rule. A number of reasons were given for this change of position, including that it would:
- permit managers to pursue a superior standalone or alternative strategy;
- help prevent foreigners from acquiring control of strategic industries;
- permit the board to negotiate price increases more effectively; and,
- more generally, defend the interests of long-term shareholders.
The new approach represents a significant departure from previous French law and raises several questions going forward.
A. Explicit statutory authorization to adopt defensive measures.
In a departure from the pre-2006 regime, the current law explicitly authorizes the board to make any decision whose implementation may cause an offer to fail: “During the period of an offer for a public issuer, the board of directors, or the management board authorized by the supervisory board of the target company, may make any decision whose implementation may cause the offer to fail, subject to the powers expressly reserved to the shareholders and within the limits of corporate interest.” The clear legislative intent behind the law was that management should be in a position to unilaterally, and without consulting shareholders (except to the extent relevant defensive measures would require shareholder approval under applicable law, such as amending the articles of association), fend off a hostile takeover bid. Indeed, as the AMF has noted, “the law is unequivocal on the right of a target to implement defensive measures.”
This provision must however be placed in the context of other provisions in existing law which are substantially similar to provisions in the pre-2006 regime.
B. Requirement to act in the corporate interest.
Under French law, board members and senior managers (together, dirigeants) and other corporate decision-makers are required to act in their company’s corporate interest (intérêt social). Thus, any defensive measures adopted by a target in the context of a hostile takeover must be consistent with its corporate interest, as expressly reaffirmed in the new provision.
The concept of corporate interest arises in a variety of contexts in French law, and management’s failure to pursue the corporate interest can result in significant civil and criminal penalties. The challenge is that despite the fundamental importance of the concept, debate continues about the contours of what constitutes the “corporate interest.”
It appears from the legislative history that the drafters of the Florange law endorsed the most widely-held view of the corporate interest, attributing to the company as an autonomous legal entity an independent purpose, distinct from but taking into account that of its shareholders, employees, creditors, clients or other constituencies. However, it should be noted that another contemporary view of the corporate interest holds that the corporate interest simply represents the interests of the shareholders (and just the shareholders) as a whole via the corporation.
In connection with implementing defensive measures, the target’s board of directors may be forced to take a position regarding these competing visions. And in the context of an attack on a French target, a variety of different tools may be available to both sides, including the use of an independent expert to defend the target management’s strategy (discussed in more detail below), possible support that may be offered to the bidder or target by the position taken with respect to the offer by investors, analysts or proxy advisers or even possibly by government agencies, employees or works councils or other stakeholders, as well as recourse to the courts or the AMF in order to adjudicate these competing definitions of the corporate interest.
C. Additional considerations in connection with the implementation of defensive measures.
Counsel and the company will also need to consider carefully the interplay of the new law with existing provisions of French takeover law.
a. Fairness opinion/independent experts.
In demonstrating that a defensive measure concords with the corporate interest, it may be prudent for a target’s board to seek a fairness opinion from a financial adviser to the effect that the terms and conditions of the measure are at arm’s length or otherwise fair to the target from a financial point of view. Such a fairness opinion regarding a defensive measure might be in addition to any fairness opinion required with respect to the offer itself under existing AMF regulations. The AMF requires that the target of a public tender offer designate an independent expert to issue a fairness opinion on the financial aspects of the offer whenever such offer “could potentially create a conflict of interest” within the board which might undermine the objectivity of the board’s recommendation or call into question the equal treatment of shareholders. A specific regime governs the issuance of such fairness opinions, including the expert’s “independence.” Although this regime has generally been used in situations where the board is inclined to recommend the offer (e.g., because the bidder is a controlling shareholder having appointed board members or because the target has agreed certain aspects of the offer with the bidder), it could also be used in the context of a transaction in which hostile defenses have been or will be implemented (including, as the case may be, on a voluntary basis).
b. Requirement to keep the AMF and the market informed of defensive measures.
