French proposals to curb shareholder activism spark debate

The French government has been criticised for publishing a report suggesting a crackdown on shareholder activism.

The report, published at the end of last year, comes as shareholders keenly anticipate how different EU jurisdictions will negotiate capital market issues in the post-Brexit era.

Following several high-profile shareholder activist
campaigns, it appears France now wants to curtail shareholder rights, with
Finance Minister Bruno Le Maire labelling shareholder activism as potentially “destabilising”
to companies.

Shareholder activism has grown in France over the past two decades following major changes to the legal environment. This has allowed minority shareholders more rights to challenge and influence companies.

Well-known activist funds include Paris-based CIAM. The fund has logged motions against several companies in recent years including French reinsurer SCOR. It also wrote to the board of French automaker Renault last year to "strongly oppose" its planned $35bn merger with Fiat Chrysler. The proposed merger eventually collapsed after an intervention from the French government.

The latest report, by the Finance Commission of the French National Assembly, states: “It is healthy for a shareholder to be active in the life of a company. Likewise, an activist can be useful to the business.

“The bottom line is not to differentiate between active
shareholders and activists, but rather to identify excessive forms of activist behaviour.”

The paper contains numerous recommendations that some believe serve to dampen shareholder rights in the country.

These include stepping up disclosure requirements, when activist investors take big positions in French companies. The report proposes that the threshold at which a shareholder is required to disclose a stake should be lowered from the current five per cent to three per cent.

It also plans to increase the powers of the French market regulator, the Autorité des marchés financiers (AMF), to enable it to respond more swiftly to market abuses.

The report distinguishes between “long” activism, where funds acquire stakes in companies whose value they wish to see increase in the short or long-term; and short sellers.

The government is also planning tougher sanctions on the
latter. This includes requiring the disclosure of bets against a company cover
all securities, including short positions through the derivatives and debt
market, rather than just shares.

Investors who fail to make these disclosures could face fines and the loss of voting rights, according to the report.

US-based Muddy Waters Capital, which has challenged big
companies including French retailer Groupe Casino over their practices and
performance, berated the report for “profoundly” missing the mark when it comes
to regulating short-selling and the activists behind these investments.

“Activist short sellers are the only ones that have both the
incentives and the means to carry out the analysis necessary to identify
practices that, although legal, ultimately amount to cheating the market,” the
company said in its response to the paper.

Activist short sellers, according to the investment firm, significantly contribute to the quality of information available in the marketplace.

“Taking Casino as an example, in our view our public
reporting in December 2015 forced the company to be far more transparent as it
allowed investors to hold the management accountable and to ask questions,” the
company stated.

Europe’s, and in particular, France’s, obsession for more regulation of short selling is, in the words of Muddy Waters, incomprehensible.

The firm pointed out that management of failed companies
often point to short sellers as the cause of falling share prices when such
falls are, above all, due to the loss of confidence of long investors in the
company and their consequent sale of their holdings.

“We consider, in consequence, that underperforming
management and boards of directors, seeking scapegoats to justify their difficulties,
have succeeded in misleading European politicians and regulators.” 

The exclusion of corporate governance from the report's scope has also raised concerns.

Éric Woerth, Member of the French National Assembly,
explicitly affirmed that the report was about activism, and not corporate
governance, when the Assembly launched the paper.

Dissociating these two issues, however, makes little sense,
Muddy Waters cautioned, adding that corporate governance issues are precisely
among the principle battle horses of activists, whether long or short.

“The real issues, such as the excessive power of managers
and of the controlling shareholders who appoint them, the fact that in practice
they are never held accountable to external investors, or the risks of conflicts
of interest that may affect different stakeholders in a company, are completely
ignored.”

With its regulatory peers in the US facing a backlash over
similar plans to restrict shareholder activism, it remains to be seen how
France and other EU countries proceed in their handling of investors and their
crucial right to a voice.