Like English and U.S. laws,1 French law allows,2 under certain conditions, public joint stock companies ("sociétés anonymes") or simplified joint stock companies ("sociétés par actions simplifiées") to distribute dividends in kind to their shareholders. These dividends may take the form of shares held by the distributing company in French or foreign companies. When decided by an ordinary shareholders' meeting, shareholders will receive shares instead of cash. This distribution method, used by Wendel in 2012 when it distributed to its shareholders the shares it owned in Legrand, is particularly interesting in times of recession, where cash flow within companies needs to be carefully managed.

The Children's Investment Fund (TCI), which holds 1% of the share capital of EADS N.V., recently urged the latter to sell its stake in Dassault Aviation, because it considered this asset as "poor use of capital". In light of this, this original and alternative distribution method could also be considered as an option to sell a stake.

TCI, EADS and the French state, a tripartite game on Dassault Aviation

TCI is an English investment fund that invested in the European group EADS. EADS N.V.,3 the Dutch holding company of the group, through its wholly-owned subsidiary, EADS France, holds 46% of the Rafale fighter jet manufacturer, Dassault Aviation.4 In August 2013, and more recently in a letter dated 13 September 2013, Ben Walker, one of the partners of TCI wrote to Tom Enders, EADS' CEO, to suggest that the aeronautical group distribute its entire stake in Dassault Aviation to its shareholders. Mr. Walker's proposal sought to avoid the sale of that stake at an "unattractive" price. Mr. Walker was also of the view that the distribution would be faster to implement than a common sale of shares. He added that it would comply with the 90-year shareholders' agreement regarding Dassault Aviation that was entered into in June 2013 between EADS N.V., EADS France and the French state, which holds a 12% stake in EADS N.V. and one "symbolic" share in Dassault Aviation.

Mr. Walker does not give sufficient detail in his letter on the transaction to enable a considered assessment of his proposal. However, as EADS N.V. is not a direct shareholder in Dassault Aviation, any distribution of the shares in Dassault Aviation would necessarily involve two steps. The first step would comprise the distribution, by way of dividends, of EADS France's stake in Dassault Aviation to its sole shareholder, EADS N.V. After completion of this step, EADS N.V. would own 46% of Dassault Aviation and, subject to Dutch law, could then, as a second step, distribute the shares in Dassault Aviation to its own shareholders, including the French, German and Spanish states and the public.

Shareholders' agreement regarding Dassault Aviation

Right of first refusal: the French state has a right of first refusal if EADS France decides to transfer ("céder") all or part of its shares in Dassault Aviation on the stock market, or by way of an accelerated book building, or a fully-marketed offering.

First offer right:

the French state also has a first offer right if EADS France decides to sell all or part of its shares in Dassault Aviation to one or several specified third parties.

Violation of the shareholders' agreement:

any transfer of the shares that does not comply with the right of first refusal and the first offer right, is forbidden for the term of the agreement.

Free transfers: under certain conditions (i.e., accession to the shareholders' agreement and EADS' commitment to buy back the shares before the EADS group transferee ceases to perform the shareholders' agreement) EADS is entitled to transfer all or part of its shares in Dassault Aviation to any company in the EADS group.

Can the distribution of Dassault Aviation shares be considered as a sale of shares in terms of the above provisions of the shareholders' agreement?

Ben Walker considers that the distribution of the Dassault Aviation's shares to the shareholders of EADS would comply with the provisions of the shareholders' agreement. Is this because such process (but only the first distribution step) would be considered as a free transfer; EADS France's sole shareholder being EADS N.V., a company of the EADS group? Or is his consideration based on other grounds?

Mr. Walker did not go into that level of detail in his letter.

But, the French Court of Cassation ruled in 1988 that a distribution of dividends in kind is not a sale between the distributing company and its shareholders but a unilateral deed ("acte juridique unilatéral") that is not subject to the payment of transfer tax. That being the case, if the shareholders' agreement regarding Dassault Aviation does not specifically define distribution in kind as a sale/transfer of the Dassault Aviation shares, it is debatable whether TCI's proposal to separate out EADS France's stake in Dassault Aviation would or would not trigger the French state's right of first refusal and first offer right. The excerpts from the shareholders' agreement filed with the French stock market regulator (AMF), and published on its website, are not sufficient to determine how a distribution in kind is to be treated in terms of the shareholders' agreement. However, it is doubtful that the French state would be unprotected in this regard. That said, it is perhaps unlikely, given France's current attempt to reduce public expenses, that it would use any first offer right it might have, to purchase 46% of Dassault Aviation for €4.2 billion (Dassault Aviation's current stock market value).

Given the current state of the law, it can be said with some conviction, that the drafting of the transfer provisions in a shareholders' agreement will be critical to avoid any ambiguity around whether a distribution of dividends in kind might be considered as a transfer or sale subject to restricting provisions concerning pre-emption, drag/tag along rights, prior approval, etc.

Sensitive matters and regulation on foreign investments in France

Should the French state not have or use any pre-emptive right under the shareholders' agreement, in the event the two-step distribution of dividends in kind were implemented, EADS N.V.'s shareholders would become direct shareholders in Dassault Aviation.

In such a situation, French foreign investment regulations would apply. These regulations would require prior authorisation by the French Economy and Finance Ministry, as foreign investors would be taking a stake in sensitive sectors (national defence, weapons manufacturing, etc.). Application of these regulations could pose delicate problems and a potential barrier to successful implementation of the proposed distribution in kind.

The French Monetary and Financial Code provides that where (i) a foreign investor (either an EU or a non-EU investor) acquires control of a company whose registered office is located in France or (ii) a non-EU investor acquires directly or indirectly more than 1/3 of the share capital and voting rights of a company whose registered office is located in France, that will constitute a foreign investment requiring the Economy and Finance Ministry's prior authorisation.

In the present case, none of EADS N.V's shareholders would, on an individual basis, trigger either of the percentage shareholding thresholds in Dassault Aviation. However, given Dassault Aviation's activities, one could easily understand that the French state is likely to keep a vigilant and protective eye over its Rafale investment.

There may be further interesting developments on the EADS/Dassault Aviation front in the near future, as well as in other European companies regarding the distribution of dividends in the form of shares.


1. "Les dividendes en nature au pays des Anglo-Saxons", Brice Mathieu, in Capital Finance, n°1112, 24 June 2013, page 10.
2. "Dividendes en nature : un mode de distribution en voie de développement", Brice Mathieu, in Capital Finance, n°1095, 18 February 2013, pages 6 and 7.
3. EADS N.V. is listed on NYSE Euronext Paris, A compartment.
4. Dassault Aviation is listed on NYSE Euronext Paris, A compartment. 3.13% is publicly held and Groupe Industriel Marcel Dassault controls Dassault Aviation (50.55%).

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