April 27, 2006
On April 1, 2006, France implemented the April 21, 2004 EU Directive on Takeovers. These new rules, effective immediately, will be followed by new regulations issued by the French equivalent of the SEC (Autorité des marchés financiers or AMF) a first draft of which was released on April 25, 2004.
Pursuant to the new French rules:
(i) the board of a French target must remain passive in the face of a takeover and is proscribed from any action, other than searching for a "white knight", unless it receives specific shareholder approval during the takeover period ("Passivity Rule");
(ii) however, if the bidder (or its controlling shareholders) is not itself subject to rules with similar effect, the board of the French target may take any action to fight the takeover provided that the shareholders have approved of such actions less than 18 months before the takeover ("Reciprocity Rule");
(iii) French companies may, during takeover periods, suspend existing mechanisms put in place to frustrate bids, such as restrictions on transfer of securities or on voting rights, as provided in their constitutional documents or shareholders’ agreements; and
(iv) French companies may adopt poison pill mechanisms.
France’s problematic implementation of reciprocity
Pursuant to the EU Directive, since France (as opposed to French companies individually as allowed under the EU Directive) has decided to implement the "Passivity Rule", French targets should be subject to this rule regardless of whether the bidder is itself subject to rules with similar effect. In other words, French law could, on this matter, be contrary to the EU Directive. As a result, actions taken by the boards of French targets to discourage offers may be invalid failing specific shareholder approval during the takeover period.
In addition, disputes as to whether a bidder (or its controlling shareholders) applies, in its home country, rules similar to the "Passivity Rule" and, as a consequence, whether the board of the French target must remain passive, will be resolved by a French authority, the AMF, regardless of the bidder’s jurisdiction of incorporation.
Poison pills "à la française"
French targets are now allowed to issue to their existing shareholders U.S.-like poison pills (free warrants convertible into shares that are then issued at a discounted price), thus making any takeover more expensive and encouraging friendly negotiations.
Again, there is much uncertainty as to whether these pills may be validly used against bidders who would not have access to similar defenses. According to the EU Internal Market Commissioner, these poison pills "à la française" are contrary to the intent of the EU Directive.
The implementation of a U.S. mechanism in a French corporate governance environment that is different to that prevailing in the U.S. is also likely to raise concerns. As a matter of example, French board members have far less stringent fiduciary duties than their U.S. counterparts. French courts will thus have (as U.S. courts did in the 1980s) the important duty of setting the conditions for the proper use of these new pills (e.g., informed view of the "intrinsic" value of the target, enhanced business judgment rule and a tougher and objective "reasonable in relation to the threat posed" test).
Early disclosure of the bidder’s intent to launch a takeover on a French company
Inspired by the UK Takeover Panel’s precedent, French takeover rules now oblige any individual or entity whom the AMF has reasonable grounds to believe is preparing a takeover (evidenced by movements in trade price and volumes, discussions between the bidder and the target or the appointment of advisors) to publicly disclose its intention. In addition, the AMF will be entitled to prohibit a bidder from launching a takeover following a six-month period should such bidder have denied its intent to do so.
In summary, despite the EU Directive’s purpose, France’s new takeover rules do allow French companies to maintain a certain level of takeover defense. At the same time, France’s problematic transposition of the EU Directive may weaken defenses taken by the boards of French targets failing specific shareholder approval during the takeover period.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or Benoît Fleury (firstname.lastname@example.org) or Sophie Resplandy-Bernard (email@example.com) at +33 1 56 43 13 00 in the firm’s Paris office.
© 2006 Gibson, Dunn & Crutcher LLP
The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.