France: Anti-take-over Defences

Last Updated: 5 June 1995
As a general rule, French company law is more institutional than contractual; consequently many techniques employed in the United States are illegal in France (companies buying back their own shares, golden parachutes, pension parachutes, etc.). This does not mean that a potential target in France is deprived of anti-take-over defences. It is in a future bidder's interest to find out what they may be by consulting the target's articles of association and by-laws, resolutions of recent shareholders' meetings and the publications of the CBV (or its operational arm, the Societe de Bourses Francaises, "SBF").

Studying the articles of association and by-laws of a company can be very instructive because defensive measures, some of which can be extremely effective, may have been inserted to protect the company from unwelcome bids. Certain clauses are intended to enable the company to track its shareholders better and in particular to detect sudden increases in shareholdings. Thus, by-laws may institute a system of identifiable bearer securities so that the company can know the name, nationality and address of shareholders and the number of shares held (Art. 263-1 of the law of July 24, 1966 on commercial companies). They may also provide for disclosure at more restrictive thresholds (by increments of at least 0.5%) than those provided by law: 5, 10, 20, 33 1/3, 50, 66 2/3% (Art. 356-1 para. 5 of the law of July 24 1966). Shareholders which hold either directly, indirectly or in concert with other perosns such participations must disclose them (see "Concerted Actions") This is not mere window-dressing, as disregard leads to loss of voting rights (Art. 356-4 of the law of July 24, 1966).

By-laws may also allocate voting rights according to a system other than "one share one vote". Many French companies have taken advantage of the 'loyalty bonus' offered under French law whereby double voting rights may be granted to shareholders who have held shares for at least two years (Art. 175 of the law of July 24, 1966). French law also authorises a ceiling on the number of voting rights a single shareholder may exercise, on condition that such limits apply equally to all shareholders (Art. 177 of the law of July 24, 1966). In 1989 for example, the Compagnie Generale d'Electricit, (now Alcatel Alsthom) restricted the voting rights of any single shareholder to 8%.

In October 1992, BSN decided to set a ceiling of 6% (12% for double voting rights), though with the proviso that the limit would no longer apply if a shareholder held at least 67% of the capital.

The minutes of shareholders' meetings are also essential reading as they provide information both on amendments to the by-laws (and hence on any new defensive measures) and on preventive measures of a financial nature. For example, in order to make a take-over more expensive, a company may decide on deferred capital increases in favour of existing shareholders and the public (but not in favour of named persons) during tender offers, though the Board of Directors must have been empowered to undertake such transactions by the extraordinary shareholders' meeting prior to launching of take-over. Such authorisation is granted for periods which do not exceed the time between two annual shareholders' meetings (Art. 180, para. IV of the law of July 24, 1966).

These financial defensive techniques are widely used by French companies. For example, in 1986 BSN issued bonds with share warrants in favour of named persons (friendly institutional investors) which may be exercised at any time, including during a threatened or actual take-over bid, and which increase the capital by 20%. It is now usual, and even routine, for the annual shareholders' meetings of major listed companies expressly to authorise their Board of Directors to carry out a capital increase in the event of a bid perceived as hostile.

Possible bidders are also well advised to monitor CBV publications, which are likely to contain vital information on potential targets since under Law No. 89-351 of August 2, 1989 on the security and transparency of financial markets, shareholders of a listed company must submit to the CBV for publication any agreement "containing preferential conditions for the disposal or acquisition of shares" (Art. 356-1-4 of the law of July 24 1966).

It is also clearly essential to find out about any pre-emption or preference agreements binding the shareholders which, if implemented, might sway the course of a tender offer against the bidder. The French courts have ruled that such agreements are valid and enforceable even if a tender offer is made at a later date. This means that a bidder may find himself unable to acquire the target's securities if, prior to his offer, the majority shareholders have agreed to sell their securities to third parties, even at a lower price (see Trib. Com. Paris, July 28, 1986, Bidermann v. Primisteres, Gaz. Pal. 1986.2.687). However, there is some doubt under French law regarding the validity of such agreements if they are concluded during a bid: the COB is hostile, though legal opinion is generally favourable, but the courts have not yet had an opportunity to rule on this point.

However, the Court of appeal of Paris had the opportunity, in connection with the take-over involving Office Central Pharmaceutique (OCP), to specify the limits as to the enforceability of agreements concluded by the bidder and companies affiliated to the target company. In this recent case, a bid was made on OCP, a company holding 100% of the capital stock of two operating companies incorporated in the form of "societes en commandite par action" (limited partnership with shares), the partnership interest in those two partnership (which give their holders the exclusive right to manage the partnership) being held by two companies not controlled by OCP. The bidder had concluded an agreement with the partners' shareholders who undertook to transfer 75% of their shares in the two partners to the bidder in the event that it obtained more than 50% of OCP as result of the tender offer.

The Court of appeal of Paris dismissed the decision of the CBV which authorised the take-over to take place. The Court held that such agreement constituted an obstacle to "the free play" of the offers and to the eventual higher bids since only the bidder benefiting from the promise concerning the transfer of the partners' shares could gain effective control on the assets of OCP (see Paris Court of appeal, April 27, 1993 in the report COB 1993 p. 149 and seq.).

For further information contact Herve Letreguilly on +33 1 4471 1717.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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