In line with recommendations from the G-20 Summit held in Pittsburgh on September 25, 2009, the French Parliament passed on October 22, 2010 the Banking and Financial Regulation Act (the "2010 Reform Act").1 The 2010 Reform Act amends shareholder disclosure and mandatory tender offer rules by harmonizing aggregation requirements, expanding the definition of concerted action and lowering the mandatory tender offer threshold to 30%.
These new rules became effective October 23, 2010, except for those relating to mandatory tender offers and the new 30% Statutory Disclosure Threshold, which are set to come into effect on February 1, 2011. On December 3, 2010, the French securities regulator (the Autorité des Marchés Financiers or "AMF") released a new set of proposed amendments (the "2010 Proposed Rules") to its regulations (the "AMF General Regulations") in view of implementing the 2010 Reform Act. The 2010 Proposed Rules will be subject to public comments until January 5, 2011.2
1. Disclosure Thresholds
1.1. Statutory Disclosure Thresholds
An investor, acting alone or in concert with others, whose percentage ownership of outstanding shares or voting rights in a publicly traded French issuer reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%,3 331/3%,4 50%, 662/3%, 90% or 95% ("Statutory Disclosure Thresholds") must notify the issuer and the AMF, within four trading days,5 specifying the number of shares it holds and the number of corresponding voting rights.
This disclosure obligation applies to shares or voting rights in issuers incorporated in France whose shares are traded on a regulated stock exchange within the European Economic Area (the "EEA") and to issuers incorporated outside the EEA that are subject to AMF oversight (i.e., foreign issuers with shares that are publicly traded in France).6
Statutory Disclosure Thresholds are reached whether an investor's ownership interest in an issuer rises above or falls below them.7 Reductions below a threshold may result from a sale of shares or voting rights, issuance by the company of additional shares or voting rights, or an allocation of double voting rights to other shareholders.
The crossing of Statutory Disclosure Thresholds must be reported on a standard disclosure form based on the model set forth under Instruction No 2008-02 of February 8, 2008 regarding shareholder notifications.8 The notice must be drafted in French or another language customary in the financial world (i.e., English) and signed by the reporting person.9 The AMF must post the disclosure form on its website within three trading days of having received a complete form from the reporting person.10
The information disclosed must include, among other things: (1) the identity of the reporting person; (2) where applicable, the identity of the individual or legal entity entitled to exercise voting rights on behalf of the reporting person; (3) the date the threshold was crossed; (4) the reason the threshold was crossed; (5) the consequence in terms of shares and voting rights; (6) where applicable, any potential aggregation of shares or voting rights held by the reporting person; (7) where applicable, the chain of control through which the shares and voting rights are held; (8) where applicable, the number of shares acquired as a result of a temporary transfer of shares; and (9) the signature of the reporting person.11
As discussed under Section 6.2 below, certain securities and derivative instruments are simply mentioned on the disclosure form at the time a Statutory Disclosure Threshold is crossed, but are not taken into account when determining whether a threshold was crossed.12
1.2. Calculating Thresholds
In calculating Statutory Disclosure Thresholds, the reporting person must take into account all shares and voting rights that it holds, as well as all shares and voting rights that must be aggregated therewith in the numerator (as discussed under Section 4 below).13 The denominator is calculated on the basis of all shares to which voting rights are attached, including shares whose voting rights have been temporarily excluded.14 For these purposes, issuers are required, at the end of each month, to disclose the total number of voting rights (including voting rights that have been excluded) and shares if these have changed relative to previous disclosures.15
The reporting person must then determine the percentage of capital and voting rights that it holds based on the total number of shares of the issuer and the total number of voting rights attached to these shares.
1.3. Thresholds Determined in Company Bylaws
A publicly traded French issuer may impose more stringent notification requirements in its bylaws for holdings of less than the statutory 5%, in increments as small as 0.5%.16 In practice, the bylaws of many issuers impose disclosure requirements for crossing thresholds set at small increments, generally from 0.5% to 2% of the capital or voting rights of the company. Statutory Disclosure Thresholds continue to apply, despite lower thresholds stipulated in the company's bylaws. Disclosures required by the bylaws are purely internal to the issuer, and disclosure is made only to the issuer and not to the AMF.
Issuers are required to disclose thresholds stipulated in their bylaws in their annual reports filed with the AMF and available on the AMF's website: http://www.amf-france.org/.17
2. Timing of Disclosures
2.1. Active Acquisitions or Disposals of Shares
Under current French regulations, the crossing of Statutory Disclosure Thresholds must be disclosed to the issuer and the AMF by the close of trading on the fourth trading day following the date the relevant threshold was crossed.18
The statutory filing requirement makes no allowance for when the shareholder learns or should have learned that a relevant threshold was crossed. This is in contradiction with the Transparency Directive, which provides that the notification must be effected "not later than 4 trading days, the first of which shall be the day after the date on which the shareholder ... learns of the acquisition or disposal or of the possibility of exercising voting rights, or on which, having regard to the circumstances, should have learned of it, regardless of the date on which the acquisition, disposal or possibility of exercising voting rights takes effect." (emphasis added)19
The eleventh preamble to the Implementing Directive states that "it is reasonable to assume that natural persons or legal entities exercise a high duty of care when acquiring or disposing of major holdings. It follows that such persons or entities will very quickly become aware of such acquisitions or disposals, or of the possibility to exercise voting rights, and it is therefore appropriate to specify only a very short period following the relevant transaction as the period after which they are deemed to have knowledge." Accordingly, Article 9 of the Implementing Directive provides that for the purposes of Article 12(2)(a) of the Transparency Directive, they "shall be deemed to have knowledge of the acquisition, disposal or possibility to exercise voting rights no later than 2 trading days following the transaction."
