French takeover rules have been significantly changed by a new law known as 'Loi Florange'. Alexandre Omaggio discusses the implications for companies.
French takeover rules have been significantly altered by the law n°2014-384 dated March 29, 2014, known as the “Loi Florange”. This law was completed by a recent administrative decision dated June 27, 2014 amending the General Regulation of the French market authority. All the changes described in this post have entered into effect, some being effective only since July 1st.
Obligation to consult the target’s works council (comité d’entreprise)
Foreign investors who have been involved in the acquisition of a French non-listed company are familiar with the consultation requirement of the target’s works council, which may adversely impact the timetable of the transaction. Indeed, the formal decision to sell a French privately owned company may only lawfully take place after its works council has issued an opinion – whether favorable or not – on the contemplated transaction. However, no consultation procedure was applicable for takeover bids, for which the target’s works council was only entitled to receive information. The Loi Florange has revised this framework and henceforth sets out a consultation process specific for tender offers.
The works council must be immediately convened by the target once the offer is filed, and may request a meeting with the bidder within one week of the filing. During this meeting, the bidder presents, in particular, its strategic plans for the target and the consequences of the offer for the target’s employees, business sites and decision-making centres.
In order to issue an opinion, the works council may be assisted by a qualified expert responsible for preparing a report on the bidder’s strategy. The expert must issue its report within three weeks of the filing of the offer and the works council must issue its opinion within one month of the same date.
If no opinion is issued within this timeframe, the works council is deemed to have been properly consulted. However, the works council may seek on an urgent basis (procédure des référés), an Order from the Court that the bidder and target provide additional information. While such Court action shall not in principle delay the timeframe of the consultation as outlined above, the Court nonetheless has discretion to rule otherwise on the consideration that the works council faces “specific issues to access” the necessary information.
If the takeover is made public before filing, the bidder may request that the consultation process be started upon announcement rather than upon filing. If the offer is successful, the bidder is under a statutory obligation to report to the works council on the fulfilment of its commitments (if any) and on the implementation of its strategy (employment, location of business sites, decision making centers) six, 12 and 24 months after closing.
Introduction of a minimum acceptance threshold
Until the Loi Florange, a bidder could carry out a takeover with no minimum acceptance threshold, possibly resulting in creeping control situations with a bidder launching an offer with a low price to get de facto control without paying a controlling premium.
The Law introduces a 50 per cent minimum threshold for both voluntarily and mandatory offers; if a bidder fails to obtain more than 50 per cent of the share capital or voting rights of the target, the offer automatically lapses.
The reform provides for additional adverse consequences on mandatory tender offers in case of lapsing: (i) if the mandatory tender offer results from the acquisition of more than 30 per cent of the share capital or voting rights of the target, the voting rights exceeding the 30 per cent threshold will be suspended and (ii) if the mandatory offer is triggered by a violation of the speed acquisition limit (see below), voting rights exceeding the number of shares held before this acquisition plus one per cent will be suspended and the relevant investor will not be able to increase its shareholding other than through a tender offer.
Revision to the “speed acquisition limit” rule
Until the Loi Florange, any person, acting alone or in concert, owning between 30 per cent and 50 per cent of the share capital or voting rights of a French company listed on a regulated market was required to make a mandatory bid if it increased its shareholding or voting rights by more than two per cent over a twelve-month rolling period, unless it was able to obtain an exemption from the AMF. This is known as the speed acquisition limit (l’excès de vitesse d’acquisition) rule. The new Law lowers this threshold from two per cent to one per cent which will have the effect of significantly reducing the pace at which the relevant shareholders may freely increase their shareholding.
The board can now adopt frustrating action (end of the “passivity rule”)
France adopted in 2006 what is known as the passivity rule: any action by the target aimed at frustrating a hostile bid, other than seeking a white knight, needed prior approval of its shareholders, even if such actions had been authorized by the shareholders prior to the filing of the offer (such as financial authorizations to increase the share capital). French targets were only able to depart from this rule if a bidder was not itself subject to an equivalent requirement under its applicable law.
The new law has put an end to the passivity rule. The board of a French listed target may now take frustrating actions without prior approval of its shareholders provided that these actions are not matters reserved to the shareholders and are not contrary to the target’s corporate interest. This major change will allow targets to defend themselves more easily. As for issuers still willing to be subject to the passivity rule, the law expressly allows French companies listed on a regulated market to include this rule in their by-laws.
Favouring long term shareholders through automatic double voting rights
Prior to the law, a shareholder holding shares for two years or more in registered form could be entitled to double voting rights only if it was expressly foreseen in the company’s by-laws. Many French companies have already included this mechanism in their by-laws.
The law reverses this rule for companies listed on a regulated market, so that double voting rights become automatic for shares held in registered form by the same shareholder for two years, except if the by-laws provide otherwise. The two year period starts running from April 2, 2014. Consequently, issuers willing to keep the one share-one vote principle have until April 2, 2016 to have their shareholders amend the by-laws accordingly.