Despite the economic slowdown of the COVID-19 crisis, which has caused shareholder activism to decline on a global scale, public awareness regarding this phenomenon has continued to increase in France over the last few years. This is a direct consequence of major French companies having been targeted by activist shareholders since 2018 (Pernod Ricard, Suez, Scor, Lagardère, Latécoère, and, more recently, Danone). Overall, around 6.2% of French-listed companies have been subject to an activist campaign over the past five years.

During the first trimester of 2019, several working groups focused on potential improvements to the regulatory framework and market practices regarding shareholder activism. Along with three ad hoc committees led by think-tanks and professional organisations (Club des juristes, Association française des entreprises privées (AFEP) and Paris EUROPLACE), the finance committee of the French parliament set up a dedicated mission on the topic and issued its report on 2 October 2019.

On 20 April 2020, the Autorité des Marchés Financiers (AMF), the French stock market regulator, contributed to this debate by issuing its own report, starting by underlining the benefits of activist intervention by stating that: “[A]ctivist investors may contribute to proper price formation in markets, and to an improvement in the corporate governance and management of the issuers” and that “on the academic level, several studies have highlighted the positive effects of activist behaviour, in both the United States and Europe”.

Taking a pragmatic approach in its report, the AMF did not call for major changes to the current legal framework but recommended targeted amendments – drawing on the conclusions of the above-mentioned reports.

After consulting its advisory commissions, it eventually approved several changes to its official non-binding doctrine on 17 March 2021, including some of the improvements examined in its past communication.

Transparency on Stake-Building

One of the amendments discussed by working groups consisted in lowering the first legal threshold for disclosure of stake holdings to the market – which is currently set at 5% of the share capital or voting rights, ie, the highest threshold allowed by the Transparency directive (Directive 2004/109/EC).

The President of the AMF had suggested in a personal statement that the first threshold should be set at 3% of the share capital or voting rights – in line with the legislation of most comparable Member States of the European Union (eg, Germany, Italy) or the UK. Since this decision is the sole prerogative of the French legislator, the AMF did not incorporate this suggestion in its report of 20 April 2020, recalling that “activists readily disclose their acquisition of a stake in an issuer, whatever the level of their holding”. Consequently, the AMF did not update its official doctrine on 17 March 2021, and it is now up to the French legislator to take up this topic.

From the issuer’s perspective, such an amendment would not trigger any significant disruption, since the by-laws of most of the major French-listed companies already provide for lower disclosure thresholds, starting at 0.5% of the share capital or voting rights. However, from a more general perspective, the position of the AMF seems legitimate. Disclosing the presence of an activist investor too early on is indeed likely to create pressure on both the issuer and the investor to go public (ie, in reaction to questions from analysts or the press, forcing each party to take a formal position on the subjects raised by the activist campaign). Further, a lowered threshold could undermine informal shareholder dialogue, with a potential impact on relations between the parties and on the issuer’s share price.

In the same vein, the AMF had suggested in its report of 20 April 2020 that issuers should publicly disclose on their websites any statutory holding notifications sent by shareholders according to their by-laws. The AMF finally refrained from updating its official doctrine on this topic on 17 March 2021, but this proposal would have been an interesting step towards reducing the imbalance of information between the issuer and the market regarding the capital structure of the issuer – a key element when shareholders have added resolutions to the agenda ahead of general meetings. In addition, from the issuer’s perspective, this would solve the complex issue of determining whether the crossing of a statutory threshold by an activist investor qualifies as insider information. This proposal has, however, the same disadvantage as lowering the first legal threshold for disclosure of stake holdings (ie, a potentially adverse effect on early-stage informal shareholder dialogue).

Finally, the AMF had at some point considered imposing increased reporting obligations on activist investors in takeover situations, claiming that activists usually “played a significant role in the conduct of public offers”. The AMF’s updated official doctrine echoes this view, as it now reminds investors in general terms to be “particularly vigilant” when carrying out their declarations in such situations. Investors should therefore expect the AMF to be more inclined in the future to sanction late or wrong filings, especially when made by activist investors.