2.2. Events Triggering a Passive Change in the Breakdown of Voting Rights
Statutory Disclosure Thresholds may also be crossed passively, following changes in capital or voting structure; through, for example, a capital reduction or loss of double voting rights.
For these purposes, the knowledge qualifier applicable under Article 12(2)(b) of the Transparency Directive applies without the limitation discussed above: the shareholder is not deemed to have knowledge of the change in voting rights within two trading days, as is the case with active acquisitions or disposals of shares or voting rights. Instead, the shareholder is able to rely on the information disclosed by the issuer regarding the total number of voting rights and shares published at the end of each calendar month during which an increase or decrease of such total number has occurred.20
To the extent the impact of changes in holdings may not readily be detected by investors, the AMF's predecessor market regulator (the Commission des opérations de bourse or "COB") had partially eased the burden on investors by presuming compliance with disclosure requirements, so long as the investor abides by the following principles:
"(i) the investor must act in good faith when assessing control in light of all information the investor may obtain without undue burden;
(ii) changes in an issuer's shareholding do not automatically trigger statutory disclosure requirements based on indirect control; these duties arise out of factual circumstances, and specifically, the long-term nature of the facts giving rise thereto, and whether a shareholder intends to assume control or to accept it."21
It seems likely that the AMF will continue to apply these principles.
3. Statements of Intent
3.1. Scope of Reporting Obligations
A person whose ownership interest exceeds a threshold of 10%, 15%, 20% or 25% of the shares or voting rights of an issuer must also file a statement of intent with the AMF and the issuer describing the objectives it intends to pursue with respect to the company in the six-month period following notification.22
The statement of intent must disclose whether the investor is acting alone or as part of a group; whether it seeks to purchase additional securities of the company; whether it intends to gain corporate control; and whether it intends to request the appointment of directors.23
Since 2009, the statement of intent must also include a description of the source of funds used in making the purchase.24 If any part of the purchase price was borrowed, the investor must describe the main terms and conditions of the loan (such as repayment terms) and, if applicable, the security granted for the loan (in particular, whether any of the relevant securities are pledged to the lender).25
If the securities were acquired other than by market purchases, the reporting person must describe the method of acquisition of the shares. The reporting person must also indicate whether any of the shares were borrowed.26
The reporting person must state any strategic plans it may have relative to the issuer and describe any transactions it intends to implement in furtherance of these plans, including: (a) any extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the issuer or any of its subsidiaries, or the transfer of a material amount of assets of the issuer or any of its controlled subsidiaries;27 (b) any changes in the issuer's business; (c) any amendments to the issuer's bylaws; (d) any delisting of securities of the issuer; and (e) any issuance of securities of the issuer.28 This list is non-exhaustive and, like Item 4 of Schedule 13D, could be completed with a description of plans or proposals the reporting persons may have that relate to or would result in: (a) any material change in the dividend policy of the issuer; (b) any other material change in the issuer's corporate structure; or (c) any actions that may impede the acquisition of control of the issuer by any person.
The statement of intent must also set forth any contract or arrangement involving the temporary sale of securities or voting rights of the issuer.29 Neither the law nor the AMF General Regulations provide guidance as to the nature of such contracts or arrangements. By analogy to Item 6 of Schedule 13D, they could include agreements for the transfer of any of the securities, loan or option arrangements, puts or calls, guarantees of profits, sharing of profits or loss, or the giving or withholding of proxies. Unlike Schedule 13D, the AMF General Regulations do not require naming the counterparties to such contracts or arrangements.
In 2009, the time frame within which a reporting person must file a statement of intent with the AMF and the issuer was reduced from ten to five trading days.30 The AMF must then post the statement of intent on its website, and the investor must issue a press release to the same effect.31
3.2. Amendments and Updates to Statements of Intent
If the reporting person changes its intentions over the six-month reporting period, a new statement of intent must be filed promptly with the issuer and the AMF and disclosed to the public. The amended statement of intent triggers a new six-month reporting period.32
In the U.S., by contrast, a person who acquires securities "in the ordinary course of his business and not with the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with or as a participant in any transaction having such purpose or effect" may file Schedule 13G, which requires less disclosure than Schedule 13D.33 However, if a Schedule 13G filer changes its intentions, it is barred from voting the securities it holds or acquiring new securities for a period of ten days.34
3.3. Exemptions from Detailed Statement of Intent Reporting Obligations
Any person whose regular business is portfolio management for third parties,35 whether incorporated in France or abroad, is exempt from filing a detailed statement of intent if the following conditions are met:
its ownership interest exceeds the threshold of 10% or 15% of the shares or voting rights of an issuer in the ordinary course of business;
it declares that it does not plan to gain control of the issuer or request any change in the issuer's board of directors; and
its portfolio management business is exercised independently of any other business.36
If these conditions are met, the portfolio management company may file an abbreviated statement of intent with the AMF and the issuer, using model language to be provided by the AMF in a forthcoming Instruction. This exemption is not available if the portfolio management company exceeds the threshold of 20% or 25% of the shares or voting rights of an issuer.
