Shareholder reporting obligations in France

There’s a particular strain of French national pride that most people familiar with French history or culture recognize. It’s a protective instinct, reflected in various aspects of French law including, now, its corporate shareholder rules. The “Law Aiming to Reconquer the Real Economy”, first enacted two years ago, is a response to deindustrialization in France that, essentially starting this month of April 2016, triggers automatic double voting rights for registered two-year shareholders of French companies. Commonly known as the Loi Florange, it finds its origins in Mittal Steel’s 2006 takeover of Arcelor that threatened several hundred jobs at Arcelor’s blast furnaces in the small northeastern French town of Florange. More broadly than this particular law, however, investors seeking exposure to French markets must remain closely attuned to a number of different legal obligations that may be imposed upon them, even at what they may consider to be low levels of investment. Many of these requirements are unique to France, despite efforts at EU-wide harmonization embodied in the recently amended Transparency Directive.

TD requirements

Already in 2004, the EU Transparency Directive (TD) established that shareholders of certain percentage levels of voting rights in companies listed on EU regulated markets, regardless of where in the world such shareholders may be located, must notify national competent authorities (NCAs) of that fact. These levels are 5%, 10%, 15%, 20%, 25%, 30% (or, instead, one-third), 50% and 75% (or, instead, two-thirds), whereupon the shareholder must notify the NCA of the relevant issuer’s “Home Member State” within at most four trading days of learning that it has either reached, exceeded or fallen below such levels.1

The fact that that an investor’s disclosures must therefore be made to the various NCAs of a multitude different issuers in which it may have relevant holdings, rather than simply to the investor’s own home authority, is part of what keeps investment managers and compliance officers busy. The TD’s Home Member State rules dictate that issuers registered in an EEA country have such country as their Home Member State, while issuers registered outside the EEA assume as their Home Member State the EEA country where their securities were first admitted to trading on a regulated market. Thus EEA-registered issuers essentially have a “passport” to become listed anywhere in the EEA while retaining their Home Member State for TD regulatory purposes.2 Consequently, investors in French-registered companies that are listed on any EEA regulated market, or of non-EEA companies that were first listed on a regulated market in France, must abide by the French shareholder disclosure requirements.3French gold-plating

France is among the several EU Member States that have “gold-plated” (been deemed “super-equivalent” to) the TD’s minimum requirements that Member States must impose upon shareholders. For one, in France there are more percentage thresholds that trigger the notification, which must be sent within four trading days of the transaction4 to the issuer and to the Autorité des Marchés Financiers (the “AMF”, France’s NCA for this purpose) which publishes the notification on its website.5 Disclosure is required when reaching, exceeding or falling below 5%, 10%, 15%, 20%, 25%, 30%, one-third, 50%, two-thirds, 90% and 95% of a relevant issuer for which France is the Home Member State. Moreover, in France this requirement is triggered at such percentage levels of both voting rights and of non-voting capital.6 Noting that a number of issuers have a larger number of outstanding voting rights than outstanding shares - and this situation will increase thanks to the Loi Florange - it is therefore very likely that investment managers (who probably won’t hold double voting rights) will first need to disclose crossing a threshold in relation to the share capital of an issuer before subsequently disclosing crossing over the same threshold in relation to that issuer’s voting rights.

France’s AMF expands upon the TD also with respect to the contents of the required disclosure. At the 10%, 15%, 20% and 25% levels, the shareholder’s notification must include a “Statement of Intent”, whereby it sets forth its objectives with respect to the issuer during the coming six month period. Any change in plans during such six-month period requires an amended Statement of Intent filing. Fortunately, investment managers who cross the 10% and 15% thresholds in the normal course of business, who act independently and who do not plan to take an activist stance (i.e. they do not intend to take control of the company or to request an appointment as a director on the executive board or supervisory board) are able to make standardized declarations, thereby reserving these particular Statements of Intent mainly for investment managers who are taking a more disruptive position in the issuer.

