The French board neutrality rule

Nicolas Lafont
McDermott, Will & Emery, Paris
​​​​​​​nlafont@mwe.com

Recent events have shed a new light – along with a series of unexpected discussions – on the compatibility of French takeover rules with European legislation.

In 2004, the European Directive 2004/25/EC on takeover bids notably established the neutrality rule in Article 3.1.c, which states: ‘the board of an offeree company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid’. EU Member States were yet allowed to opt out of the no-frustration rule in the transposition process via Article 12, which provides optional arrangements.

France’s Florange Act, adopted on 29 March 2014, expressly authorised the board of directors (BoD) of a French company to take frustrating action within the boundaries of the interest of the company^[1] but without prior approval of its shareholders, thus enacting the suppression of the neutrality principle (see Article L, 233–32, of the Commercial Code).

However, companies were concurrently allowed to re-implement and adjust the neutrality principle in their articles of association (Article L, 233–33, of the Commercial Code).

Since then, French takeover rules notably provide:

• that the articles of association may require prior authorisation by the general meeting to implement defensive measures taken by the board, as well as the issuance of offer warrants and the suspension during the bid period of any delegation granted prior to the bid by the general meeting to the board to take any measure likely to frustrate the bid (with the exception of seeking alternative bids); and
• that the articles of association may require approval or confirmation by the general meeting for any decision of a governing body, taken before the offer period, which is not fully or partially implemented, is not a routine measure and may cause the bid to fail.

As expressed by some authors,^[2] this leaves the shareholders of the target company with three options:

• not to amend the articles of association, in which case the board may take any decision likely to frustrate the bid without any prior authorisation from the shareholders, since the latter have not expressed their wish to decide on the merits of the bid in the articles of association;
• amend the articles of association to make any decision by the board likely to frustrate the bid subject to prior approval by the general meeting of shareholders, even if the bidder does not apply the neutrality rule; or
• amend the articles of association to introduce the neutrality rule, unless the bidder does not apply the neutrality rule (reciprocity).

Yet this approach remains far from obvious considering a recent Autorité des Marchés Financiers (AMF) opinion, which refused to consider that Article L, 233–32 I, of the Commercial Code gives the target company's BoD ‘a right to frustrate the bid, provided that the measures taken are not otherwise contrary to the company's interests’. Such opinion inevitably prompted a debate on whether the guiding principles of takeover bids should add to Article L, 233–32, of the Commercial Code in the treatment of anti-takeover defence discussions, and whether the interpretation of Articles 3.1.c and 12 of Directive 2004/25 can be challenged by public authorities.

The AMF^[3] indeed suggested that the management body of a target company would have to comply with the ‘rules and principles governing takeover bids’ other than the provisions of Article L, 233-32 I, of the Commercial Code and, more importantly, those resulting from Directive 2004/25/EC which would set up limits other than those imposed by the Directive.

Such an approach fails to convince, since one could easily argue that Directive 2004/25/EC has no direct effect but also that the interpretation of Articles L, 233–32 I, and L, 233–33, of the Commercial Code in the light of Directive 2004/25/EC should not differ from the one expressly provided.

The form of the exercise also raises some procedural issues. Instead of taking a formal decision, the AMF issued a public statement on its website. By doing so, the AMF implicitly endorses the fact that it does not systemically solicit any observations from the parties, and without any prior public hearing having taken place to discuss the arguments at stake. This raises some serious concerns toward this practice, which ultimately deprives the parties of their rights to a fair trial.

All things considered, the legislative initiatives once adopted to discourage hostile takeovers still continue to raise technical issues today, confronting shareholders’ rights and defence measures that are likely to be taken by directors with ‘the principles of market transparency and integrity, fairness in transactions and competition, and the free play of bids and overbids’ as referred to by the AMF.