As the information disclosed in a statement of intent must already be disclosed in the offer prospectus, the AMF General Regulations exempt the offeror in a tender offer from filing a statement of intent when its ownership interest exceeds a threshold of 10%, 15%, 20% or 25% of the shares or voting rights of an issuer during the offer period or at the closing of the offer if a prospectus (note d'information) in connection with the tender offer has been made public.37
4. Shareholding Aggregation Principles
4.1. Aggregation of Controlling Interests
In assessing whether Statutory Disclosure Thresholds have been crossed,38 reporting persons must aggregate all shares and voting rights held by other entities they "control," as such term is defined by Article L. 233-3 of the French Commercial Code.39 For these purposes, Article L. 233-3 of the French Commercial Code defines "control" broadly as: 40
the direct or indirect ownership of a majority of voting rights at shareholders meetings (de jure control test);41
a contractual right to direct by itself a majority of voting rights pursuant to an agreement entered into with other shareholders or members of the company in question (contractual control test);
ownership of sufficient voting rights to exercise de facto control over the outcome of shareholder meetings (de facto control test); or
the right to appoint or remove a majority of the members of the administrative, management or supervisory board (e.g., the board of directors) (board control test).
Control is presumed whenever an entity owns directly or indirectly more than 40% of voting rights and no other person holds directly or indirectly a greater percentage of voting rights.42 Unlike the first four control tests, which constitute irrebuttable presumptions of control, the 40% presumption may be rebutted by contrary evidence.43
Legal commentators have argued that even if an investor meets the de jure control test, he may not necessarily have effective control over the company's policies if, for instance, the investor did not appoint a majority of the members of the board of directors of the company in question.44
Nevertheless, French courts and the AMF take a narrow approach in construing the de jure control test and do not deviate from the terms of the statute. If the investor holds directly or indirectly over 50% of voting rights at shareholders meetings, control is established in the view of the AMF notwithstanding any factual circumstances that would point to the absence of actual control.45
By this standard, informational barriers or other Chinese walls would not be effective in disproving control to the extent a parent company held over 50% of its subsidiary's voting rights. However, an investor holding 50% or less of the voting rights could attempt to prevent the de facto control test from applying by setting up appropriate organizational mechanisms that prevent it from exercising the fundamental incidents of control listed in the statute (i.e., control of the outcome of shareholder meetings or the right to appoint or remove a majority of the members of the administrative, management or supervisory board).
The de facto control test widens the scope of the de jure control test by encompassing circumstances in which an issuer's capital is so spread out among multiple shareholders or the attendance rate at shareholders meetings is so low that an investor is able to exercise de facto control with a percentage of voting rights that is less than 50%. In determining de facto control, the AMF examines, inter alia, the existence of "directors in common, cash management, services, offices or registered offices in common, common or complementary corporate objects."46
Legal commentators have argued that additional elements, such as the public float of the issuer, the distribution of holdings, the number of proxies left blank at shareholders meetings, the existence of common directors or officers between the investor and the issuer, the attendance rate at shareholders meetings, and voting practices at shareholders meetings, should all be taken into account in assessing de facto control.47
In this regard, it should be noted that the French prosecutor's office and the AMF are authorized to bring court proceedings to establish the existence of control over one or more companies.48
4.2. Aggregation of Interests Held in Concert with Others
Reporting persons must also aggregate the equity securities and voting rights held by them with those held by investors with whom they are deemed to "act in concert."49 Executive officers and directors of an investor, investors controlled (as such term is defined above) by or under common control with an investor, or a trustee (fiduciaire) and beneficiaries of a trust (contrat de fiducie) are presumed to be "acting in concert."50
Aggregation rules based on concerted action and on controlling interests are linked: two or more investors acting in concert are deemed to jointly control a company where they exercise de facto control over the outcome of shareholder meetings.51
Until the 2010 Reform Act, investors were considered to be "acting in concert" if they had entered into an agreement for the acquisition, transfer or exercise of voting rights, provided that such agreement was aimed to further a common policy regarding the issuer.52 Over the years, this rule gave rise to varying interpretations by the AMF and the courts. Two recent landmark cases (Eiffage/Sacyr and Gecina) prompted the French legislature to revisit the definition of concerted action.
In the Eiffage/Sacyr case, the AMF ruled that two groups of shareholders without a written agreement between them were acting in concert.53 The AMF's finding was based on circumstantial evidence that supported an inference of concerted action. The Paris Court of Appeals overturned the AMF's decision on procedural grounds. However, the Court upheld the AMF's finding of concerted action on the ground that Article L. 233-10 of the French Commercial Code does not require that an agreement to jointly acquire or sell securities of a company or to exercise voting rights in common "be in writing, nor does it need to be legally binding."54 This decision was widely viewed by legal commentators as an expansion of the code definition of concerted action.55
In another landmark case (Gecina), the AMF went further in aggregating shares held by two groups of shareholders who entered into a formal separation agreement in view of splitting up their respective interests in two publicly traded entities (Metrovacesa and Gecina), but did not seek to effect any changes in the policies of the issuer itself. Implementation of this agreement required Metrovacesa and Gecina to launch self-tender offers and to enter into various asset contributions. On October 27, 2009, the French Supreme Court upheld the AMF's ruling. The Court held that concerted action could be found even in the absence of long-lasting policies with respect to an issuer for as long as an agreed upon policy extends beyond a mere one time effect. Further, the Court held that the implementation of a common policy does not require that concerting shareholders have agreed on a common policy relating to the management of an issuer. Shareholders may be found to be acting in concert simply by agreeing to act together for the purpose of managing their respective holdings in an issuer.56
The 2010 Reform Act seeks to codify this body of case law by creating a two-prong test for concerted action that distinguishes agreements to acquire, dispose of, or exercise voting rights to further a common objective regarding an issuer from those based on the purpose to gain control of an issuer. A number of commentators have criticized this new definition on the ground that it is both unnecessary and fails to capture the essence of the case law.
