Response to US Critics of the French Securities Regulator Position on Activism

Alain Pietrancosta is Professor of Law at the Sorbonne Law School at the University of Paris and Alexis Marraud des Grottes is a partner at the Paris office of Orrick Herrington & Sutcliffe LLP. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here) and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

The measures proposed on April 28, 2020, by the Autorité des marchés financiers (French Financial Market Authority) [1] in response to an environment of increasing shareholder activism have been generally welcomed by the financial markets of Paris. They have been judged by most operators to be appropriate and balanced, although they supplement a legal system that already contains suitable provisions for managing activism and that the far-reaching impact of some of them may not yet have been fully assessed. It is, moreover, doubtful that the activist community fully shares this sentiment.

These measures are the culmination of in-depth analysis conducted over several months involving all relevant parties. The movement was instigated by the Minister of the Economy and Finance, resulting from concerns relating to mounting activism in France. A series of reports followed, one issued by members of the parliament, and others by institutions representing issuers, associations of well-informed professionals and even think tanks more open to the activist cause. The Paris markets have therefore collectively seized on the matter and we can congratulate them on their initiative and their efforts to analyse and understand this international movement, in order to draw conclusions regarding the expediency of regulatory intervention.

On conclusion of its various analyses, the AMF has expressed a rather consensual and self-proclaimed measured position. As it has stated, “it is not an issue of preventing activism but of defining its limits and having the means for controlling excess.” Clearly annoyed, certain loud anti-activist voices quickly made themselves heard across the Atlantic in criticism of the balanced approach adopted by the French regulator, inviting it to reconsider its conclusions by taking into account certain economic studies suggesting that activism does not create value but simply transfers value to short-term speculators. [2]

However, we must avoid falling into the trap of rushing to judge these conclusions. Examined in detail, the proposed system incorporates measures demanded for many years in the country of those who have put pen to paper, none of which have yet come to pass. This applies to the proposals of the AMF, designed: to improve disclosure of increased stakes and shareholder identity, by reducing the first legal declaration threshold to 3% of share capital or voting rights; to provide the market with enhanced information on the economic exposure of investors by supplementing declarations of short positions with information about the debt instruments also being held (such as bonds and credit default swaps); to promote open and fair dialogue between listed companies and their shareholders; to specify that issuers may respond publicly to activist campaigns, including during “quiet periods”; to require every shareholder initiating a public campaign to communicate, without delay to the issuer concerned, the important information they would forward to other shareholders; and to provide the AMF with the power to issue administrative injunctions and the ability to force investors to issue amending or supplementary publications in the event of previous inaccuracy or omission in their public statements. This set of recommendations, some of which would require legislative amendments, sometimes at EU level, once again falls within a French legal framework that is already less prone to shareholder activism than US legislation. This notably mirrors existing regulations on the crossing of thresholds, on market disclosure when financial transactions are being prepared, on investment recommendations, on concerted action or on the prohibition of insider dealing and market manipulation.

Certain of the proposals put forward by the AMF even go beyond a US or even global equivalent, to the point of threatening the philosophical constructs on which the securities market is based. One such measure recommended by the AMF merits particular attention in this regard due to its consequences, namely disclosure to issuers by shareholders when statutory thresholds are crossed. French company law allows a listed company to include within its articles of association an additional disclosure obligation regarding holdings of share capital or voting rights below 5%, which may go as low as 0.5% of capital and/or voting rights. Up to now, such disclosure of the crossing of statutory thresholds notified to companies has not been subject to mandatory publication.

