Following a five-year-long saga, the enforcement committee of French market regulator Autorité des Marchés Financiers (AMF) fined Elliott Management (Elliott) €20m for its numerous offenses in connection with the April 2015 takeover of French shipping company Norbert Dentressangle by US-based XPO Logistics.
In what has become a typical playbook for activists, especially in Europe, Elliott acquired stock and derivatives of Norbert Dentressangle, likely with the intention to block an eventual squeeze out, and asserted that the offer price did not reflect the real value of the target.
It was the derivatives that ultimately landed Elliott squarely in the cross-hairs of the AMF, which found that Elliott disclosed in regulatory filings that it had acquired contracts for difference, when Elliott had actually purchased equity swaps and that Elliott’s failure to properly disclose its holdings in Norbert Dentressangle permitted Elliott to hide its strategy of blocking the squeeze-out.
Ultimately, the enforcement committee fined Elliott on the grounds that:
- Elliott inaccurately reported of the nature of its derivative stake in Norbert Dentressangle; and
- Elliott did not comply with its disclosure obligation following the filing of the public tender offer, by belatedly declaring on July 10, 2015, nearly a month after it should have done so, its intention not to tender the securities of Norbert Dentressangle to the public tender offer.
Elliott faced a number of challenges in the investigation and penalty phase. First, the enforcement committee believed Elliott obstructed the AMF’s investigation by providing late and incomplete information. Second, the committee noted that this was not Elliott’s first regulatory issue: it had been sanctioned in 2014, only a year before its XPO/Norbert Dentressangle campaign, for insider dealing and received a penalty of €8m.
While the €20m fine was one of the largest fines in the AMF’s history—only two other fines in its history approached this magnitude—Elliott did not fare too badly here. It sold its stake in Norbert Dentressangle (by that time known as XPO Logistics Europe) to XPO at a 20 percent premium from its initial investment, allowing XPO to finalize the squeeze out and finally acquire 100 percent of legacy Norbert Dentressangle, resulting in a profit of significantly more than the fined amount (even before accounting for leverage).
With such a significant ruling, it is worth taking a moment to consider the current activism landscape in France and lessons from the XPO/Elliott campaign and its resolution for activism in France and cross-border activism more broadly.
In France, activism activity has increased significantly, according to 2019 Lazard report on activism—as much as a 75 percent increase in 2019 compared to 2018, although overall Europeans campaigns were lower in the same period. French companies have been at increasing risk of activism due to:
- increases in the protection for French minority shareholders due to the reinforcement of corporate governance rules; and
- the influx of institutional investors that have consolidated stockholder bases, as has been a trend in the United States for the last decade.
Following adoption of the EU regulation MIFID II, “active” managers have adopted passive management strategies and, as a consequence, unlike in the US where significant passive strategy funds have invested in their own governance resources and make independent assumptions, are likelier to follow proxy advisor recommendations or be swayed by activist campaigns.
In some ways, the AMF has found itself in the middle of a tug-of-war between the activists and corporations familiar to market regulators around the world.
On the one hand, activists expect the AMF to require issuers to have more disclosure transparency, which can facilitate activist theses and campaigns. Absent such disclosure, it can be difficult for investors to understand the dynamics of the corporation and can make it more difficult for activists to form a solid thesis, run alternative models, and sell the alternative view to the market.
On the other hand, issuers are lobbying for the AMF to investigate the conduct and statements of activists, suggesting their behavior (short-selling, etc.) might be market abuse.
For a long time, the AMF did not issue any official position, and made the choice to remain neutral in this struggle between activists and issuers. However, the French Parliament recently addressed this issue and published a report on activism in October 2019 to better understand this phenomenon in France.
The AMF has contributed to the Parliament’s report, providing preliminary input on this subject and issued a press release on April 28, 2020 to clarify its approach. While it did not believe there was a need for major changes to the applicable legal framework, it recommended the following incremental proposals (which were in fact already included in the French Parliament’s report):
- Lower the first legal threshold for disclosure of an investor position to a company, which is currently 5 percent. (The AMF has not yet provided the proposed threshold.)
- Require companies to disclose when they have received notice from an investor of an acquisition which crosses the threshold set forth in company by-laws, which is often lower than the threshold required to be disclosed to the AMF. (Under French law, only the issuer has access to the information in case of crossing of a threshold set forth the by-laws and there is no current obligation to disclose that information. Commonly, by-laws of French companies provide for information at ascending ownership levels started at 0.5 percent.)
- Provide supplemental declarations of short positions with information on debt securities (e.g. bonds, credit default swaps,) to provide clarity to the market on investors’ economic exposure. The AMF will support these proposals at European level.
- Supplement the AMF guide on management of inside information to permit companies to discuss developments on shareholder accumulations. It will also clarify that issuers may provide any information expected by the market in response to public statements, even during “quiet periods” before the publication of annual/half-year/quarterly results, subject to compliance with market abuse regulations. It will also recommend that any shareholder which initiates a public campaign should immediately inform the relevant issuer of any material information that it would address to other shareholders.
- Increase the AMF analysis and reaction capabilities to be able to provide quick and appropriate responses when circumstances require: for example, by establishing a power to issue administrative injunctions and an ability to order any investor, and not just an issuer, to make corrective or additional disclosures in the event of inaccuracies or omissions in its public statements.
The Elliott fine and the AMF proposals highlight one of the significant tools a company has in its defense against an activist—particularly in cross-border campaigns: knowledge of their regulatory landscape.
The global complex regulatory environment is an area where companies have significant home court advantage—they spend significant resources ensuring compliance and understanding their obligations. It is not uncommon for outsiders to struggle to appreciate, understand, and in some cases comply, with the intricate web of regulations in a local jurisdiction.
As part of an effective defense preparation exercise, companies should review what regulatory tools are available—from stock acquisition disclosure requirements or other disclosure or securities requirements, antitrust considerations or regulated industry requirements.
Knowledge of a regulatory hurdle will not necessarily stop an activist campaign, but it can be used to undercut a portion (or all of) an activist thesis, as a lever in settlement negotiations, or bolster management’s and the board’s credibility with stockholders and proxy advisory firms in candid engagement during a campaign.
With both domestic and foreign activist-focused investors and other investors using the activist toolkit continuing to expand their reach around the world, it is a welcome sight to see market regulators such as the AMF taking their roles seriously in monitoring these kinds of activities and punishing wrongdoing.
However, post hoc fines are not a substitute for careful planning and preparation on the part of the companies, including understanding activists and their playbooks and leveraging important defensive measures, such as regulations and regulators that protect companies from these threats.