All is not quiet on the French front: why some US lawyers are looking at how France adapts to activist shareholders.

By Louis NOIRAULT, Student in Economic Law Masters. 

The question of shareholder activism is not new to France; already in 2008, the New York-based hedge fund Pardus Capital won a proxy fight against a French target[1]. However, in the last years, this issue has become more pressing as the number of activist campaigns launched by investors in the European Union has surged. Figures from the most recent Lazard report suggest that, in the first half of 2020, the share of global activist campaigns directed against European companies reached 28% for the first time[2]

It is well-known that this activity generally attracts negative media attention because it appeals to some long-standing political narratives[3]. These campaigns mostly target[4] firms from the industrial sector and are generally led by specialized hedge funds. They therefore crystalize the classical opposition between the hard-working industrialist and the Wall Street white-collar preying on the value they add to society. In addition, especially in France, the fact that most of these hedge funds are “Anglo-Saxons”[5] elicits a reaction of protectionist velleities. In 2005, Dominique de Villepin, then Prime Minister, popularized the notion of “economic patriotism” in response to the rumors of a hostile takeover bid of the French yogurt-maker Danone by PepsiCo[6].

Most recently, activists have launched campaigns against two major companies, namely the popular liquor-maker Pernod Ricard and publisher Lagardère-Active, which were listed on the CAC40 index tracking most of the largest companies incorporated in France. It was therefore only a matter of time before this question would gather political attention. The response of French policymakers is of particular interest because the United States is also dealing with a significant number of such campaigns but the corporate framework has not significantly evolved as a result of it[7]. Last October, a group of partners at Wachtell, Lipton, Rosen & Katz wrote in a Harvard Law School blog post that US lawyers are “encouraged to see other countries taking [the risks of shareholder activism] seriously and taking steps to address them[8].

There was however a legitimate fear that the French response would take the form of an atavism from Colbertian dirigisme whereby the control from the authorities would be so stringent as to diminish the attractivity of France to investors. There is indeed a subtle balance to strike between ensuring that each shareholders can monitor that the firm they partially own is run in accordance with their interest and protecting shareholders from short-term investors adopting a “pump and dump” approach to activism.

Shareholder activism is indeed not a monolithic phenomenon. In its report on the subject, the French legal think-tank Le Club des Juristes has put the emphasis on the varying strategies and goals of activists[9], which makes the question subject to undue generalizations. In this regard, it is important to mention the landmark paper by Bebchuck, Alon and Wei[10].  On the basis of a sample of more than 2000 activist interventions, the study has put into question the conventional mediatic and sometimes scholarly wisdom that the interests of long-term retail investors collide with that of activist hedge funds[11]. The data gathered displayed no pattern of short-term spike in value which would correspond to the “control premium” activists allegedly seek. If there is an increase in the market capitalization of the target firm, it tends to be sustainable. The departure of an activist is also not followed by negative returns, as the “pump and dump” narrative goes. In fact, the main inconvenient firms encounter when they are targeted is adversarial interventions such as a “proxy contest, a lawsuit or public campaigns involving confrontation[12]. It is fundamental to have this in mind because it reveals that activist campaigns are not negative per se. On the contrary, they can serve as a good accountability mechanism to an underperforming management.

Fortunately, it appears that French lawmakers have seized the opportunity to set a possible example. The report to the National Assembly drafted by the MPs Eric Woerth and Benjamin Dirx showcases a fine understanding of the issue, as its self-proclaimed objective is to “better regulate activist behaviors without damaging the market[13]. The Member of Parliaments who wrote the report are fully aware that the attractivity of French law is a key stake, especially in anticipation of the consequences of Brexit.

Indeed, Lipton and Cammaker referred to their work as a “carefully researched, reasonable and balanced report[14] and reiterated that “it would be well for the SEC to consider creating a similarly tasked commission[15]. The report is articulated around three axes; increasing the flow of information between the different stakeholders to ensure a more efficient functioning of the market, increasing the means of the regulators to allow them to keep pace with the market and acting on the internal corporate governance to make firms less vulnerable to potentially harmful campaigns. In April 2020, the French independent regulating authority, namely the Autorité des Marchés Financiers (henceforth AMF), has also agreed with some of the specific recommendations.

