In review: shareholder rights and responsibilities in France

All questions

Engagement with shareholders

i Shareholder rights and powersEquality of voting rights

The Commercial Code lays down a principle of proportionality of voting rights, according to which voting rights attached to capital or dividend shares must be in proportion to the share of the capital they represent. However, it also provides for the following exceptions:

1. automatic double voting rights for shares held for at least two years unless the articles of association provide otherwise. A large number of companies have opted out in accordance with proxy advisers’ recommendations;
2. the voting rights attached to preference shares can be suspended or cancelled; and
3. limitation of voting rights (e.g., voting limits).

Powers of shareholders to influence the board

Shareholders’ rights regarding corporate governance remain limited, although they have gained an increasing influence in France through the introduction of the mandatory say on pay. Shareholders would exercise their voting rights at shareholders’ meetings on the appointment or dismissal of board directors, on related-party transactions and on rejecting say-on-pay resolutions.

The AMF also recommends issuers to organise a permanent dialogue with their shareholders. Hence, shareholders can enter into contact with the company’s chair or lead director and express their views, including on environmental and climate issues.⁵³ In practice, such dialogues also often occur with proxy advisers.

When they represent a certain percentage of the share capital, shareholders can propose resolutions (or items on the agenda without a vote) to the shareholders’ meeting. Such resolutions can include requesting the appointment of their own candidates. Recently, shareholders have also requested non-binding votes on environmental matters (say on climate).⁵⁴ In addition, the shareholders’ meeting can decide at any time to replace the board. Shareholders may also ask the board questions, which the board must answer at the shareholders’ meeting, or request, in court, the appointment of an expert who will present a report on a specific transaction.

Decisions reserved to shareholders

Decisions reserved to shareholders are those that fall within the ambit of the ordinary or extraordinary general meetings of shareholders. Ordinary general meetings of shareholders may decide, notably, on, inter alia, the approval of the annual accounts, appointment and dismissal of directors or members of the supervisory board, appointment of auditors and approval of related-party transactions. Extraordinary general meetings of shareholders can amend the articles of association of the company and decide, inter alia, to increase or reduce the share capital.

Rights of dissenting shareholders

Dissenting minority shareholders may bring a claim requesting that a decision be voided (if the conditions are met). If they suffered personal prejudice caused by the actions of the executive officers, they can also seek to obtain damages.

Finally, they could argue that majority shareholders, if any, have committed an abuse of majority, which, if successful, could also result in cancellation of a decision and the award of damages.

In French law, shareholders do not benefit from a sell-out right when they oppose a specific decision.

Benefits for long-term shareholders

Besides automatic double voting rights described above, listed companies may grant loyal shareholders increased dividends, also known as loyalty dividends. French law provides that payment of loyalty dividends also requires that the shares have been held for more than two years. In addition, loyalty dividends may not be more than 10 per cent higher than ordinary dividends, and the relevant shares must represent, for a particular shareholder, no more than 0.5 per cent of the company’s capital.

Board decisions subject to shareholder approval

As described above, related-party agreements are subject to shareholder approval, as are all decisions that fall within the scope of the ordinary or extraordinary general meetings of shareholders.

The AMF also recommends that listed companies organise a consultative vote of the shareholders prior to making any disposal of a significant asset. The AMF requests more detailed reporting to demonstrate that the transactions are in accordance with the corporate interest.

ii Shareholder duties and responsibilitiesControlling shareholders’ duties and liability

Pursuant to the AFEP-MEDEF Code, controlling shareholders must take particular care to avoid possible conflicts of interest, ensure transparency of the information provided to the market and equitably take all interests into account. They may be held personally liable if they use their votes in their own interest to the detriment of other shareholders and the company (majority abuse).

Institutional investors’ duties and best practice

The AFEP-MEDEF Code does not specifically address the issue of institutional investors. There is a separate governance code for asset managers containing recommendations on voting at shareholders’ meetings of the companies in which the funds are invested and on reporting on the voting. In addition, the AMF has required that asset management companies report to shareholders and unit holders of collective investment schemes about their voting rights.

The Pacte Law aims to transpose the Shareholder Rights Directive as regards the encouragement of long-term shareholder engagement, and provides that institutional investors and asset managers will have to disclose their engagement policy describing how they integrate shareholder engagement into their investment strategy and disclose key information about the performance of their mandates.

iii Shareholder activismSay on pay

Owing to the implementation of a mandatory and binding say-on-pay regime (see Section II.i), executive officers’ compensation is less of a focus for activist investors. However, it remains a focal point for proxy advisers.

Proxy battles

French law provides rules and binding provisions regarding proxy solicitation and proxy advisers. Shareholders of French listed companies can appoint any person as proxy.

Professional proxy solicitors must disclose their voting policy. In addition, on 18 March 2011, the AMF published a specific recommendation,⁵⁵ which notably urges proxy advisers to issue voting policies in a transparent manner, communicate with listed companies, submit draft reports to the relevant company for review and take measures to avoid conflicts of interest.