Shareholder Dialogue

Activist campaigns over the past years have revealed the need to improve shareholder dialogue – the latest example being the context in which the resignation of Mr Emmanuel Faber from the board of directors of Danone occurred in March 2021.

In order to tackle this issue, the AMF contemplated several amendments in its report of 20 April 2020, many of which resulted in an update of its official doctrine in 2021.

Firstly, in its report of 20 April 2020, the AMF had expressed the wish to keep promoting direct shareholder dialogue by encouraging issuers to set up dedicated shareholder dialogue platforms. The main precedent of such platforms is the UK Investor Forum, which enables shareholders to reach out collectively to management and to present joint requests through a member of the Investor Forum, who acts as a trusted facilitator.

Whilst the AMF did not incorporate this specific recommendation in its official doctrine, it re-emphasised the importance of permanent investor dialogue throughout the year, and not only prior to annual general meetings. In that regard, the AMF endorsed the recommendation provided for in the non-binding corporate governance code of listed corporations published by the AFEP and the Mouvement des Entreprises de France (MEDEF), the largest employer federation in France, that issuers should appoint a member of their board of directors to be specifically in charge of shareholder dialogue, with the duty to report to the board. Investors and issuers should expect the role of this “lead director” to become increasingly important in the future.

Secondly, the AMF had suggested facilitating a response by issuers to activist campaigns. To that end, the AMF has now clarified its current doctrine on “quiet periods” in order to enable issuers to reply to public statements made by activist shareholders during such periods and to provide the market with any necessary information.

In the same vein, the AMF completed its current policy in order to require shareholders engaging in public campaigns to disclose immediately to issuers and to the market the material information and arguments that they are sending to other shareholders (eg, white papers, letters to shareholders, etc).

The AMF also incorporated in its doctrine a new request for activist shareholders first to attempt a dialogue with the issuer before launching a campaign.

However, the AMF did not endorse the suggestion of one the above-mentioned working groups (Club des juristes) that shareholders engaging in activist campaigns should be required to send their materials to the issuer prior to their launching. Such a measure would have brought a much more significant change to the current practice, even though the benefits of such a measure are not obvious. Indeed, it appears that, in practice, before publishing any materials, activist investors undertake thorough research on the basis of publicly available information. The risk that such materials contain significant mistakes is therefore rather unlikely. In addition, an activist campaign usually comes as a second step, following informal meetings with the management of the issuer, during which both parties have the opportunity to exchange their respective views and propositions. The issuer is therefore seldom caught off-guard by the later publications of the investor.

On the whole, these updates to the AMF official doctrine should not trigger any major change, since the majority of activist investors already publish these materials on their websites or on dedicated platforms during a campaign.

Finally, the AMF indicated in 2020 that it would contact the European Securities and Markets Authority and the European Commission to ask for clarification regarding the applicability of the current regulation on investment recommendations (Commission Delegated Regulation (EU) 2016/958 of 9 March 2016) to public statements of activist investors.

This is a welcome initiative, which could clarify and secure the framework of activist campaigns, to the benefit of both issuers and shareholders. The AMF, however, did not provide additional information on that topic at this stage.

Short-Selling and Regulation of Securities Lending

One of the most sensitive topics surrounding shareholder activism in France is short-selling. In particular, the campaign led by US hedge fund Muddy Waters against French retailer Casino in 2016 and the subsequent increase of short-sellers on Casino’s share capital, attracted significant media attention.

Following this precedent, the 2019 working groups made several suggestions to amend the current legal framework, which mainly derives from Regulation (EU) No 236/2012. Notably, the dedicated mission of the finance committee of the French parliament recommended introducing a presumption of abnormal market functioning when short-selling of a financial instrument exceeds certain limits, which would lead to the opening of an investigation by the AMF.