Such publication is supposedly justified by the desire for a better understanding of the shareholding structure, and in the interests of market transparency and equality of treatment between issuers and investors. In practice, however, it is a development that runs the risk of severely impacting the business model of activists. It will necessarily undermine the benefits activists may hope to realise and therefore also the investment they are prepared to make as a result of their research and analytical work. Activists are frequently investors of renown. Their presence alone often produces copycat investments. Such a measure would therefore constitute a restriction on the value the investor may generate from the prior analysis conducted on the companies in question. Previously, investors have been able to remunerate their analysis by acquiring up to 4.99% of the capital without disclosure. They now risk only being able to do so up to 0.5% of the capital. A certain proportion of activist investments would therefore be markedly impacted. It is also feared that such earlier publication will contradict the proclaimed desire to establish conditions that favour private dialogue between issuers and shareholders. [3] It should also be noted that such a negative impact would not be limited to activist funds, perhaps due to the inability to define this investor category precisely. It would therefore also affect other large shareholders of French companies, whether investment professionals, family offices or prominent investors. It would severely undermine the added value of all investors of renown, whose presence alone is able to increase the share price.

However, it is uncertain whether consideration given to the collateral effects of this measure, undoubtedly based on the desire to build further on the highly French notion of equality, will be enough to quash the criticism aimed at the AMF. This is because the criticism is based on the very principle of activism, of which the author was clearly expecting official and even regulatory condemnation. This is not the path France has decided to take. In truth, it would be an adventurous and somewhat lonely journey. This would require prior substantiation of the toxicity of active shareholder engagement, at a time when it is rather hoped to promote it in Europe, and that agreement is reached about the very concept of shareholder activism. Yet there exists no consensus in these two areas on which a regulator could base any action. Numerous academic works demonstrate the contribution of such shareholders in terms of investor protection, in support of which they contribute in many circumstances, and not only in the short term, particularly in terms of the valuation of securities in and outside the context of takeovers. We must also consider the fact that due to their ultra-minority positions, long-term activists most often require the support of collectively dominant shareholders, frequently institutional shareholders, in order to press home their views to the management, which should better contextualise the notion of a radical divergence of interests with the remaining body of shareholders. In this context, the regulator can only be encouraged to let market dynamics play out and concentrate on preventing any resultant excesses which, after all, corresponds to the essence of a securities regulator’s mission.

Endnotes

2https://corpgov.law.harvard.edu/2020/05/07/reconsidering-activism-in-france/ Reconsidering Activism in France, Posted by Martin Lipton and Hannah Clark, Wachtell, Lipton, Rosen & Katz, May 7, 2020 : “Surprisingly, the AMF’s report then suggested that there is relative consensus on the usefulness of shareholder activism in improving corporate governance and defending the interests of minority shareholders, determining that the dangers of shareholder activism are only in “excessive” activist behavior. The report pointed to several academic studies highlighting the positive effects of activist behavior.In taking such view, the AMF has clearly overlooked recent academic studies which have taken the contrary view with regard to shareholder activism, including DesJardine and Durand’s article in the Strategic Management Journal; Allaire and Dauphin’s article in the International Journal of Disclosure and Governance; Bower and Paine’s article in the Harvard Business Review and Colin Mayer’s book, Prosperity: Better Business Makes the Greater Good. These articles and Professor Mayer’s book make up only a portion of the large body of empirical and experiential evidence that pressure from activists does not create shareholder value, but simply shifts value from shareholders and other stakeholders to short-term speculators.(go back)

3https://www.agefi.fr/financements-marches/actualites/hebdo/20200528/activisme-l-amf-fourbit-armes-299541“ L’AGEFI – ACTIVISME – L’AMF fourbit ses armes, Florent Le Quintrec, May 20, 2020: “A number of measures are causing controversy. Although the proposal to lower the legal disclosure threshold from 5% to 3% is causing few waves among professionals, mainly because it constitutes alignment with other European countries, the recommendation to publish the by-laws crossing of thresholds in order to enhance market transparency, hitherto only notified to issuers, is a matter attracting heightened caution. “This may not necessarily work to companies’ advantage”, stresses Rich Thomas. “Dialogue can be much more constructive before the matter is made public. Public campaigns harm companies”. For its part, the AMF judges that such a measure will not harm issuers.(go back)

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