In line with European recommendations and trends, the Pacte Law has strengthened regulation of proxy advisers regarding, inter alia, the compliance with their code of conduct and information on the preparation of their work as well as management of conflicts of interest.

However, proxy battles per se are rather rare in France. One example of a shareholders’ battle took place at the general meeting of REIT Unibail-Rodamco-Westfield in 2020.⁵⁶

Long-term shareholder value

The Shareholder Rights Directive aims to encourage long-term shareholder engagement, in particular by facilitating the identification of shareholders. It enables companies to communicate with their shareholders with a view to facilitating the exercise of shareholder rights.

Following the publication in 2019 of various reports on shareholder activism, the AMF published a communication in April 2020 recommending minor targeted legal reforms aimed at improving market efficiency and transparency and increasing the AMF’s means to react in the context of activist campaigns. The authority notably recommended the introduction of further legal thresholds for notification of major holdings, the reinforcement of transparency on short-selling and securities lending, and the introduction of a new power for the AMF to impose a fine in the context of an administrative injunction.⁵⁷

iv Takeover defencesShareholder and voting rights plans and similar measures

A French company may first try to identify its shareholding by providing in its articles of association an obligation to disclose any interests over 0.5 per cent in its share capital or a right to request certain information from the central securities depository (Euroclear France) as to the identity of its shareholders and the size of their shareholdings.

In addition, articles of association may include a provision limiting the number of votes that may be exercised by a single shareholder.⁵⁸

French law also permits equity warrants to be issued during an offer period (bons Breton). The warrants may be issued free of charge to all shareholders of the target prior to closing of the offer and may entitle the holders to subscribe for new shares on preferential terms.

An issuance can be authorised by the shareholders either during the offer to allow the target to defend a hostile bid or in advance, in view of a potential offer. However, in practice, such a resolution is rarely presented to the shareholders.

Board and company practice in takeovers

During a takeover bid, the board of directors may adopt any provisions to thwart a takeover,⁵⁹ without shareholder approval, subject to the powers expressly granted to general meetings and with due regard to the company’s corporate interests. However, companies may amend their articles of association (with the shareholders’ approval) to opt out of the ability to adopt anti-takeover measures without shareholders’ prior approval.

It can also be noted that proxy advisers and institutional investors recommend voting for the implementation of limitations in the articles of association preventing the board from putting defensive measures in place, and against financial authorisations (regarding modification of the share capital) that are not suspended during a takeover period.

White knight defence

There should be no legal objection to a target board seeking a third party (a white knight) to make a competing offer for the target. Theoretically, a target could alternatively issue new shares to a third-party ‘friendly’ shareholder. However, such an issue would generally require specific shareholder approval; therefore, such a tactic would, in practice, be unusual.

When arranging for a white knight defence, the target’s board of directors must comply with the company’s interest and ensure that it does not infringe the principle of free interplay of bids and counterbids and maintains a level playing field.

Staggered boards

The AFEP-MEDEF Code recommends avoiding replacement of the board as a whole to enhance a smooth replacement of directors.⁶⁰ As a result, French companies commonly use staggered boards.

The efficiency of staggered boards as a takeover defence under French law is limited, as the general meeting of the shareholders may dismiss directors at any time and without cause.

v Contact with shareholdersMandatory and best practice reporting to all shareholders

Listed companies have developed various communication practices that differ for individual shareholders or institutional investors.

Financial communication tools (specific sections of the company’s website, financial publicity, publication of a shareholders’ letter, shareholders’ guides and even custodial services) and clubs are generally used to maintain contact with individual shareholders. The AMF has published several recommendations and created briefing sheets covering usage and best practices in different areas, ranging from online and social media strategies to shareholder guides and consultative committees.⁶¹

Telephone or individual meetings, roadshows, conferences organised by brokerage firms, analysts’ and investors’ days, and on-site visits are used to communicate with institutional and financial investors.

Selective meetings and communications: circumstances of meetings with individual shareholders

It is customary for investor relations services to organise meetings or conference calls with large shareholders and proxy advisers prior to shareholders’ meetings. These meetings allow shareholders to be fully informed before voting. The AFEP-MEDEF Code provides that the chair of the board or the lead director, if one has been appointed, will be responsible for the board’s relations with the shareholders, particularly with regard to corporate governance aspects.⁶²

Individual meetings may also be organised regularly between senior executives, investor relations departments, and analysts and investors. For investors, one-on-one meetings provide an opportunity to assess, inter alia, the vision that senior managers have for their company, their analysis of the competitive environment and market trends.

Listed companies generally have quiet periods preceding the release of their annual, half-yearly and quarterly financial information, during which they must refrain from any contact with analysts and investors. More generally, companies shall not disclose inside information during these meetings.

Information received by shareholders before shareholders’ meetings

Shareholders are informed of the date of a meeting 35 days in advance. Companies make certain documents available on their websites at least 21 days before the meeting. These documents must include, inter alia, a summary statement of the company’s situation and its annual financial statements and draft shareholders’ resolutions.