The AMF did not take up these recommendations in its publication of 20 April 2020, nor in its updated official doctrine, considering that: “[T]he existing framework already enables the regulator to respond in the event of exceptional circumstances and market dysfunctions. As a result, it does not seem advisable, as things stand, to recommend a radical change in the regulations applicable in this area”. The AMF merely indicated that it would support proposals made at the EU level to request short-selling investors to disclose their exposure in debt instruments (notably, bonds and credit-default swaps).

The February 2019 development in the Wirecard affair – where the German stock-exchange regulator enacted a temporary ban on short-selling the company’s stock – questions the common perception of short-selling investors and whether it is justifiable to over-regulate their activities.

As for regulation of securities lending, the AMF had announced in its 2020 publication that it would reiterate in a recommendation the good practice for fund managers to repatriate loaned securities before any general meeting and effectively to exercise their voting rights. This recommendation was effectively issued in its 2021 communication.

Powers of the AMF

Further, in 2020, the AMF suggested amending several provisions of French legislation in order to strengthen its enforcement powers. Notably, the AMF wishes to be able to impose fines with regard to its administrative injunctions and to be empowered to order any investor financially exposed to the securities of a listed issuer to make corrective or supplementary publications if errors or omissions have been identified in its public statement.

The AMF also indicated that it would engage in discussions with the European Securities and Markets Authority (ESMA) in order to suggest the publication of a “white list” of activist behaviours which may not, in and of themselves, lead to those shareholders being regarded as persons acting in concert – which otherwise could ultimately put those shareholders under the obligation to file a tender offer on the remaining shares that the group does not hold and/or being deprived of the voting rights if legal or statutory thresholds have been crossed by the group without adequate notification.

This list would follow the precedent of the white list already published by the ESMA with regard to the Takeover Directive (ESMA, 12 November 2013, Information on shareholder co-operation and acting in concert under the Takeover Bids Directive, ESMA/2013/1642).

International investors would certainly welcome such a clarification, since it would reduce the uncertainty they face when taking part in an activist campaign – as long as the “white list” remains a sufficiently comprehensive list of typical examples of non-concert situations and is not too restrictive, since the qualification of an action in concert relies on very specific circumstances.

Outlook

In contrast to the wide public attention which the development of shareholder activism has attracted during the past few years, the proposals made by most of the other working groups and the measures taken by the AMF are limited in number and balanced in their substance. As the AMF puts it: “[A]ny additional regulations specific to the Paris marketplace, notably regulations significantly increasing the obligations incumbent on all the market participants, including investors, might have undesirable effects, especially concerning its attractiveness”.

With the emergence of environmental, social, and corporate governance (ESG) activism and the recent enactment of major environmental laws in France, some of the AMF’s next noteworthy regulations will most probably deal with ESG questions and, more specifically, the “Say on Climate” movement.

Initiated in the UK, the “Say on Climate” movement aims at encouraging companies to reduce their carbon footprint by publishing their annual greenhouse gas emissions and having their transition plan submitted to an advisory vote from the shareholders during the annual general meeting.

Following that trend, numerous French listed companies (such as Vinci, Nestlé, Total or Atos) included “Say on Climate” advisory resolutions related to their environmental plans on their 2021 ballots. To date, these resolutions have generally been very successful (eg, Vinci’s climate resolution was adopted by 98% of the votes, Atos’s by 97%).

As of today, the inscription of such resolutions by companies on their agenda remains entirely discretionary. However, the AMF, which has already called for a clarification of the current legal provisions to improve legal certainty for issuers as well as for shareholders who wish to influence climate transition strategies, could decide to take on the matter. Similarly to what happened for the “Say on Pay” movement on the remuneration of executives, climate votes at AGMs could become mandatory to ensure increased efficiency of the system.

This would raise many important questions, such as the legal framework to be implemented to ensure a binding “Say on Climate” mechanism, as well as the consequences of a negative vote by the shareholders or of a failure from the executives to implement the plan (or to achieve the targeted objectives).

In any event, and regardless of the legislator’s actions, ESG issues promise to be a key feature of shareholder activism in the upcoming years.