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Company Law

Analysis - guidance - compliance

12 AUG 2013

Shareholder activism in France: a new revolt ?


By Isabelle Landreau

When a national icon and our most internationally recognised film star leaves France in search of fiscal salvation, we know we are at the point where real questions need to be asked : do we have enough rights as shareholders to defend our position ? Can minority shareholders be an effective counterpower to investors and majority shareholders?

Recent events in France have raised fresh questions where major companies have suffered from minority shareholder disagreements during general meetings (Danone) or minority shareholders in the same family put the family shares at risk (Hermès, Taittinger cases).

Shareholder activism has taken a new path since ordinance N° 2010-1511 on December 2010, transposing EU directive 2007/36EC dated 11 July 2007. Shareholders gained new rights concerning financial activism (I): the right to written questions (article L. 225-105 of the French commercial code) and the right to be represented by proxy (article L. 225-106 of the French Commercial Code). But with the crisis, we can also see in this Shareholder spring a non-financial activism (II), which, thanks to the Internet and social networks, has become a significant counterpower (II).

After two years of implementation, we can see that minority shareholders availed of these new rights to raise their voices to increase control and transparency within corporations. It is still being debated in France whether this trend in fact represents progress or not, but surely we cannot go back now that associations have used this new power. We are seeing a kind of financial class action or financial collective action emerge in France through legal action of either a single attorney or of an ad hoc association.

There is certainly cause for fear that shareholder activism may be a danger when shareholders have short term objectives. However, analysis of the jurisprudence shows that the companies which are doing best, are those who respect shareholder activism and ultimately implement sustainability with respect to country impact, economic consequences, even on human resources and achieve better corporate governance.

Shareholder activism is defined as shareholders, often minority shareholders, working to influence the running of the companies, primarily through the shareholder voting. The aim is designed to deter the bad governance we saw in the past resulting in a loss of profitability. Accordingly, companies are pushed to amend their governance to assess their social impact.

I Financial activism in France: the progress of the ordinance N° 2010-1511

i)        Right to written questions

Minority shareholders representing fewer than 5% of a company's capital, can now request that their issues be raised during general meetings, and can ask that specific points be discussed with or without their being linked to the voting project (article L. 225-105 of the commercial code). 

The French Supreme court condemned a company where a minority shareholder had his mandate revoked having been found to be defective at the general meeting. Whilst a manager can have his mandate revoked at any time without this point being fixed at the resolution project, the Supreme Court found, according to article L. 225-105, that the minority Shareholder did not have time to defend himself against this revocation ad nutum.

Cass., Commercial Court, July 10th, 2012, N° 11-23280

Accordingly, the Supreme court decided that where an increase of capital decided at an extraordinary general meeting needs to suppress the preferential right to subscribe shares, this suppression shall be fixed in the resolution project according to article L. 225-105 of the commercial code.

Cass., commercial Court, September 25, 2012, N° 11-17256.

ii)      Right to be represented by proxy

Article L. 225-106 of the French commercial code allows a shareholder to be represented by any person who signs a proxy for that purpose, as opposed to before, when a shareholder could only have been represented by a spouse or another shareholder.

Even though it is progress, in practice it is difficult to organise an electronic vote and companies and shareholders follow few technical and legal prerequisites.

A formal agreement is necessary prior to replacing the normal postal notification with an electronic one. It should be included in the memorandum and articles of association of the company.

The company needs to have a secured mail exchange system with a website dedicated to the vote. Then, you need to identify precisely the shareholder, the number and type of shares he has. Depending on the type of shares, you may need to check with the bank or the institution managing the shares.

The company will need to encrypt the mail, to identify the messages, to save the data, and to trace the mail.

The mail shall be sent to the shareholder 15 days before the general meeting and 6 days before the special meeting. The use of fax is not accepted regarding the question of proof.

The electronic proxy must keep the same legal information as the paper proxy.

Instructions on the proxy shall be received at the latest the same day of the general meting before 3pm French time. As soon as they arrive, these instructions are deemed to be irrevocable.

To take part in the debate and/or vote by video conference, the company must strictly organise the security and the control the identity of the shareholders when live. The vote can take place live or beforehand whereby the shareholder is only a witness to the video conference. If the vote takes place live, the company must secure all the technical conditions are in order to ensure that the participation of the shareholders is the same as if they were present: that the network is fine, that there is no outage of electricity, the transmission must be reliable and immediate. The shareholders are deemed to be present for the quorum and the majority calculation of the vote. The minutes of the vote shall reflect any technical difficulty if any occurred. The presence sheet of the meeting counts the shareholders who voted by distance either by paper proxy or by electronic proxy.

Some decisions are excluded from the process of electronic vote:

  • Designation and revocation or modification of the retribution of the CEO
  • Settlement of annual accounts and managing report
  • Consolidated managing report

In practice, the companies usually install special software for the shareholder on the Internet to trace what he does, to save his data, to trace movements on the account, and to seal the account to register its logs, so as to constitute proof.