4.3. Other Aggregation Rules
Implementation of the Transparency Directive into French law has led to the creation of additional aggregation requirements. An investor must also aggregate the shares and voting rights it holds with:
shares or voting rights held by a third party in its own name on behalf of such investor;57
shares or voting rights that have already been issued which such investor (or any other entity with whom aggregation is required) has the right to acquire, at the investor's sole discretion, at any time on or before their maturity, pursuant to any agreement or financial instrument (as illustrated under Section 6.1 below);58
shares in which the investor has a life interest;59
shares or voting rights held by a third party under an agreement entered into with the investor providing for the temporary transfer of the shares or voting rights in question;60
shares deposited with the investor, if the investor can exercise voting rights attached to such shares at its discretion in the absence of specific instructions from the relevant shareholder;61 and
voting rights that the investor may exercise as a proxy where the investor can exercise the voting rights at its discretion in the absence of specific instructions from the relevant shareholder.62
5. Exemptions from Shareholding Aggregation Principles
As stated in the preamble to the Transparency Directive, "in order to clarify who is actually a major holder of shares or other financial instruments in the same issuer throughout the European Union, parent undertakings should not be required to aggregate their own holdings with those managed by undertakings for collective investment in transferable securities (UCITS)63 or investment firms, provided that such undertakings or firms exercise voting rights independently from their parent undertakings and fulfill certain further conditions."64
In application of this recital, the Implementing Directive and the AMF General Regulations provide for an exemption from aggregation for management companies and investment firms.
5.1. Scope of the Exemption
Pursuant to that exemption, an investor need not aggregate the shares and voting rights it holds with:
shares held by funds managed by a management company65 it controls (as such term is defined above), except as otherwise provided by the AMF General Regulations;
shares held in a portfolio managed by an investment firm it controls (as such term is defined above) which such investment firm66 manages on a client-by-client basis (pour compte de tiers) pursuant to conditions laid out in the AMF General Regulations and except as otherwise provided by the AMF General Regulations.67
The AMF General Regulations also reflect the stated position in the Transparency Directive that the exemption for management companies or investment firms not be limited to firms licensed or authorized in the EEA,68 and extend to any firm subject to domestic regulations as investment managers or advisers69 if, under those domestic regulations, the firm is required:
to be free in all situations to exercise, independently of their parent undertaking, the voting rights attached to the assets they manage; and
to disregard the interests of their parent undertaking or of any other controlled undertaking of the parent undertaking whenever conflicts of interest arise.70
To qualify for the exemption, group companies must comply with all the conditions set out under Section 5.2 below and, in addition, must attest in a certificate filed with the AMF that, with respect to each non-EEA investment firm or adviser for which they are claiming the exemption, they comply with the above two conditions.71
5.2. Conditions to Qualify for the Exemption
To qualify for the exemption, corporate groups must submit, without delay, to the AMF a list of management companies or investment firms they consider eligible for the exemption from aggregation rules. This list must set forth the competent authorities that oversee them72 and state that, in the case of each such management company or investment firm, the parent company complies with the conditions set out below.73 No reference needs to be made regarding relevant individual securities giving rise to the list. The list must be updated on an ongoing basis. It is unclear from the regulations whether the list may be drafted in English, as is the case with Statutory Disclosure Threshold notices.74
Entities filing the exemption must be able to demonstrate to the AMF, on request, that:
their organizational structures, as well as those of the management companies or investment firms, are such that voting rights are exercised independently by the management companies or investment firms, and this is reflected in written policies and procedures designed to prevent the distribution of information between parent undertakings and the management company or investment firm in relation to the exercise of voting rights;
the individuals who decide how the voting rights are to be exercised act independently; and
if the parent undertaking is a client of the management company or investment firm or has holdings in the assets managed by the management company or investment firm, there is a clear written mandate demonstrating mutual independence between the parent undertaking and the management company or investment firm.75
These regulations are meant to induce investment firms to set up informational barriers, such as Chinese walls, through written policies and procedures designed to restrict the flow of information about the exercise of voting rights within investment firms.
Pursuant to the AMF General Regulations, an investor is not entitled to the exemption and aggregation applies if the management company or the investment firm may only exercise voting rights under direct or indirect instructions from the investor or another entity controlled (as such term is defined above) by the investor.76
The AMF General Regulations define "direct instruction" as any instruction given by the investor, or another entity controlled by the investor, in relation to the exercise of the voting rights by the management company or investment firm. "Indirect instruction" is defined as any general or particular instruction, regardless of the form, given by the investor, or another entity controlled by the investor, that limits the discretion of the management company or investment firm in relation to the exercise of the voting rights in order to serve specific business interests of the parent undertaking or another entity controlled by the parent undertaking.77
With respect to shares held in portfolios managed by investment firms, the AMF General Regulations set out two additional alternative conditions:
the investment firm may only exercise voting rights attached to such shares under instructions from the principal;78 or
the investment firm must guarantee that individual portfolio management services are being conducted independently of any other services.79
Accordingly, an investment firm must not only refrain from taking direct or indirect instructions from its parent company, but must also put in place appropriate mechanisms to ensure that voting rights are being exercised under direct instructions (preferably written)80 from clients or, alternatively, guarantee that individual portfolio management is exercised independently from proprietary trading.