Rather than accepting such disclosures in the standard notification template approved by ESMA (the European Securities and Markets Authority) as some NCAs have done, the AMF provides for disclosure on its own form. That form may be used for both the standard thresholds and the Statement of Intent, but shareholders should be aware that the AMF will publish both the content of the notification form and the Statement of Intent on the AMF’s website.

Non-regulated markets

Surpassing thresholds in non-regulated markets can also trigger disclosure. The French Commercial Code provides that shareholders of issuers listed on a multilateral trading facility (an “MTF”, such as Alternext Paris) must notify the issuer when crossing any of the “standard” French thresholds in capital or voting rights (ie 5%, 10%, 15%, 20%, 25%, 30%, one-third, 50%, two-thirds, 90% and 95%).7 Moreover, at the 50% and 95% levels the AMF must also be notified.8 Furthermore, if the relevant MTF-listed issuer had moved its listing from a regulated market to the MTF within the prior three years, both issuer and AMF must be notified at the full set of thresholds.9

TD2

In addition to the gold-plated provisions mentioned above, some formerly gold-plated aspects of the French regime, about the types of instruments that count as holdings for disclosure purposes, are now in fact required throughout the EU under TD2. Among its new requirements, TD2 imposes notification obligations upon shareholders when they cross thresholds both in acquiring a (physically-settled) derivative and separately when acquiring its underlying shares.10 It also requires shareholders to include cash-settled derivatives as notifiable holdings, with calculation of the amount required to be based on the notional value of the applicable referenced shares and then delta-adjusted as appropriate.11 Because these were requirements that already existed under the French disclosure regime before TD2, investment managers may in some areas feel TD2’s impact less for their French holdings than for their investments in other issuers with Home Member States that had more lenient pre-TD2 regimes.12

Loi Florange

Already heavily debated and passed in 2014, one of the key provisions of the Loi Florange affecting investment managers is essentially triggered for many French companies on April 3, 2016, two years after its entry into force. Under France’s “opt-in” system, the familiar one-share-one-vote principle has existed by default under commercial law, and the many French issuers choosing to depart from it have done so through their corporate organizational documents. With the Loi Florange this effectively became an “opt-out” system for a certain type of shareholding: registered shareholders of at least two years in a company listed on a regulated market automatically assume double voting rights, unless the issuer decides otherwise by a two-thirds majority shareholder vote.13

Thus many foreign asset managers are now likely to see their percentage holdings of voting rights in such companies decrease, because while they themselves are not likely to qualify for the statutory double voting rights, other existing French shareholders can. As foreign asset managers typically hold their shares in French companies through a local nominee, rather than being registered in their own name, they are in essence forced to re-consider their custodial arrangements or risk being permanently disqualified from the automatic double voting rights. While this clearly may raise strategic issues relating to voting power for such managers, they must also be aware of possibly falling below any applicable percentage thresholds and thus triggering the shareholder filing requirements outlined above.

One way they can remain aware is by consulting the “regulated information” required to be disseminated by issuers under the TD: in any month in which such an issuer’s amount of outstanding voting rights changes, it must publicly disclose the new amount by the end of such calendar month.14 ESMA’s web page athttps://www.esma.europa.eu/access-regulated-information provides links to the national databases for this purpose.15 Note that because most issuers publish their updated figures as at month end, with a week’s delay, there can be a consequent delay in obtaining the updated figures (eg a change made on 03 March may not be published until 07 April). Investors may therefore be inclined to check with their relevant issuer for confirmation of the outstanding voting rights and share capital amounts (the AMF's notification form for shareholder use specifies that if such direct issuer confirmation is the source of the shareholder's figure, the notification should include any information obtained from the issuer).