For example, Michelin has set up a special web-page for its shareholders: http://www.michelin.com/corporate/finance/shareholder-section/your-personnal-page to have access to one's shares and information on meetings. It is secured and developed with the help of Société Générale bank.

Michelin has 220,000 shareholders in the world, 70,000 are also employees and all the shares are personal. Therefore to organise a meeting, the notification shall be sent to all of the shareholders, which is a major stake. For this company, as other worldwide companies, it is not only a green attitude to implement e-notification to meetings in order to save tons of paper, but it is also a way to save up to hundreds of thousands euro as the cost of paper notification is between 5 to 10 euros per notification.

Michelin has experienced a good rate of participation with e-notification -  20% of the French shareholders - but when it comes to vote, there is a drop to 2000 votes. The main impediment is that the shareholder is not used to the Internet generally and more specifically to the process of going to the dedicated shareholders site and filling in the necessary login credentials and security steps. For many it seems more complicated than signing a letter and returning it in the stamped address envelope provided. Michelin set up a special platform inside the shareholders' space for e-notifications. Nevertheless it is a change of mentality and it takes time, states M. Jacques ENGASSER [1], head of the relations with the individual shareholders at Michelin company. The same experience is shared by other French multinational companies.

The rate of participation in electronic voting is much less. None of the French companies organise a live vote through video-conferencing over the internet. Most companies organise the vote over the internet ahead of the general meeting as it takes time to check the identity of the shareholder and the type of share and his voting rights. There is therefore no direct vote by Internet on general meetings and investors are not in favour of such a move.

We are far from the worries expressed by various shareholder associations such as ADAM or from the critics by PROXINVEST as the long as the voting rate is small among the shareholders who sign up for e-notification. There is no danger of dilution of the voting instructions of the principal by the proxy; no danger of vote diversion.

There is however a new form of activism among shareholders through social networks which are developing in parallel and may have more success than any litigation or negotiation with the companies or government concerned.

II   Non-financial activism in France: a new revolt?

We can contemplate new forms of shareholder activism: what I name net-activism: where shareholders of the same company join forces to protest on the Internet, to stage a sit-in the premises of the company, to take collective action.

i) Net activism

Facing the current economic downturn and financial measures which deter any entrepreneurial activity in France, some entrepreneurs have joined forces into a network named: the pigeons - http://defensepigeons.org. It is a play on words as a pigeon is not only a bird which moves in group but it is also a way to describe a person who is usually abused, mislead or deceived.

This group aims at changing the existing legal and regulatory regime to favour economic growth and employment. The founders of this group are entrepreneurs and the speaker is the founder of hedge fund ISAI. Their aim is clear and simple: to protest against the future financial bill 2013 which plans to install a new tax on the added value realised by a company at sale (tax: 60.5% on the added value).

Their complaints were rapidly a success and thousands of entrepreneurs  (Medef and Afep) and the French public joined them on Facebook and other social networks. President Hollande did not respond to their manifesto and some ministries tried to stigmatise them as a right wing movement or a millionaires club.

They successfully provoked a change of policy on this point from the government on 19th October 2012 in relation the new financial bill. The added value actually would be taxed at 34.5% under certain conditions. One needs to be the CEO or the executive manager, having the shares for 5 years before the assignment or holding them through your spouse, children, parents, brothers and sisters and holding at least 10% of the capital or voting rights for at least 2 consecutive years out of the past 10 years and holding at least 2% of the capital at the time of the assignment.  Also if the shareholder reinvests 50% of the added value, the investment would be tax free.

In October 2012, this new activism declined in favour of more direct ways of protest as lobbying and traditional negotiations. On 10th January 2013, they started their campaign against this tax again with their speaker, Mr Jean-David Chamboredon underlined that start-up investment had decrease by 50% in France particularly through business angels, or informal private investors.

Nevertheless, their movement lead to another movement called the Sparrows, a young entrepreneurs movement which claims that there is an urgent need of investment and financing these fledgling companies from the very beginning.

 ii) Sit-ins on company premises

Generally, the sit-in is a last resort before more serious conflicts arise. It is mostly done by employees and conducted by trade-unions. This was the case for example in ST-Ericsson in Caen in February 2010, where eight employees elected at the work council refused to leave their offices despite the bailiff's action. They sought a better restructuring plan for the company as 114 employees were laid off while they claimed, one billion euro had been distributed to shareholders in 2009. The group lost 932 million euros in the last semester of 2012, and reduced the number of employees by 30% in April 2012.

The impact of the sit-in here was not effective in bringing about a compromise between employees and shareholders' interest.