The Transparency Directive's third condition, that the investment firm exercise its voting rights independently from the parent company, has not been included in the AMF General Regulations, as the AMF considers this condition to be redundant with the general French statutory principle that a management company exercise voting rights attached to shares in the exclusive interests of the fund's shareholders.81
6. Disclosure of Positions in Derivative Instruments
6.1. Aggregation of Shares and Voting Rights Resulting from Certain Derivatives
In compliance with the Implementing Directive, the 2009 Reform Act redefined the types of shares or voting rights that must be aggregated82 pursuant to a derivative instrument. Aggregation is required whenever the derivative holder has the right to acquire, at the holder's sole discretion, at any time on or before their maturity, pursuant to any agreement or financial instrument, shares or voting rights that have already been issued.83 Reporting of such derivative instruments is required even if the derivative holder does not otherwise hold any shares or voting rights of the issuer.84
The AMF General Regulations set forth a non-exhaustive list of derivative instruments that fall within the scope of this definition:
certain types of convertible bonds that by contract are exchangeable for existing shares at the sole discretion of the bondholder (obligations échangeables en actions);
futures contracts; and
options, including options that may be exercised at any time before their maturity date ("American Options") and those exercised only at their maturity date ("European Options"), whether or not such options are in or out of the money. This would also include barrier options85, once the limit price has been reached, even if the price of the underlying shares later falls below the limit price (ratchet options).86
The definition excludes the aggregation of financial instruments which give the legal right to acquire underlying shares at the initiative of any party other than the holder thereof, such as warrants or securities that can only be issued at the issuer's discretion (including bonds convertible into, or exchangeable for, new or existing shares (OCEANEs)). Furthermore, derivatives which give the legal right to acquire shares that have not yet been issued, such as certain types of convertible or redeemable securities or convertible bonds with attached warrants (OBSA, OBSAR, ORA, ABSA, BSA, etc.), are also exempt from aggregation, as long as the underlying shares have not been issued. However, as discussed further below, the various securities that do not meet the test for aggregation may have to be disclosed separately.
6.2. Separate Disclosure of Shares and Voting Rights Resulting from Certain Derivatives
Shares and voting rights referenced by certain derivative instruments ("Separately Disclosed Instruments") must be disclosed separately whenever Statutory Disclosure Thresholds have been crossed as a result of direct holdings in shares or as a result of aggregation. These Separately Disclosed Instruments are not taken into account nor aggregated when determining whether a Statutory Disclosure Threshold has been crossed. They are simply mentioned on the disclosure form at the time a Statutory Disclosure Threshold is crossed.
Pursuant to the AMF General Regulations, the following instruments must be disclosed separately:
derivatives that give a right to acquire shares which have not yet been issued and voting rights to be attached thereto, such as warrants (bons de souscription d'actions, bons d'options) and convertible bonds excluded from the definition of derivatives to be aggregated (obligations convertibles en actions or obligations convertibles ou échangeables en actions nouvelles ou existantes (OCEANEs));
issued shares not meeting the conditions for aggregation set forth above that the derivative holder has the right to acquire pursuant to an agreement or derivative instrument (e.g., issued shares or voting rights that the derivative holder has the conditional or non-discretionary right to acquire, such as barrier options for which the limit price has not been reached or warrants or securities that can only be issued at the issuer's discretion); and
cash-settled derivative contracts or instruments related to the performance of shares that have already been issued, which create for the holder of the contract an economic effect similar to ownership of the actual shares.87
Like the Financial Services Authority's definition of "contracts for difference," the AMF's definition of this last category of Separately Disclosed Instruments is any derivative instrument that meets the following two criteria: (a) its terms are in any way related, indexed or referenced to an issuer's shares, and (b) the holder of the derivative has, in effect, a long position on the economic performance of the shares.
The AMF General Regulations provide a non-exhaustive list of cash-settled derivatives that fall within the scope of the definition, including contracts for difference ("CfDs"), equity swaps, and other structured products such as basket and index derivatives, unless they are sufficiently diversified.88 The AMF has stated that it would issue an interpretive release (position paper) holding that basket or index derivatives are sufficiently diversified if no single stock represents over 20% of the basket or index. In contrast, with the FSA, which decided that disclosures of CfDs should be made on a "delta-adjusted basis," the AMF requires that notional interests in cash-settled derivatives be disclosed.
Cash-settled derivatives do not give a holder either ownership of the referenced shares or any ownership rights, such as voting rights. Since these instruments are cash-settled, they do not create any right to take delivery of the shares in place of settlement. In economic terms, however, a cash-settled derivative places the long party in substantially the same economic position that it would occupy if it had held the referenced stock or security. More importantly, according to a Report on shareholder notification requirements issued by an AMF Working Group chaired by Bernard Field in October 2008 (the "Field Report"), equity swaps and other derivative instruments have been used in a number of cases (Fiat, Implenia and CSX Corp.) to exert influence on an undisclosed basis over voting rights attached to stock held as a hedge against those contracts and/or to build up stakes in companies on an undisclosed basis.89
Despite these precedents, the French government elected not to go beyond the minimum harmonization rules set by the Implementing Directive. This policy choice may have been partly driven by lobbying groups, as there is no clear rationale for the French Finance Ministry's deliberate failure to heed the red flags raised in the Field Report or in the AMF's recommendations to aggregate cash-settled equity swaps. It is all the more surprising given that the French Finance Ministry explained in its report to the French President that the objective of this new law was to enhance the level of transparency on the economic positions held by investors with respect to issuers. Following the stealth accumulation by LVMH of a 17.1% stake in Hermès using cash-settled equity swap contracts,90 it is likely that the French government will revisit these rules in the near future.