Additional notification thresholds

Well before the Loi Florange, the Commercial Code had created other wrinkles in French shareholder rules, notably the ones providing for the possibility of disclosure at thresholds of merely 0.5%. For one, issuers have the right to impose their own private thresholds, which are permitted to be as low as 0.5% of voting rights or capital.16 While issuer-defined thresholds exist in other countries as well, an important difference in France is the great number of issuers that have them, including the vast majority of the blue chip companies listed on France’s CAC40 index. Such issuers’ particular disclosure levels are typically set forth in their articles of association, but their websites (or annual reports) can also contain the relevant information including the deadline for notification and the required submission format. As there is no obligation to take a harmonized approach, there can be great disparity in the details: some issuers will require investors to consider TD2 instruments in their calculation (eg swaps and contracts-for-differences), some issuers require disclosure of the relevant transaction date, while others might also require shareholders to certify that they also have no holdings that give them access to unissued shares. Moreover, the deadlines can vary from 4 trading days to 15 calendar days. As a result, it is important to pay close attention to the precise terms of the articles of association. Notifications are made to the issuer, which under the Commercial Code may enforce these obligations by stripping offending shareholders of their non-notified voting rights, if requested by another shareholder holding a minimum amount.

In addition, a half-percent transaction can be caught by the “empty voting” disclosure rules. To prevent investors from borrowing shares to increase the weight of their vote at general meetings, there exists an obligation to notify the AMF and the issuer if the investor holds, pursuant to a borrowing or similar transaction granting temporary possession, “a number of shares representing 0.5% of the voting rights” of a French issuer listed on an EEA regulated market17. The notification deadline is the shareholder record date before the next general meeting, and the issuer must publish on its website any notification it receives by the next business day. However, the AMF has informally indicated that, in its view, the obligation does not apply to physical short selling activities where the relevant stock has been (or will be) returned before the above-noted deadline. Nonetheless, in this regard, only the French courts can give a firm position on this point (and there have been no cases on this issue to date).

A securities transaction providing for preferential terms and conditions is also disclosable, if it comprises at least 0.5% of a regulated market-listed issuer’s capital or voting rights. The relevant portions of the agreement containing the preferential terms must be submitted, within five days of its execution, to the AMF which then makes the information public18. Failure to disclose the arrangement will render the terms inapplicable in a take-over situation.

Take-over situations

Mandatory tender offer

If a person acquires interests of more than 30% of the shares or voting rights of an issuer that has the AMF as its NCA, it must make a bid for the company.19 Cash-settled equity derivatives such as swaps and contracts-for-difference are not taken into account when calculating the 30% threshold. Moreover, if the investor has crossed the 30% threshold due to the attribution of double voting rights, the AMF is authorized, until December 31, 2018, to exempt such investors from filing a mandatory bid.20 Investors are not likely to cross this threshold carelessly; however, as we detail below, they can easily be caught by the daily declaration obligations - should they have a position in an issuer that is the target of a take-over.

Transaction reporting

In the event of a tender offer, investors holding at least 5% of the capital or voting rights of the target company, or 5% of the securities targeted by the offer other than shares, must report daily to the AMF if they are party to any transactions in the securities or voting rights targeted by the offer.21 The same daily dealing disclosures apply to investors that have increased, after the filing of the draft offer document or after the commencement of the pre-offer period, any such holdings by at least 1%. Note that this 1% rule shall apply not only from the day a tender offer document is filed with the AMF, but also from the day the AMF publishes an announcement confirming that a bidder has declared its intention to launch a tender offer.22 The same rules apply to transactions in the bidder, if the price offered includes shares of the bidder as payment. 23

The AMF regularly publishes an updated list of issuers in pre-offer and offer periods, at http://www.amf-france.org/en_US/Acteurs-et-produits/Societes-cotees-et-operations-financieres/Offres-publiques-d-acquisition/Liste-societes-concernees-par-une-offre-publique.html.

Disclosure of objectives

Additionally, investors must set forth on Form I the objectives they intend to pursue regarding the offer if, since the beginning of the offer period (or pre-offer period if applicable) they increase their holdings in the capital of the target company either (i) by at least 2% or (ii) by any amount if they already hold more than 5% of the target company’s capital or voting rights.24 The relevant disclosure is termed a “declaration of intent”, located in section 6 of Form I.