But nowadays, we can see that employees who are also shareholders don't hesitate to occupy their place of work, day and night to make pressure on the board of directors and majority shareholders. The main criticism is the same: the management announce job cuts while simultaneously handing out bonuses. In the company Le Monde for example, the journalists are also shareholders of up to 22% of the capital. For the second time in the history of the newspaper since 1944, journalists went on strike in 1976 and in 2008, where 130 of them were to be laid off.  They also occupied the building and stopped publishing articles. As the journalists are both employees and shareholders this activism was effective even if it is debatable if such conduct is good thing overall or not. In  June 2011, one hundred employees attempted to occupy the premises of the Free company owned by Xavier Niel, an extremely wealthy French businessman, in order to call on him to invest between 20 to 30 million euros in the newspaper. They were not immediately successful however the main shareholders today are now Xavier Niel, Mathieu Pigasse and Pierre Bergé.

These events stress two things: first of all only action conducted by hundreds of persons can be successful and secondly, being an employee and an active shareholder can lead to better decisions for the sake of the group of individual shareholders.

iii) Collective actions

2013 will be the year of the adoption of the French class action, certainly in the case of consumers.

Nevertheless, the future system will probably be an opt-in system. Our Minister of Justice, Mrs. Taubira and our Minister of Finance, Mr. Moscovici, are in favour of such an action but limited to material loss. The President of the National Bar Association (le Conseil National des Barreaux CNB in French, Mr. Charrière-Bournazel) considers the introduction of a "French" class action a necessity as the number of actions involving massive damages increase. It is unclear yet which sectors will be impacted but banking and financial activities should not be included. The procedure shall be conducted from start to finish by a judge and certain courts will have exclusive competence.

Though shareholder actions are still possible and some are in process, the actual means is by way of joint representation action through an association. The most famous financial class action for French individual shareholders is the one against Vivendi. It started in 2002 in the USA and was litigated before the New-York Federal Court. The question was whether an American judge could join French (and Dutch and English) shareholders to the American litigation. In March 2007, the judge recognised the right of the European shareholders to join the American litigation by way of an incredibly simple opt-in system by filling out the form on the website: www.vivendiclassaction.com. On 29th January 2010, the judged found Vivendi liable and ordered them to pay 9 billion dollars in damages to the shareholders.

In France, an attorney has the power to represent more than one plaintiff if each one has the same ground ("la cause" in French) for litigation (article 4 of the code of procedure and article 1131 and follows of the Civil code), litigation restricted to consumers.

This was recently the case in an interesting example concerning litigation in the wine industry. An attorney from Bordeaux represented several consumers who used the same website to buy wine on order. The company failed to deliver the wine although it was available on other wine websites such as Wineandco or Vin Malin. The attorney successful sued the company on behalf of the multiple plaintiffs. Many other plaintiffs will join the litigation as an association has been created www.abus1855.org for the remaining hundred of plaintiffs.

Therefore, even if the "French" class action is limited to consumers and to a limited number of sectors, the attorney has always the choice to represent more than one plaintiff  only and only if they share the same cause of action. The judge will automatically analyse this point. This applies to Internet consumers and to tenants where increasing real estate prices cause landlords to increase rents. It can also apply in the case of shareholders holding shares against banks for default of advice and negligence and against companies for insider trading and misrepresentation. But in France, there are very few trials on this last topic as it is not yet the mentality here. The economic crisis may change this.

On July 3rd, 2013, our deputes adopted this new bill initiated by Benoit Hamon (adjunct Minister to the Economy and Solidarity) by 326 votes against 182. It is planned to be discussed in September by the Senate. This project limits the collective action to consumers associations (only 16 associations have been accepted) and to consumer topics. The process is an opt in system decided by the judge, where the judge will determine the group and the type of consumers. Attorneys are completely excluded.... The process will be long and poorly attractive for companies. As it has been written, it will increase the legal insecurity. Let's wish that the Upper House will have enough time and power to amend this mediatised project.

To conclude

It will take years for individual shareholders to get used to the e-notification of meetings and to vote ahead of the meetings over the internet. It is a considerable step forward promising greener credentials as well as cost-savings for corporations.

Live e-voting via video-conferencing is not and will not be effective in France as it can be a security risk to the companies. Considering the frequent cyber-attacks on banks (80 millions of euros have been diverted in 2012 in Europe, USA and south America), we can imagine the worst scenario where shareholders' accounts can be usurped through hackers on a large scale in order to affect the value of company share. It is already the case in relation to online reputations where a single post on a social network can set off hundreds even thousands of bad comments regarding a company and then decrease the value of the share on the stock exchange.

The future lies in better governance through cooperation and transparency. As our famous economist Daniel COHEN says: "everyone needs to understand a system that we cannot change alone, but everyone needs to be aware of it in order to establish new rules of game, where a balance between competition and cooperation, competition and reciprocity could be defined".

[1] Special thanks to Mr. ENGASSER, Head of relations with individual shareholders at Michelin corporation, who quickly and favourably responded to my questions with a very open mind.

Isabelle Landreau is an Attorney at the Paris Bar, PhD in Japanese Trademark Law, founder of Landreau Law Firm, member and co-manager of Association of French Law PhD Holder, member of ACE: association for Entreprises counselors, member of ADIJ: Association for Law and Computers, Law professor at ESSEC and other business schools.


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