"Fonds de Pérennité": A Viable Substitute to the Dutch Poison Pill in French Unsolicited Takeovers?
Over the past few weeks, the so-called “Dutch poison pill” made headlines with Veolia Environment’s unsolicited takeover bid of its rival Suez.
On August 30, Veolia, a French waste, water and energy management company, offered Engie, Suez’s main shareholder, to acquire 29.9% of its 32% stake in Suez. On October 5, the board of directors of Engie approved Veolia’s improved offer at €18 per share. Quickly after, and renewed on November 3, Veolia committed to make a tender offer on the remaining of the stock.
On September 23, in retaliation to Veolia’s hostile takeover, the board of directors of Suez transferred its French water activities to a Dutch foundation. Suez’s French water activities will be inalienable for a period of four years, unless decided otherwise by the board of directors of Suez and the foundation.
On November 5, the board of directors of Suez announced that it would not deactivate the foundation since Veolia’s offer still contained unacceptable conditions and major execution risks for the company and its shareholders.
The Dutch foundation, also called stichting or Dutch poison pill, is a tried and tested defense against hostile takeovers. A stichting is a Dutch legal entity which can own assets, but unlike other corporate entities, has no shareholders or members. The only legally prescribed governing body is a board of directors, which has full power to manage the foundation in accordance with the foundation’s purpose. Since there are few legal requirements with respect to the appointment, the dismissal or the composition of the board, the settlor can provide in the stichting’s bylaws that the directors will be immovable, thus enabling the board to resist any threats in the context of a tender offer.
A stichting can be used to ward off hostile takeovers in two different ways. The first one, which was used by Mylan N.V. to rebuff Teva Pharmaceutical Industries Ltd.’s unsolicited offer in 2015, is roughly analogous to an American-style or French-style poison pill (bons Bretons) where the target of the unsolicited takeover grants to a stichting an option to subscribe for authorized, but unissued preferred stock, usually far below market price. While the preferred stock often has negligible economic value, it usually carries significant voting rights. However, unlike an American or a French poison pill, the call-option is given to an entity outside the target’s control, not to the target’s shareholders. Additionally, preferred stock dilutes all stockholders, not only the bidder. Therefore, the threat is not to make the bid more expensive, but to make it more complicated for the hostile bidder to obtain enough votes to control the target’s board of directors.
The second defense use of a stichting is similar to the “Crown-Jewel Defense,” where the target temporarily transfers ownership of its strategic assets to the stichting to shield them from the bidder’s reach, and prevent their divestment for antitrust compliance. Like Suez, Arcelor used this strategy to ward off Mittal Steel’s tender offer in 2006. Arcelor transferred to a stichting the shares it held in Dofasco, a Canadian subsidiary, for a period of three years. In consideration for this contribution, the stichting issued depositary receipts in favor of Arcelor giving Arcelor all the political and economic rights it had in Dofasco prior to the contribution, with the exception, however, of the power to transfer the Dofasco shares which belonged only to the board of directors of the stichting.
Further to the recent legislative developments in France, we can question the reasons that led Suez to use a foreign law vehicle when it could have likely reached the same result with a French fonds de pérennité. A fonds de pérennité, alike a stichting, is an “orphan entity” – i.e. it has no owners. The only legally prescribed governing body is a board of directors. Settlors have full discretion to establish in the fonds de pérennité’s bylaws the conditions under which the board should be run, including the possibility to provide that directors shall be immovable. However, three main features of the fonds de pérennité may account for the reasons why Suez decided to use a stichting instead of a fonds de pérennité. First, and since the fonds de pérennité is constituted through the free and irrevocable transfer of stock, such transfer constitutes, under French law, a taxable income at a rate of 60% on the part of the fonds de pérennité as a donee. However, such taxable income can be significantly reduced if the stock transferred has negligible financial value (with instead strong political rights). Second, the contribution made to a fonds de pérennité is irrevocable. The stock received is also inalienable, making any return to the settlor impossible in theory. Nonetheless, it seems possible to circumvent the inalienability of the stock by providing in the fonds de pérennité’s bylaws, that the fonds de pérennité will have a definite lifespan, and shall dissolved, and the stock returned to the settlor, at the end of such period of time. The legislator seems to have expressly authorized such dissolution and subsequent transfer, even where the fonds de pérennité has been used for the sole purpose of repelling a hostile bidder. Also, it should be possible to bypass the inalienability of the stock received by the fonds de pérennité, by providing in the strategic subsidiary’s bylaws that the political rights attached to the preferred stock will be deactivated if, for instance, (i) the hostile takeover was withdrawn or failed, or (ii) the takeover was unanimously approved by the target’s board of directors. Then, unlike the stichting which effectiveness in the context of hostile takeovers has been demonstrated on numerous occasions – notably in the Arcelor-Mittal takeover – the effectiveness of the fonds de pérennité has not been tried in French courts yet. Given the stakes involved, it is not surprising that Suez preferred to use a tried and tested mechanism in its dispute with Veolia.
Vincent Maire is an LL.M. student in the Corporation Law program. He completed his Master of Laws and his Bachelor of Laws in France at the University of Rennes 1. Admitted to practice in France since October 2020, Vincent will take the New York Bar Exam in July 2021. Vincent takes a strong interest in M&A, private equity, and capital markets. Prior to joining NYU, Vincent interned at various international law firms in Paris.