Investors should note that their holdings for purposes of the 5%, 1% and 2% rules described above should take into account cash-settled instruments (in contrast with the mandatory tender offer rule triggered at 30%).

More EU thresholds

Investors must also contend with other notification requirements under EU law, notably in the Short Selling Regulation (SSR) and AIFMD (the Alternative Investment Fund Managers Directive). Under the SSR, reaching, exceeding or falling below a net short position of 0.2% of the issued share capital of a company listed or registered (depending on the financial instrument shorted) in France requires notification to the AMF by the following trading day at 15:30 local time. Disclosure is required at each additional level of 0.1%, and is made public at 0.5%. Short positions in French sovereign debt are also covered, at an initial disclosure level of 0.5% and at subsequent increments of 0.25% (ie 0.75%, 1%, 1.25%, etc.).25 Reporting is handled via the AMF’s reporting portal ONDE. As for AIFMD,26 alternative investment funds subject to AMF jurisdiction when reaching, exceeding or falling below 10%, 20%, 30%, 50% and 75% of voting rights in unlisted issuers must notify the AMF within 10 days thereof.

Conclusion

The essential lesson, for asset managers maintaining French holdings in their portfolios, is that their legal and compliance officers must remain vigilant about keeping up with the broad array of unique French shareholder disclosure rules. From a practical perspective, it’s clear that the EU’s repeated attempts at harmonization, while establishing important minimum levels of compliance, cannot be said to have created a unified disclosure regime for investors with European holdings. Meanwhile, NCAs have repeatedly imposed fines for late or missed filings and, although France’s AMF has not been more active than others in this area, it has levied substantial fines under its authorization to impose sanctions of up to €100m, or 5% of annual turnover or ten times any profit gained (or loss avoided) by the non-disclosure.27

1 See Directive 2004/109/EC of the EU Parliament and Council on transparency requirements about issuers admitted to trading on regulated markets (the TD), Arts. 9 and 12(2). For active acquisitions or disposals, the Commission’s relevant implementing Directive specifies that in no event may the shareholder claim to have learned of the obligation more than two trading days after the transaction occurred (see Commission Directive 2007/14/EC implementing the TD, Art. 9). For reaching or crossing a threshold passively, however, as in the case of a change in the issuer’s capital or voting structure, the shareholder may rely on the issuer’s announcement of such change (which is required of the issuer at the end of such calendar month, under the TD). See TD, Art. 15.

2 For asset managers, this means that investing in, say, five instruments listed on one exchange in the EEA, can potentially create five different disclosure obligations to five different NCAs.

3 Yet even when investing in an issuer that is not listed on a regulated market, asset managers must be cognizant that many domestic laws can impose separate disclosure obligations upon them when reaching certain threshold levels, including in France as we shall examine further in this article.

Two additional practical items are worth pointing out. First, “regulated market” is a precise term defined in the TD by reference to MiFID (the EU Markets in Financial Instruments Directive) and, while it essentially means a primary exchange, investors can confirm this by consulting the new “ESMA Registers” portal, which lists EEA regulated markets and other information at http://registers.esma.europa.eu/publication/.  For France the regulated markets are listed as Euronext Paris, its derivatives exchange affiliates MONEP and MATIF, and the power futures market Powernext.

Secondly, the above references to the “EEA” of course mean that the TD requirements apply not just to the EU’s 28 Member States but also to Iceland, Liechtenstein and Norway (together making up the 31 nations of the European Economic Area (EEA)). Like many aspects of EU financial legislation the TD has officially been incorporated into the EEA Agreement. It should be noted, however, that “TD2”, the amended version of the TD already required to have been transposed into national law by November 26, 2015, has not yet been officially incorporated into the EEA Agreement. TD2 is currently considered to be an adopted act under scrutiny by the EEA, which is a procedural step in the direction of eventually becoming fully incorporated into the EEA Agreement. For shareholders of issuers that claim as their Home Member State the non-EU nations of Iceland, Liechtenstein or Norway, this means that the revised requirements within TD2 (discussed further below) do not yet have official legal effect upon them, and therefore they should consult the relevant NCA to determine the extent to which any TD2 compliance is currently being required.

