October 19, 2010
On October 11, 2010, the French Parliament adopted the French Banking and Financial Regulation Statute (loi de regulation bancaire et financière).
The 100 page long Statute contains provisions significantly amending existing laws and regulations regarding, inter alia, (i) the activities and liabilities of credit rating agencies, (ii) short selling and naked short sales, (iii) temporary holding of shares before shareholders’ meetings, and (iv) mandatory takeovers.
Credit Rating Agencies
- In furtherance of EC Regulation no. 1060/2009 regarding credit rating agencies (CRA), the Statute aims at better regulating CRA activity. A specific liability regime is created, enabling third parties (and not only the issuer being rated) to claim damages from CRAs.
- In summary:
- the law applicable and the competent jurisdiction to determine potential damages resulting from a CRA’s fault or negligence will be that of the country where the damage is suffered regardless of the CRA’s seat or registered office
- contractual provisions agreed to in advance of a dispute and providing for the exclusive competence of a jurisdiction situated in a State other than an EU member State in a situation where French courts would otherwise have been competent, are null and void
- subject to the French courts’ case law, clauses excluding a CRA’s liability provided for in agreements governed by foreign laws should not be nullified if the contractual relationship presents no links with France or a French person
- These provisions should not result in a liability regime for CRA departing from general French liability law. Under the new Statute, however, CRAs’ fault could be easier to demonstrate in the sense that it will be sufficient to evidence a failure to implement the EC regulation’s clear requirements. In addition, the new provisions enable third parties, as opposed to the sole issuer, to claim damages.
- In September 2008, the French financial markets’ watchdog (Autorité des marchés financiers or AMF) released temporary rules regarding the disclosure of short sales where such sales involve 0.25% or more of the share capital of certain specific issuers.
- The AMF is now empowered to adopt permanent and general (i.e., not limited to certain issuers) disclosure rules regarding not only short selling but more generally any kind of short positions (including situations where the short position is achieved by means of puts or structured products).
Naked Short Sales ("locate rule") / Settlement and Delivery Dates
- Under current French rules, the seller must deliver the securities three trading days after the trade; French rules, however, do not compel the seller to hold the securities at the time of the trade. In other words, naked short sales may be implemented between the trade date and the settlement date (except with respect to financial issuers listed in the September 2008 AMF rules mentioned above).
- To avoid naked short sales, a new regime is enacted inspired by US securities rules and the EU Commission’s draft rules regarding short sales and CDS.
An investor is now prohibited from issuing a sell order regarding any listed financial instrument (which includes securities and options, forwards, swaps, etc.), except if it either (i) holds on its account the financial instruments that it is selling or (ii) has taken vis-à-vis third parties measures necessary for it to have reasonable assurances that it will be able to deliver such financial instruments on the settlement date.
- The settlement date will be reduced from three to two trading days once an equivalent harmonization regime at the EU level is adopted.
Temporary Holdings Before Shareholders’ Meetings
- In order to limit perceived adverse effects of shareholder activism, new disclosure rules regarding the temporary holding of voting shares before shareholders’ assembly meetings are envisaged.
- Any investor (with certain exceptions) which, pursuant to a temporary sale agreement or any other agreement enabling or compelling it to deliver the shares back to the seller, holds shares giving it right to more than 0.5% (and not 2% as an ambiguity in the Statute could lead to think) of the voting rights of a French issuer which shares are listed in France or in another EU or EEA member State must disclose to the issuer and the AMF the number of securities temporarily held. The issuer will release such information to the market.
"Temporary sale agreement" would cover, as a matter of example, loans or repurchase options. "Any other agreement enabling or compelling the investor to deliver back to the seller the same number of shares" would cover, as matter of example, a purchase with a call or a put option or equity swaps. CFD (contracts for difference) settled in cash and cash-settled equity swaps should not be concerned.
The 0.5% threshold should be determined taking into account the voting shares that are temporarily held only and not the aggregate number of shares owned by the investor.
Disclosure must occur at the latest on the third business day at 0:00 am (Paris time) preceding the shareholders assembly meeting, provided that on such date the agreement pursuant to which the shares are temporarily held is in force and effect. In other words, there is no permanent disclosure obligation of temporary holdings but only a requirement to disclose them in anticipation of shareholders’ assembly meetings.
Disclosure must include the number of shares temporarily held, the identity of the seller, the date and term of the agreement as well as any voting arrangement.
- Failing such disclosure, shares temporarily held are automatically deprived from their voting rights at the concerned shareholders’ assembly meeting and any other shareholders’ assembly meeting until the shares are delivered back or sold. In case the investor nonetheless votes such shares, the decisions taken by the shareholders’ assembly meeting may be declared void in Court.
In addition, Courts may, at the request of the issuer, a shareholder or the AMF, deprive the defaulting shareholder from all or part of its voting rights (and not only regarding the shares temporarily held) for a period of up to 5 years.
- The threshold for mandatory takeovers is decreased from 1/3rd to 30% of the share capital or voting rights of a French issuer which shares are listed in France or in another EU or EEA member State. Other mandatory takeover thresholds (crossing the 50% threshold or acquiring in excess of 2% per year while holding between 30% and 50%) remain unchanged.
The threshold is now being determined pursuant to the rules that apply in the context of the disclosure of significant holdings, in accordance with Article L. 233-7 and L. 233-9 of the French Commercial Code.
The new 30% threshold (as well as the abandonment of the so-called garantie de cours described below) will enter in effect 3 months after publication of the Statute. In addition, the 1/3rd threshold continues to apply to shareholders holding as of January 1, 2010 between 30% and 1/3rd of the shares or voting rights as long as they do not cross the 1/3rd threshold and subject to further conditions to be provided in the AMF regulations. Moreover, exemption provisions may be provided in the new AMF regulations with respect to certain shares or voting rights already issued which the shareholder is entitled to acquire, immediately or at maturity, on its own initiative pursuant to an agreement or a financial instrument.
- The so-called garantie de cours (standing market offer) is abandoned. This type of offer applied in cases where an investor acquired or agreed to acquire a block of securities that, with the securities or voting rights that the investor already held, conferred a majority of an issuer’s equity or voting rights. In such case, the investor had to launch an offer for all of the issuer’s securities at a price not lower than the price at which the block was purchased.
In practice, however, the garantie de cours was rarely applied by the AMF which preferred to apply simplified takeover rules. As a consequence, with respect to regulated markets, situations were the garantie de cours previously applied are now subject to the simplified takeover regime (this will mainly affect the price of the offer).
- The definition of "acting in concert" (used to assess holdings held by several investors but requiring to be treated as a whole) is amended to cover situations where investors have entered into an agreement with a view to take control of an issuer.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following in the firm’s Paris office:
Benoît Fleury (+33 (0)1 56 43 13 00, [email protected])
Jean-Philippe Robé (+33 (0)1 56 43 13 00, [email protected])
Fabiola Seibt (+33 (0)1 56 43 13 00, [email protected])
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