Among those is the proposition to lower the disclosure threshold for share ownership from 5% to 3%. This is based on the observation that activist shareholders are not seeking to own a high share of the company they target, as they use the rights given to minority shareholders.  Such a reform would not serve to unduly tame activist shareholders but would increase the transparency of the market and thereby allow firms to better prepare and adapt their corporate strategies.  It is especially interesting because the United States is, like France, an outlier in this regard. While many European countries have adopted a 3% threshold, the mandatory disclosure to the Securities and Exchanges Commission called Schedule-13D must be filled by anyone who acquires beneficial ownership of more than 5% of any class of voting securities. In addition, Leo Strine observes that the Schedule-13D system is flawed in that there are “loopholes allow[ing] activist investors to avoid making full and timely disclosure”.[16] This conclusion by the French legislator and regulator should therefore be given consideration by their US counterparts.

Furthermore, the French MPs drafting the report suggested that it be made easier for a firm to know who its shareholders are at any given moment. In international standards, France is already quite a transparent market in this domain since there exists a specific procedure called “titre au porteur identifiable” (TPI) thanks to which a publicly-listed company can ask for a list of its shareholders to Euroclear France. However, this register can be quite costly and lengthy to obtain and even once it is in the hands of the firm, the picture of ownership it gives can be blurred by the fact that many shares are owned through nominee accounts[17]. The authors of the report to the National Assembly want to make this procedure more efficient by providing incentives for the private sector to develop new technologies which would make this process easier and less expensive. They also urge their colleagues to consider whether EU regulations offer the possibility to restrain the ability of firms like Euroclear to charge such high fees for their services.

In the United States, the level of transparency is even lower as most shares are entrusted to the Depository Trust Company (DTC) for clearing and settlement efficiency purposes. However, shares managed by the DTC are registered in the name of Cede & Co. Former Goldman Sachs banker and Watchell Lipton lawyer Matt Levine explained this in layman terms: “Nobody owns stocks. What you own is an entitlement to stock held for you by your broker. But your broker doesn’t own the stock either. What your broker owns is an entitlement to stock held for it by Cede & Co.”[18]  Although this system might have efficiency advantages, owners at the end of this contractual chain have the option to refuse the disclosure of their identity to the issuer. Even if they do not use this right, the DTC charges a fee to the issuers seeking to know who owns its stocks[19]. The conclusions reached by French MPs may therefore be even more relevant to the US than they are to France.

These two examples serve to highlight why lawyers and regulators from the United States are paying heed to how the different stakeholders are adapting to the rise to prominence of shareholder activism. While French law is not sufficiently interconnected and influential to have a “California effect[20] on the US, whereby other jurisdictions would adopt somewhat stringer regulations because France did, the SEC could definitely take inspiration from these works. In addition to the federal level, one should also pay attention to Delaware lawmakers and judges. Their decisions are very impactful because most of the Fortune 500 companies are incorporated in this state[21]. Delaware has reached this status because of “exceptionally favorable tax, trust, and corporation laws historically supported by sound court decisions[22], leading to what is referred to as the “Delaware effect”.

Although this effect has lost some of its potency according to Guhan Subramanian[23], it still seems unlikely that Delaware lawmakers would adopt corporate regulations that would be detrimental to one of the major sources of tax revenue for the state. The crux of the matter for a potential exportation of the French recommendations is therefore whether they strike the right balance between adaptation to new circumstances and excessive stringency which would decrease the attractivity of the jurisdiction.

As far as Delaware judges are concerned, the landmark recommendation paper by Leo Strine is noteworthy. Leo Strine had been Chief Justice of the Delaware Supreme Court since 2014 when he announced his retirement in late 2019. Soon thereafter he published an essay titled “Toward Fair and Sustainable Capitalism”[24] in which he warns that there is a risk that activists “affect the interest of company employees, whose livelihood can be put in danger by proposals to pump up immediate profits in an unsustainable way[25] . As a result, he believes they should be held to strict disclosure rules to allow the other shareholders to assess “whether the activist making the proposal has a genuine, long-term interest in the company’s sustainable profitability[26]. While this theory may come from a specific political Weltanschauung, it leads to conclusions which are very similar to that of the French MPs and the Club des Juristes. How much of an impact, if any, this will have on future rulings in Delaware remains however to be seen.