Under the pre-2006 regime, many commentators took the view that the main practical obstacle to the company’s implementation of takeover defenses was the requirement that the AMF be informed of any non-ordinary course actions by management, thereby permitting the AMF to ensure that the public was fully informed of such measures and to comment if necessary. This rule was in particular viewed as creating a significant chilling effect on management’s recourse to defensive measures. Relatively little if any commentary has been devoted to the presence of a very similar provision in the new post-Florange regime. On balance, and taking into account some cosmetic changes in the new version of this provision, in our view this requirement should not of itself create an obstacle to defensive measures implemented in accordance with the new law. What is crucial for targets and bidders and their respective advisors alike is to keep in mind the primacy of maintaining strong dialogue with the AMF in the context of a hostile offer, and that the AMF will likely scrutinize any defense not submitted to shareholders (see section c. below).
c. Free play of offers.
AMF regulations require that the bidder, the target, and their respective concert parties, must respect the free play of offers and increased bids. Prior to the new law, the AMF had rendered a decision based on this principle forbidding a target from adopting defenses which would effectively – the offer being irrevocable – unilaterally increase the offer price. Acknowledging the target’s newfound ability to defend itself, the AMF recently modified its rules in order to permit a bidder to abandon its bid in the event that defensive measures implemented by the target effectively modify the characteristics of the offer.
Another consequence of the free play of offers rule is the requirement that all (actual or potential) offers and offerors should be treated equally. Certain prominent commentators have expressed concerns regarding whether the abandon of the passivity rule creates a system that is irreconcilable with this requirement. The AMF itself examined whether or not the equal treatment of offers requirement should be amended as a consequence of the Florange law. Ultimately, the AMF concluded that it should be maintained, essentially because the Takeover Directive – even though it allows the Member States to opt out of the board passivity rule – states as a general principle that shareholders should be allowed to decide on the merits of an offer.
Some commentators have gone so far as to suggest that abandoning the passivity rule may permit the selective use of defensive measures against one bidder to favor another bidder, or directed against one bidder only (even in the absence of a competing bid), which might otherwise appear to violate the principle of free play and equality of offers. Under that view, the AMF’s rejection of Sanofi’s Plavix rights plan in 2004 because the measure discriminated specifically against Sanofi-Synthelabo’s offer would be invalid under the post-Florange law regime. However, it is not at all clear that the AMF or a court would share this view, and indeed it should be emphasized that the AMF has very pointedly maintained the regulatory requirement of free play of offers.
2014 has witnessed a number of significant changes to French takeover regulations. The withdrawal of the passivity rule and the specific authorization of board-adopted defensive measures is certainly a major departure from previous law. However, it remains to be seen how the law and practice of takeover defenses in France will now evolve within this new regime. For example, it appears likely that from the AMF’s perspective defensive measures should not discriminate against one bidder relative to another actual or potential bidder. Also, there is a general principle of French stock exchange law, according to which a company may not render itself totally immune against takeovers; as a consequence, any defensive measure tending to such result would likely be ruled invalid.
* Associate at Darrois Villey Maillot Brochier.
 The AMF is the Autorité des marchés financiers, the French financial markets regulator.
 AMF, decision no. 214C0339, 4 Mar. 2014; Paris Court of Appeal, Order no. 14/05670, 10 Apr. 2014.
 Law no. 2006-387 dated 31 Mar. 2006 pursuant to Article 9 of Directive 2004/25/EC of the European Parliament and of the Council of 21 Apr. 2004 on takeover bids (the Takeover Directive).
 In France, the offer period (période d’offre) runs from the moment the AMF first publishes the key terms and conditions of the offer until the AMF publishes the offer results, or, as the case may be, the results of a subsequent offering period (réouverture de l’offre). Gen. Reg. art. 231-2 (6°).
