France adopts a new law on takeover bids
On March 31, 2006, France issued a new law on takeover bids,
transposing the EU Directive. Although French rules were to a large extent already in compliance with the Directive, the new law contains a number of significant changes which are summarized below:
The target will have increased flexibility to implement defensive measures (such as poison pills), provided such measures receive shareholder approval;
Such shareholder approval must be given during the offer period, except if the target is entitled to invoke the reciprocity principle; and
The target will be able to invoke reciprocity if the bidder itself would not have to obtain shareholder approval during the offer period to take defensive measures in the event it was subject to a bid (see further below).
Other relevant changes are set out in Appendix I.
Increased flexibility to implement defensive measures – A basic
principle of the Directive (Article 9) is that after a takeover bid has been launched, any action that may frustrate the bid must be approved by the shareholders of the target during the offer period (except if the target may invoke reciprocity). The previous rules in France were in fact even more stringent for the target: in the event of a bid, the target had to remain essentially passive and could not implement frustrating actions, even with shareholder approval. An example of these limitations was given in the Sanofi/Aventis deal in 2004, where the issuance of warrants called “BSA Plavix” was barred by the French Stock exchange regulator (the “AMF”), which prevented Aventis from even seeking shareholder approval to implement that defensive measure.
The law now envisages that, provided the target obtains shareholder
approval, the target can implement any defensive measure. For example, the new law specifically permits the target to issue BSA Plavix type warrants, allocated free of charge to its shareholders, allowing them to subscribe for new shares on preferential terms – effectively diluting the bidder in the event its bid was successful.
This memorandum is a summary for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice.
As a consequence of the new law, the AMF will have to adapt a number of
its rules governing takeovers: the AMF is expected to publish for comments, in the coming weeks, draft revisions to its regulations in order to implement the new law. An example of a rule the AMF is expected to change is the rule whereby a bid is essentially “irrevocable” for the bidder once announced and filed with the AMF. Now, as the target will have more flexibility to implement major changes (e.g. to issue shares or BSA Plavix type warrants, or to proceed with a major acquisition or disposal), one could expect the AMF to permit a bidder more flexibility to either adjust the consideration offered accordingly, or withdraw its offer altogether.
Reciprocity – If the target is entitled to invoke the reciprocity
principle, the board of the target will be able, in order to implement defensive measures, to rely on any authority delegated to it by the shareholders within 18 months before the bid was launched (instead of during the offer period). The whole concept of reciprocity, which was optional under the Directive (Article 12), is entirely new under French law where previously the rules of games were the same for all companies, regardless of the status or jurisdiction of the bidder. The target now can invoke reciprocity when (i) the bidder itself (whether French or foreign) would be entitled to frustrate a bid without having to get specific shareholder approval during the offer period, or (ii) the bidder is controlled by entities, at least one of which would be entitled to frustrate a bid in the same way. For example, if the bidder is a private (non-listed) company, or is controlled by a private shareholder, the target will be entitled to invoke reciprocity. It is expected that the particulars of each bidder, and whether or not it can be subject to the reciprocity rules for these purposes, will generate lots of uncertainties and provide opportunities for the target to litigate.
Practical impact so far – As a result of the new law, some French
issuers have already announced that they would be submitting to their next Annual General Meeting (in the coming weeks), specific resolutions allowing the board, in the event of a hostile bid against which the target would be entitled to invoke reciprocity, (i) to issue BSA Plavix type warrants on a free of charge basis to all shareholders and (ii) make use of the standard delegations of authority to issue new shares or equity securities. It remains to be seen how institutional investors will react to these proposed resolutions.
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This memorandum is a summary for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice. Appendix I – Other relevant changes resulting from the new law
Breakthrough – Article 11 of the Directive relates to the
“breakthrough” principle, which seeks to remove restrictions on transfer of shares and limitations on voting rights in connection with a takeover bid. Article 11, which was optional under the Directive, was only partially transposed by the new law. For example, the law now confirms the prior AMF policy whereby any cap or restrictions on voting rights provided for in the by-laws of the target (which are fairly common for French companies) shall not apply at the first shareholders’ meeting following completion of a takeover bid, if the bidder has reached a minimum threshold in terms of capital or voting rights (which is yet to be fixed by the AMF, but will be set between two-thirds and 75%).
Competent authority – The Directive clarified which national
authority would be competent to supervise public bids involving various jurisdictions across the EU. As before, the AMF is competent to supervise a takeover bid made in relation to a French incorporated target whose shares are traded on a regulated market in France (regardless of whether its shares may be listed elsewhere). The AMF also has jurisdiction where the target is non-French but incorporated in the EU or the European Economic Area and is only listed in France (or, if it is also listed in other EU or EEA jurisdictions other than its home state, where France is the country where its shares were listed for the first time).
Statement of intentions – The new law enables the AMF to require
any person in respect of whom there is a reasonable basis to believe that it is preparing a takeover bid to disclose its intentions with respect to the potential target. There are some uncertainties about how the AMF will implement such provision, e.g. whether it would consider that rumors constitute such a “reasonable basis” of belief. The AMF rules will set the conditions of such disclosure and the time limit during which a person having denied to be preparing a takeover bid shall be prevented from launching a takeover bid for the target. (This is the so-called “Danone amendment”, which is unrelated to the transposition of the Directive).
Information to employees – The new law clarifies that the workers
council of the bidder (if French) and of the target do not have to be consulted before the launch of the takeover bid, but need to be informed shortly thereafter. It also increases the scope of the information that must be provided to the workers council.
Parties acting in concert – The new law broadens the concept of
“concert party”: entities will be deemed to be acting in concert if they have entered into an agreement with the bidder or the target aimed at either (i) obtaining control of the target or (ii) frustrating the successful outcome of the bid. With this new definition, financial advisers and other parties (including
This memorandum is a summary for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice.
potential White Knights) would be deemed to be in concert with the bidder or the target. As a result, they would be jointly liable with the relevant party for all obligations imposed on entities acting in concert (essentially, that the shareholding of all the parties acting in concert are aggregated and any disclosure or mandatory bid obligation falls jointly on all the parties). This is in addition to the usual trading restrictions that are applicable to financial advisers.
Squeeze out – To carry out a squeeze-out in relation to shares, the
bidder must hold at least 95% of the outstanding share capital and voting rights of the target. This rule remains unchanged, but the new law clarifies that, for the bidder to make a squeeze-out on equity securities other than shares, this 95% threshold must be calculated on a fully-diluted basis.
This memorandum is a summary for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice.
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