6.3. Additional Disclosures to Be Made with Respect to Derivatives
In compliance with the Implementing Directive and the AMF General Regulations, the following additional disclosures must be made with respect to derivatives:
date of maturity or expiration of the instrument or contract;
an indication of the date on which or time period during which shares will or can be acquired, if applicable;
name of the underlying issuer;
a description of the main features of the derivative instrument or contract, including the conditions pursuant to which the derivative holder has the right to acquire shares, and the maximum number of shares that the derivative instrument or contract gives a right to acquire or that the derivative holder or beneficiary may acquire without offsetting the number of shares such holder has the right to sell pursuant to another derivative instrument or contract (i.e., no netting between long and short positions).91
Footnotes
1 Law No 2010-1249 of October 22, 2010 on banking and financial regulations, JORF No 0247 of October 23, 2010, page 18984.
2 Prior to these amendments, the AMF released amendments to the mandatory disclosure rules applicable to purchases and sales of equity securities in publicly traded French companies on July 31, 2009, as promulgated by Ministerial Order (Arrêté) of July 27, 2009,concerning the approval of the AMF General Regulations (JORF No 0175 of July 31, 2009, p. 12747 text N 15). The 2009 version of the AMF General Regulations was the third set of regulations released in implementation of the EU Transparency Directive (Directive 2004/109/EC of the European Parliament and of the Council of December 15, 2004 on the harmonization of transparency requirements and amending Directive 2001/34/EC (the "Transparency Directive")) and EU Commission Directive 2007/14/EC of March 8, 2007 laying down detailed rules for the implementation of certain provisions of the Transparency Directive (the "Implementing Directive"), with the stated aim of enabling investors to acquire or dispose of shares in full knowledge of changes in the voting structure, as well as of enhancing effective control by issuers and the overall market transparency of important capital movements. The AMF General Regulations were enacted pursuant to an Ordinance adopted by the French government by legislative delegation on January 30, 2009 (the "2009 Reform Act").
3 The 30% threshold was introduced by the 2010 Reform Act as a new threshold triggering mandatory tender offers as described under Section 9 below. For consistency purposes, the 30% threshold was also added as a new statutory disclosure threshold pursuant to Art. L.233-7 (I) of the French Commercial Code. It will become effective February 1, 2011.
44 Prior to the 2010 Reform Act, this particular threshold constituted the mandatory take-over threshold under French regulations. The 2010 Reform Act has lowered it to 30%.
5 AMF General Regulations, Art. 223-11; French Commercial Code, Art. R.233-1.
6 French Monetary and Financial Code, Art. L.451-2-1.
7 French Commercial Code, Art. L.233-7, I, par.2.
8 AMF General Regulations, Art. 223-14(V). The Instruction generally follows the format of the "standard forms to be used for the purposes of notifying the acquisition or disposal of major holdings of voting rights and of major holdings of financial instruments, and of notifying the activity of market makers in the context of Directive 2004/109/EC" published by the European Commission in cooperation with the Commission of European Securities Regulators (CESR). Amendments to the Instruction reflecting the AMF General Regulations are still pending.
9 AMF General Regulations, Art. 223-14(V).
10 AMF General Regulations, Art. 223-14(V).
11 AMF General Regulations, Art. 223-14(II).
12 AMF General Regulations, Art. 223-14(III).
13 AMF General Regulations, Art. 223-11.
14 AMF General Regulations, Art. 223-11.
15 AMF General Regulations, Art. 223-16, implementing Art. 15 of the Transparency Directive.
16 French Commercial Code, Art. L.233-7, III.
17 See Item 21.2.7 of Commission Regulation (EC) No 809/2004 of April 29, 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses, as well as the format, incorporation by reference and publication of such prospectuses, and the dissemination of advertisements.
18 French Commercial Code, Art. R.233-1. In compliance with the Transparency Directive, the AMF General Regulations reduced this time period from five to four trading days.
19 Transparency Directive, Art. 12(2)(a).
20 AMF General Regulations, Art. 223-16, implementing Art. 15 of the Transparency Directive.
21 Bull. COB, Sept 1985, p. 10.
22 French Commercial Code, Art. L.233-7. The AMF decided not to implement a graduated disclosure approach, as it considers that the materiality of a threshold in terms of control should be based on the individual facts and circumstances of each case, rather than on arbitrary percentages. Accordingly, the AMF General Regulations impose the disclosure of the same level of details for each of the relevant thresholds giving rise to an obligation to file a statement of intent.