 J.-F. Lepetit, Rapport du groupe de travail: Sur la transposition de la directive concernant les offres publiques d’acquisition, 14 (27 Jun. 2005) (“De l’avis unanime des praticiens auditionnés, la faculté pour les dirigeants de prendre des mesures relevant de leur compétence propre est par conséquent aujourd’hui plus théorique que réelle.”). Under the pre-2006 regime, many commentators took the view that a significant practical obstacle to the company’s implementation of takeover defenses was the requirement that the AMF be informed of any non-ordinary course actions by management. Cf. AMF Gen. Reg. Art. 231-36 (repealed 2006) (“S’ils décident d’accomplir des actes autres que de gestion courante, à l’exception de ceux expressément autorisés par l’assemblée générale des actionnaires réunie pendant l’offre, les dirigeants de la société visée en avisent l’AMF afin de lui permettre de veiller à l’information du public et de faire connaître, s’il y a lieu, son appréciation.”). This rule was in particular viewed as creating a significant chilling effect on management’s recourse to defensive measures. See, e.g., Lepetit op. cit.
 Commission of the European Communities, Commission Staff Working Document, Report on the implementation of the Directive on Takeover Bids, §2.1.3, at 6-7 (2 February 2007); Christophe Clerc, Fabrice Demarigny, Diego Valiante & Mirzha de Manuel Aramendia, A Legal & Economic Assessment of European Takeover Regulation, 15-16, tbl. 3 (2012).
 Law no. 2014-384 dated 29 Mar. 2014.
 See, e.g., Clotilde Valter, Rapport au nom de la Commission des affaires économiques sur la proposition de loi visant à redonner des perspectives à l’économie réelle et à l’emploi industriel, p. 136 (17 July 2013); Lettre du président de la commission des affaires économiques de l’assemblée nationale et du rapporteur de la proposition (18 Sept. 2013), at p. 4 quoted in Alain Viandier, OPA OPE et autres offres publiques, 389-90 (2014).
 Article L. 233-32 code de commerce. This is the default regime. Shareholders can always elect to voluntarily set aside the default regime, and reinstate the board passivity rule, by amending the Articles of Association (statuts). At the date hereof, the Florange law having been adopted just before the 2014 annual shareholders’ meetings season, none of the CAC40 companies has done so. For 2015, several proxy advisors (Proxinvest, ISS, Glass Lewis & Co) have recommended that those companies propose, and their shareholders vote in favor of, such an amendment.
 Article L. 233-32 I code de commerce (duplicative of Art. L. 225-35). In contrast to the prior regime, delegations granted by a shareholders’ meeting to the board before the takeover bid (e.g., to increase the share capital) whose implementation could hinder the bid are not suspended during the takeover bid period. The proxy advisors referred to in footnote 9 above (as well as the Association française de la gestion financière (AFG), which advises asset managers) have recommended that in companies where the bylaws are not amended so as to reinstate the board passivity rule, shareholders vote against any such delegation which does not specifically provide for its suspension during the takeover bid period.
 AMF, Synthèse des réponses à la consultation publique sur les modifications du livre II du règlement général concernant les offres publiques d’acquisition, 17 (13 Oct. 2014).
 Nicolas Rontchevsky, L’utilisation de la notion de l’intérêt social en droit des sociétés, en droit pénal et en droit boursier, Bulletin Joly Bourse, 1 July 2010 no. 4, 355 ¶6.
 Article L. 233-32 code de commerce (any decision on defensive measures must be “within the limits of the corporate interest”). See also Article 231-7 AMF Gen. Reg. (“Pendant la période d’offre publique, l’initiateur et la société visée s’assurent que leurs actes, décisions et déclarations n’ont pas pour effet de compromettre l’intérêt social et l’égalité de traitement ou d’information des détenteurs de titres des sociétés concernées.”).
 For example, if it is found that there is no corporate interest for the French company in a transaction and the transaction has been made in favor of the de facto or de jure management of the French company or of companies in which they have (directly or indirectly) an interest, the transaction can be found to be a misuse of corporate assets (abus de biens sociaux) exposing management (including board members and related companies) to significant civil and criminal sanctions.
 Viandier, supra note 8, at p. 386, ¶2024; Eric Cafritz & Delphine Caramalli, La responsabilité des dirigeants de la société cible quant à leur prise de position sur l’offre envisagée, Recueil Dalloz 2004.
 See, e.g., Clotilde Valter, Rapport au nom de la Commission des affaires économiques sur la proposition de loi visant à redonner des perspectives à l’économie réelle et à l’emploi industriel, no. 1283, p. 22.