[1] Crédit Suisse « The activism agenda: What are activist investors looking for?” Corporate Insights, 2016 Third Quarter.

[2] Lazard “Review of Shareholder Activism – H1 2020” Lazard’s shareholder advisory group, July 2020.

[3] See Girard, Laurence and Chaperon, Isabelle « Le fonds activiste Elliott s’attaque à Pernod Ricard » Le Monde, december 12th 2018.

[4] Note how the vocable “target” itself conveys the idea that the shareholder is a “hunter” of some sort.

[5] While I do not endorse the use of this outdated and inaccurate concept based on racialist theories, it is still a common way to refer to the United-States / United-Kingdom axis in France.

[6] Jones, Adam and Jenny Wiggins “French pledge to defend Danone » Financial Times, July 20th 2005.

[7] Emmerich, Adam O. , Sabastian V. Niles, and John L. Robinson “Shareholder Activism and Governance in France”, Harvard Law School Forum on Corporate Governance, October 23rd , 2020.

[8] Ibid. Op. Cit.

[9] Le Club des Juristes, “Report : Shareholder activism” November 2019.

[10] Bebchuk, Lucian A., Alon Brav, and Wei Jiang, The long-term effects of hedge fund activism. No. w21227. National Bureau of Economic Research, 2015

[11] See Martin, Roger L. “Activist Hedge Funds Aren’t Good for Companies or Investors, So Why Do They Exist?” Harvard Business Review, August 20th, 2018.

[12] Ibid. Op. Cit.

[13] Woerth, Eric and Dirx, Benjamin, Rapport d’information déposé par la commission des finances, de l’économie générale et du contrôle budgétaire en conclusion des travaux d’une mission d’information relative à l’activisme actionnarial , Assemblée Nationale, October 2nd 2019.

[14] Lipton, Martin and Cammaker, Joshua “Wachtell Lipton Discusses Shareholder Activism in France as Model for U.S.”, Columbia law school’s blog on corporations and the capital market, November 11th 2019.

[15] Ibid. Op. Cit.

[16] Strine Jr, Leo E. “Toward Fair and Sustainable Capitalism: A Comprehensive Proposal to Help American Workers, Restore Fair Gainsharing Between Employees and Shareholders, and Increase American Competitiveness by Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth and Encouraging Investments in America’s Future.” Restore Fair Gainsharing Between Employees and Shareholders, and Increase American Competitiveness by Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth and Encouraging Investments in America’s Future”, Roosevelt Institute, October 3rd, 2019.

[17] Corney, Claire ; Van Rooijen, Kirsten and Kaut Amanda “Transparency of share ownership, shareholder communications and voting in global capital markets” ComputerShare, Georgeson, March 2015.

[18] Levine, Matt “Banks Forgot Who Was Supposed to Own Dell Shares” Bloomberg, July 15th 2015.

[19] Corney, Claire et al., Op. Cit.

[20] Vogel, David. “Trading up, consumer and environmental regulation in a global economy”. Southern Economic Journal, 1996, vol. 63, no 1, pp. 271-272.

[21] See the figures on this official Delaware government website https://corp.delaware.gov/aboutagency/

[22] Advertisement of Wilmington Trust Company, American Banker, Feb. 5, 1974. Cited in Cary, William L. “Federalism and corporate law: reflections upon Delaware.” The Yale Law Journal 83.4 (1974): 663.

[23] For more on this see:  Subramanian, Guhan. “The disappearing Delaware effect.” Journal of Law, Economics, and Organization 20.1 (2004): 32-59.

[24] Strine Jr, Leo E. Op. Cit. p.17

[25] Ibid. Op. Cit.

[26] Ibid. Op. Cit

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