23 AMF General Regulations, Art. 223-17(I)(2).
24 French Commercial Code, Art. L.233-7(VII). This provision is similar to item 3 of Schedule 13D. According to the AMF, the more detailed content of the statement of intent was directly inspired by Schedule 13D in the U.S. Schedule 13D is commonly referred to as a "beneficial ownership report." The term "beneficial owner" is defined under U.S. Securities and Exchange Commission ("SEC") rules to include any person who directly or indirectly shares voting power or investment power (the power to sell the security). When a person or group of persons acquires beneficial ownership of more than 5% of a voting class of a company's equity securities registered under Section 12 of the Securities Exchange Act of 1934, they are required to file a Schedule 13D with the SEC. (Depending upon the facts and circumstances, the person or group of persons may be eligible to file the more abbreviated Schedule 13G in lieu of Schedule 13D.) Schedule 13D reports the acquisition and other information within ten days after the purchase. The schedule is filed with the SEC and is provided to the company that issued the securities and each exchange where the security is traded. Any material changes in the facts contained in the schedule require a prompt amendment.
25 AMF General Regulations, Art. 223-17(I)(1°).
26 26 AMF General Regulations, Art. 223-17 (I)(1°). In the case of borrowed shares, the AMF asked in its consultation whether the name of the entity loaning shares to the reporting person should be made available to the public. Following a short selling controversy that arose in September 2008 following the bankruptcy of Lehman Brothers, the AMF took the view that the borrowing
of shares should be subject to the greatest transparency. Several market participants argued against such a disclosure on the grounds that: (i) it would not shed any light as to the intent of the reporting person; (ii) it could create confusion as to the existence of a group between the lender and the reporting person; (iii) it could give rise to confidentiality issues outweighing the benefits of disclosure; and (iv) the actual ultimate owner of the borrowed shares is generally unknown to the reporting person. Accordingly, the AMF decided not to require disclosure of the name of the entity that loans shares to the reporting person.
27 Within the meaning of Art. L.233-3 of the French Commercial Code.
28 AMF General Regulations, Art. 223-17(I)(5) and (6).
29 AMF General Regulations, Art. 223-17(I)(7).
30 As recommended by the Field Report (as defined below).
31 French Commercial Code, Art. R.233-1-1.
32 French Commercial Code, Art. L.233-7 (VII).
33 Securities Exchange Act of 1934, Rule 13d-1(b) and (c).
34 Securities Exchange Act of 1934, Rule 13d-1(e). The New York Stock Exchange may also suspend trading in or delist the shares of an acquiring company that fails to provide "timely, adequate and accurate" disclosure of information to investors. New York Stock Exchange Listed Company Manual, Rule 802.01 D.
35 Investment firms licensed to provide portfolio management under point 4 of Section A of Annex I to Directive 2004/39/EC on markets in financial instruments.
36 AMF General Regulations, Art. 223-17(II).
37 AMF General Regulations, Art. 233-17(III).
38 The aggregation principles do not apply to the computation of thresholds determined in company bylaws or to declarations of intent.
39 French Commercial Code, Art. L.233-9, I, 2°.
40 Implementing Art. 2(f) of the Transparency Directive.
41 Under the de jure control test, holding only 50% of the shares of a company does not suffice to establish control, so long as none of the other criteria below apply.
42 French Commercial Code, Art. L.233-3, II.
43 Bull. COB, Sept. 1985, p. 9.
44 See Round Table, la limitation de l'autocontrôle des sociétés, J.C.P. 86, éd. E, II, 14749.
45 J-Cl., fasc. 165-2, groupes de sociétés, n° 7.
46 Bull. COB, Sept. 1985, p. 9.
47 Lamy sociétés commerciales 2006, n° 1950; Jurisclasseur. Sociétés, fasc. 165-2, n° 11.
48 French Commercial Code, Art. L.233-5.
49 French Commercial Code, Art. L.233-9, I, 3°.
50 French Commercial Code, Art. L.233-10, II.
51 French Commercial Code, Art. L.233-3, III.
52 Pursuant to the provisions of Art. L.233-10, I of the French Commercial Code as effective prior to the 2010 Reform Act. This is a concept similar to Rule 13d-5 under the Securities and Exchange Act of 1934, which provides that when two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed thereby shall be deemed to have acquired beneficial ownership, for purposes of the reports by persons acquiring more than 5% of certain classes of securities and statements of equity security ownership, as of the date of such agreement, of all equity securities of that issuer beneficially owned by any such persons. A group shall be deemed not to have acquired any equity securities beneficially owned by the other members of the group solely by virtue of their concerted actions relating to the purchase of equity securities directly from an issuer in a transaction not involving a public offering where, among other conditions, the purchase is in the ordinary course of each member's business and not with the purpose nor with the effect of changing or influencing control of the issuer.
53 AMF Decision No 207C1202, June 26, 2007 (Eiffage/Sacyr). The AMF ruled that six of Eiffage's Spanish shareholders were acting in concert with Sacyr in order to gain control of Eiffage without abiding by the laws on shareholder disclosure and mandatory bids. The AMF grounded its decision on the fact that the successive acquisitions of shares in Eiffage by Sacyr and the six Spanish shareholders did not arise from individual and autonomous transactions but rather through a collective undertaking in pursuit of a common objective (i.e., to obtain, by surprise, enough seats on the board of directors of Eiffage to be able to implement a friendly takeover).
54 Paris Court of Appeals, 1st Chamber, Section H, 2 April 2008, RG No 2007/11675, p. 13.
55 The reasoning in the Eiffage case is similar to that of US Court of Appeals for the Second Circuit in Hallwood Realty Partners, L.P. v. Gotham Parthers, L.P., 286 F.3d 613, 617 (2d Cir. 2002), where the court held that the existence of a group turns on "whether there is sufficient direct or circumstantial evidence to support the inference of a formal or informal understanding between [members] for the purpose of acquiring, holding or disposition of securities." The Court went on to state that the requisite agreement "may be formal or informal, and need not be expressed in writing."