4 In France, the declaration time limit is triggered by the transaction itself.

5 Code de Commerce, Art. R233-1; General Regulation (“Gen. Reg.”), Art. 223-14(I).

6 Code de Commerce, Art. L233-7(I); Gen. Reg., Art. 223-11.

7 Code de Commerce, Art. L233-7(I).

8 Code de Commerce, Art. L233-7(II); Gen. Reg., Art. 223-15-1.

9 Gen. Reg., Art. 223-15-2; Code de Commerce, Art. L233-7-1.

10 Directive 2013/50/EU of the EU Parliament and Council amending the TD (“TD2”), Art. 1(10) (adding TD Article 13a).

11TD2, Art. 1(9)(b) (amending TD Article 13).

12 Nevertheless, even for some of its progressive rules such as inclusion of cash-settled instruments, the AMF had to modify its Gen. Reg. provisions to reflect certain practices that TD2 is requiring of investors (for example, that their delta adjustments be made according to a generally accepted pricing model that takes into account interest rate, dividend payments, time to maturity, volatility and price of underlying shares). See Gen. Reg., Art. 223-11(III); Commission Delegated Regulation (EU) 2015/761 supplementing TD, Art. 5(3). 

Separately, while France has been relatively vigilant in its transposition of TD2 rules, for several Member States such efforts are still a work in progress despite the expired deadline. In such cases investors may want to consult the relevant NCA website for the latest status on transposition (the NCAs of Member States Luxembourg and Portugal, for example, have on their websites encouraged shareholders to comply with TD2 notwithstanding their delayed transposition of it).

13 Law No. 2014-384 of 29 March 2014 (the Loi Florange), Art. 7(I); see Code de Commerce, Art. L225-123.

14 TD, Art. 15; Gen. Reg., Art. 223-16.

15 Under TD requirements a common European Electronic Access Point (EEAP) is scheduled to perform this function by January 01, 2018.  See ESMA Final Report, Draft Regulatory Technical Standards on EEAP (25 September 2015, ESMA/2015/1460). On a timely side note, as of April 01, 2016 several of ESMA’s information registers were no longer accessible at their regular web location, having been migrated to the “ESMA Registers” web portal at http://registers.esma.europa.eu/publication/. The moved registers include lists maintained within ESMA’s former “MiFID Portal” such as Regulated Markets and MTFs, as well as the list of exempted shares under the EU Short Selling Regulation (SSR).

16 Code de Commerce, Art. L233-7(III).

17 Code de Commerce, Art. L225-126; see Gen. Reg., Art. 223-38.

18 Code de Commerce, Art. L233-11; Gen. Reg. Art. 223-18.

19 Gen. Reg., Art. 234-2.

20 Gen. Reg., Art. 234-9.

21 Gen. Reg., Art. 231-46.  The transactions that must be declared are all those that result in, or are likely to result in, a transfer of ownership in the securities or voting rights targeted by the offer, including those involving financial instruments with a similar economic effect to owning such securities.

22 Gen. Reg., Arts. 231-2, 223-34.

23 Gen. Reg., Art. 231-8.

24 Gen. Reg., Art. 231-47.

25 See Regulation 236/2012 of the EU Parliament and Council on short selling and credit default swaps (SSR), Arts. 5, 6 and 7. The threshold levels are subject to change, which would be announced by ESMA.  Note also that, for short positions in the sovereign debt of any EU Member States that have an outstanding sovereign debt of €500 billion or less, the initial notification threshold is 0.1% rather than 0.5% (and the subsequent thresholds are 0.15%, 0.2%, 0.25%, etc.).

26 See Directive 2011/61/EU of the EU Parliament and Council on alternative investment fund managers (AIFMD), Art. 27.

27 Code Monétaire et Financier, Article L621-15(III).

Ian Rogers
Partner, Simmons & Simmons

Greg Hotaling,
Advise Technologies