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New French law offers takeover targets more defences against hostile bids

Businesses attempting to take over companies in France should adopt a friendly rather than hostile approach following the introduction of new laws which give French companies more powers to defend themselves against takeovers, a legal expert has said.28 May 2014

The new measures align France's mergers and acquisitions culture more closely with that of the US, said Christophe Clerc of Pinsent Masons, the firm behind Out-Law.com, who was closely involved in discussions with the French government relating to the drafting of the new legislation.

"The French system is going in the direction of the US system in which companies are more able to defend themselves against takeovers than companies in some countries are able to, for example, those in the UK," said Clerc, who is based in Paris.

"Hostile takeovers are more likely to succeed in an environment where the board can not defend itself," Clerc said. "With these changes to the law in France, companies are more able to defend themselves, so a takeover will be more likely to succeed if the bidder approaches the board and takes a friendly approach."

Greater defences for companies which are the target of takeovers are among a range of new measures which have recently come into effect in France under the Loi visant à reconquérir l’économie réelle, which is also known as the Florange law in France. The law focuses on measures relating to the real economy, which is that part of the economy concerned with producing goods and services, as opposed, for example, to that area of the economy which focuses on buying and selling on the financial markets.

Under the Florange law, those bidding to take over a company in France are also now legally obliged to meet with the workers' committee of the target company and answer questions about what they plan to do if they succeed in taking over. Bidders who refuse to divulge their plans, or are later to be found to have withheld their genuine intentions, could in some cases face prosecution for infringing the law.

With the adoption of the Florange law, companies are now able to employ a range of defensive measures against takeover bids. Pre-Florange, company boards required the permission of shareholders to take defensive action, but now they can go ahead with defensive measures without shareholder permission, provided that their defensive action is within their rights and provided that it is in the interests of the company.

Clerc said that among a range of defence strategies now open to target companies, the "most powerful" is the possibility of introducing a "poison pill". The poison pill defence originated in the US in the 1980s and is still commonly used by US companies fighting takeovers.

A poison pill alters the company's stock plan in a way which is designed to make the target company unattractive to the bidder. This is a measure for which the board would require the permission of shareholders.

In order to implement a poison pill, the company would offer discounted shares to existing shareholders in order to dilute the bidder's stake in the company. Clerc said that this is "equivalent to a unilateral increase in the bid price that would be decided by the target company."

"In the US a poison pill has never been beaten," said Clerc. "This is very much an example of the French system moving towards the US system."

Clerc said that the Florange law also opens up a number of other defences.

This includes the possibility of creating alliances with other companies including suppliers and clients which would be in the interests of the target company, but might not be in the interests of the bidder should a purchase take place. Such a move would be designed to make the target company less attractive to the bidder.

Clerc said that another defensive option a target company might employ would be to merge with another company.

Clerc said: "I think we will see a number of other means employed by companies trying to defend against takeovers. Now that companies have more ways of defending themselves, the advice to companies trying to take over another company would be to prepare well and make a friendly approach."

Clerc's comments follow a recent decree by the French government which extended its existing powers and will allow it to veto foreign takeover attempts to include additional "strategic" sectors. The government can now veto foreign takeovers of companies in the energy, transport, telecoms, water and health sectors, as well as foreign acquisitions of companies in the technology, defence and betting sectors.

Clerc said: "I think that all these reforms are a move towards a more long-term capitalism approach, with the thinking that short-term capitalism can lead to problems. I think it is aiming to develop a better balance of power between bidders and targets."

"If you look at the big picture, it may be seen as being in the interests of the economy. Statistics show that hostile takeovers are considered by economists of all types to be, more often than not, failures. In order to create value, it is generally better to have a friendly takeover," Clerc said.

The new law is known as the 'Florange law' in reference to the ArcelorMittal steel plant in the French town of Florange. The plant became a symbol of problems in the French industrial sector after the Indian firm Mittal took over Arcelor in 2006 and later announced that it was to close down two blast furnaces in the north-eastern town. The French government threatened to nationalise the plant but later secured promises from ArcelorMittal to invest and avoid forced lay-offs among 630 workers at the site, according to Reuters.