56 Cass. Com, 27 October 2009, No 08-18.819, Soler Crespo et al. v/ Gecina et al.
57 French Commercial Code, Art. L.223-9, I, 1°, implementing Art. 10(g) of the Transparency Directive.
58 French Commercial Code, Art. L.223-9, I, 4°, implementing Art. 13(1) of the Transparency Directive.
59 French Commercial Code, Art. L.223-9, I, 5°, implementing Art. 10(d) of the Transparency Directive.
60 French Commercial Code, Art. L.223-9, I, 6°, implementing Art. 10(b) of the Transparency Directive.
61 French Commercial Code, Art. L.223-9, I, 7°, implementing Art. 10(c) and (f) of the Transparency Directive.
62 French Commercial Code, Art. L.223-9, I, 8°, implementing Art. 10(h) of the Transparency Directive. Pursuant to Art. 223-15 of the AMF General Regulations, the notification of such an aggregation may take the form of a single notification, provided that it clearly explains what the situation will be with regard to voting rights when the proxy holder is no longer able to exercise them after the proxy expires. In this case, the proxy holder is no longer required to give notice when its shareholding falls below the Statutory Disclosure Threshold after the proxy expires.
63 "Undertakings the sole object of which is the collective investment in transferable securities of capital raised from the public and which operate on the principle of risk-spreading and the units of which are, at the request of holders, repurchased or redeemed, directly or indirectly, out of those undertakings' assets." Transparency Directive, Art. 2(g).
64 Recital 21 of the Transparency Directive.
65 For these purposes, a management company is defined as a company whose regular business is the management of UCITS.
66 For these purposes, an investment firm is defined as a firm licensed to make discretionary investment decisions in relation to financial instruments on a client-by-client basis. In this regard, discretion should extend to decisions on the exercise of voting rights attached to any shares held in the managed portfolio.
67 French Commercial Code, Art. L.223-9, II.
68 Art. 23 of the Implementing Directive implementing Art. 23(6) of the Transparency Directive.
69 More specifically, the exemption is available to firms having registered offices outside the EEA if they would have required an authorization in accordance with Art. 5(1) of the Directive 2009/65/EC of the European Parliament and of the Council of July 13, 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities, recast (the "UCITS Directive") or, regarding portfolio management, under point 4 of section A of Annex I of the Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC (the "MIFID Directive"), had their registered office or, only in the case of investment firms, their head office, been located within the EEA.
70 AMF General Regulations, Art. 223-12-1(1° and 2°).
71 AMF General Regulations, Art. 223-12-1(3°).
72 If they are not supervised by competent authorities, the certificate must simply mention that fact.
73 AMF General Regulations, Art. 223-12(II), implementing Art. 10(2) of the Implementing Directive detailing rules for the implementation of certain provisions of the Transparency Directive, published by the European Commission on May 24, 2006.
74 AMF General Regulations, Art. 223-14(9°).
75 AMF General Regulations, Art. 223-12(III).
76 AMF General Regulations, Art. 222-12-1, II, implementing Art. 12(4) and 12(5) of the Transparency Directive.
77 AMF General Regulations, Art. 223-12(IV), implementing Art. 10(4) of the Implementing Directive.
78 Proprietary trading in one's own account is listed as a separate service under Art. L.321-1, 3° of the French Monetary and Financial Code, implementing point 3 of Section A of Annex I to Directive 2004/39/EC of the European Parliament and of the Council of April 21, 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and the MIFID Directive.
79 AMF General Regulations, Art. 223-12(I), implementing Art. 12(5) of the Transparency Directive.
80 Art. 12(5) of the Transparency Directive requires that instructions be in writing or by electronic means.
81 French Monetary and Financial Code, Art. L.533-4, 8°.
82 Transparency Directive, Art. 13(1).
83 French Commercial Code, Art. 233-9(I)(4), implementing Art. 11(1) of the Implementing Directive, provides that "the instrument-holder must enjoy, on maturity, either the unconditional right to acquire the underlying shares or the discretion as to his right to acquire such shares or not."
84 AMF General Regulations, Art. 223-11(I).
85 Options that can only be exercised when a limit price defined in the option agreement is crossed by the underlying shares.
86 AMF General Regulations, Art. 223-11(II).
87 AMF General Regulations, Art. 223-14(III), implementing Art. 233-7(I) of the French Commercial Code.
88 AMF General Regulations, Art. 223-14(III).
89 Field Report, p. 5.
90 On October 27, 2010, LVMH revealed that it had accumulated a 17.1% stake in Hermès International by using equity swap contracts for 12.8 million Hermès shares. In its regulatory filing, LVMH stated that it had no plans to bid for all of Hermès' shares, and that it was not seeking control or board representation, but that it "considered pursuing, where appropriate, its acquisitions of Hermès International shares according to market conditions." LVMH's surprise announcement after crossing various statutory disclosure thresholds raised questions about whether it violated French securities regulations or instead exploited loopholes in these regulations to avoid disclosure. On November 5, 2010, the French securities regulator, the AMF, announced that it had begun investigating the conditions under which the Hermès shares were acquired.
91 AMF General Regulations, Art. 223-14(III), last paragraph.
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