 Maurice Cozian, Alain Viandier & Florence Deboissy, Droit des sociétés, 229, ¶394 (2012) (“la société a un intérêt propre qui transcende celui des associés ; en fin de compte, il s’agit de l’intérêt propre de la société en tant que personne morale, en tant que communauté dans laquelle associés et dirigeants ne sauraient agir en négligeant l’intérêt commun et supérieur qui les domine”); Le conseil d’administration des sociétés cotées, Rapport AFEP/CNPF, Jul. 1995, p. 8 (“L’intérêt social peut ainsi se définir comme l’intérêt supérieur de la personne morale elle-même, c’est-à-dire de l’entreprise considérée comme un agent économique autonome, poursuivant des fins propres, distinctes notamment de celles de ses actionnaires, de ses salariés, de ses créanciers dont le fisc, de ses fournisseurs et de ses clients, mais qui correspondent à leur intérêt général commun, qui est d’assurer la prospérité et la continuité de l’entreprise”).
 Nicolas Rontchevsky, L’utilisation de la notion de l’intérêt social en droit des sociétés, en droit pénal et en droit boursier, Bulletin Joly Bourse, 1 Jul. 2010 no. 4, 355 ¶29.
 As opposed to interim or preliminary proceedings in the context of which courts may be reluctant to rule on whether measures adopted by the target’s management comply with the corporate interest.
 AMF Gen. Reg. Article 261-1 I.
 AMF Gen. Reg. Art. 261-3.
 AMF Gen. Reg. Art. 231-36 (repealed 2006) (“S’ils décident d’accomplir des actes autres que de gestion courante, à l’exception de ceux expressément autorisés par l’assemblée générale des actionnaires réunie pendant l’offre, les dirigeants de la société visée en avisent l’AMF afin de lui permettre de veiller à l’information du public et de faire connaître, s’il y a lieu, son appréciation.”). Prior to 2004, the same rule was provided under art. 3 of the COB Regulation no. 89-03, and thereafter under art. 4 of the COB Regulation no. 2002-04.
 See supra note 5 and accompanying text.
 AMF Gen. Reg. Art. 231-7 al. 2 (“Si le conseil d’administration ou le directoire, après autorisation du conseil de surveillance des sociétés concernées, décident de prendre une décision dont la mise en œuvre est susceptible de faire échouer l’offre, ils en informent l’AMF.”).
 AMF Gen. Reg. Art. 231-3; see also AMF Gen. Reg. Art. 231-7 al. 1.
 AMF, consultation publique de l’AMF sur son projet de règlement général concernant les offres publiques d’acquisition, p. 6 (13 May 2014); AMF Gen. Reg. Art. 232-11.
 ANSA, La loi du 29 mars 2014 visant à reconquérir l’économie réelle : Modification du RG de l’AMF sur les OPA, no. 14-046 2014-IV, p. 3 (September 2014) (“En effet, le droit reconnu désormais aux organes de direction de la société visée de prendre des mesures susceptibles de faire échouer une offre pouvait paraître peu compatible avec [le principe du libre jeu des offres et de leur surenchères].”).
 AMF, consultation publique de l’AMF sur son projet de règlement général concernant les offres publiques d’acquisition, p. 5 (13 May 2014) (“Cette faculté de mettre en œuvre des mesures de défense semble poser la question de son articulation avec le principe de libre jeu des offres et de leur surenchères … qui laisse en effet penser qu’une attitude passive devrait être imposée aux organes de direction.”).
 Barthélémy Courteault, Loi “Florange” dated 29 March 2014 : dispositions relatives aux offres publiques, Revue Lamy Droit des Affaires – 2014 96 (“Une société cible devrait donc … être capable de mettre en œuvre des mesures de défense contre tous types d’initiateurs ou susceptibles de n’entraver l’action que de certains d’entre eux.”). But see Viandier, supra note 8, §2044, p. 391 (citing the AMF’s rejection of the Plavix rights plan, which specifically, and according to the AMF inappropriately, disproportionately aimed to defeat the Sanofi-Synthelabo offer).