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The 30-Month Fight for Gucci
LVMH Goes To Court
The French conglomerate asked the Enterprise Chamber of the Amsterdam Court of Appeals, a five-judge panel that oversees complex commercial cases, to conduct an official inquiry into Gucci's actions. Under Dutch law, the holder of a minimum of ten percent of a company's stock has the right to ask the court to appoint one or more experts to conduct such an investigation. If the results show mismanagement--that is, if the company has not followed "proper policy" that takes into account the interests of all stakeholders including employees--the court can set aside provisions of the articles, or vitiate resolutions of the board or the general meeting, and even suspend or dismiss directors. LVMH also asked the court to enjoin in the meantime the voting rights of the Stichting shares.
On March 3, 1999, the court criticized the actions of both sides. LVMH had a broad duty of good faith, as the acquiror of so much stock in another company. A company in its position "must...consult to a reasonable degree with the [target] company...and act in accordance not only with [the acquiror's] own interests but also with those of the company...and with those of the persons involved with the company." This was the first time such a duty had been articulated in the Netherlands: an acquiror must show its credentials at the door, instead of trying to break it down.
Gucci, on the other hand, may well have violated the intent of Dutch corporate laws if it set up the Stichting only to frustrate a potential acquiror. The court said it needed to look into this matter. In the meantime, the court put a pox on both houses, freezing the voting rights of both LVMH and the Gucci Stichting. The president of the Enterprise Chamber urged both sides to continue to negotiate the proposed standstill and independence agreement. Gucci suggested that the two sides meet on March 19 to go over the term sheet it had submitted to LVMH on February 16. LVMH agreed.Before the March 19 meeting, the two sides continued to spar. LVMH reiterated its position that it had no intention to make an offer for all of the outstanding shares of Gucci, much less one at a premium. In hindsight, this stance turned out to be a crucial error.
It seemed that Gucci had actually been taken over. Again, much had gone on behind closed doors. In what must have brought back memories of good old-fashioned American hostile takeovers, Skadden and Wachtell lawyers put together an agreement with a white knight brought into the fray by Michael Zaoui and Joseph Perella of Morgan Stanley Dean Witter: François Pinault, CEO of Pinault-Printemps-Redoute, a French retailing chain. Pinault asked to meet Gucci, during the time of frozen votes after the March 3 ruling, and by March 15, Skadden's Simpson and Wachtell's David Katz, PPR's outside counsel, had put together the mainframe of an agreement. "It was like the days before the Williams Act in the United States," recalls Katz. "The Dutch legal system together with the NYSE listing requirements allowed for some creative solutions. Skadden's use of the ESOP was bold and gave Gucci time to find a full solution."
Gucci sought to leave the path always clear for a full tender offer to all its stockholders. PPR had to be provided with enough power to enable it to step in front of a determined opponent that had already captured much of the territory at significant cost. Using its other defense, the ability to issue new stock to third parties unrelated to the company, Gucci sold PPR 39 million new shares, virtually double the LVMH stake, that placed 40 percent of the target in PPR's hands at a price of $75 per share (significantly higher than any price paid by LVMH) or $2.9 billion, diluting LVMH's interest in Gucci to 20 percent. In its initial proceeding before the Enterprise Chamber, LVMH had asked the court to remove Gucci's right to issue stock to third parties. But even when it froze the Gucci Stichting, the court refused to remove from Gucci's arsenal the right to issue shares to an unrelated third party.
PPR was permitted to increase its stake to 42 percent of the outstanding shares on a fully-diluted basis, but was otherwise generally prohibited from acquiring additional Gucci shares for a five-year period. Under the strategic investment agreement between Gucci and PPR, the latter did get an option to acquire additional shares, at a maximum of 10.1 percent tranches, to match any increases by LVMH. If LVMH made a bid for all of Gucci's stock, PPR could sell its shares or make its own bid for all the stock. PPR got the right to nominate four of the nine members of the target's supervisory board and was granted veto power over the appointment of the chairman. A new "strategic and finance committee" of Gucci's supervisory board was to be established. PPR would appoint three of the five members of this new body, and a number of significant corporate and financial decisions would have to be submitted to the committee for its approval before they could be sent on to the supervisory board.
In connection with its investment in Gucci, Pinault also agreed to sell Gucci the Yves Saint Laurent business together with a line of perfumes that were to be acquired from Sanofi S.A., another French company, for $1 billion. This was the first step to implementing Gucci's multi-brand strategy.
Hours after all this was revealed, LVMH announced an offer for all of Gucci's stock, which it had so far refused to do, to protect its investment now that PPR was ensconced. Under Dutch law, a bidder has to give seven days' notice of a formal bid. Although never made public, LVMH was offering $81 for all shares, or $85 if the issuance of stock to PPR was nullified. Gucci turned down this offer. At an impasse once again, LVMH looked again to the court that same afternoon.
LVMH made several offers to buy Gucci stock. Its final bid formally submitted on April 7 was $85 per share for all shares except those held by the Stichting, or $91 per share if Gucci abandoned its white knight. Also, LVMH demanded that Gucci dilute PPR's stake if after such an offer LVMH won 50 percent of the independently held shares but less than 50 percent of the total tradable stock. LVMH cited the court's declaration that the PPR arrangement should not be allowed to deter shareholders from joining in an LVMH offer for all stock lest independent shareholders get short shrift.
The Gucci board met on April 8, the next day, and turned down LVMH because, the target said, of conflicts with its PPR agreement. That pact, Gucci pointed out, released PPR from its standstill if another bidder got over 25 percent of the stock. LVMH came back with an alternative: Make sure that PPR tenders its shares and get a top Gucci designer to agree to stay on for two years after an LVMH tender offer. Gucci again tossed this aside. On April 19, Gucci said it would support an offer of $88 per share--as if to say, "So come and get us." LVMH did not raise its bid from $85.
To strike back, LVMH considered turning to the New York Stock Exchange. If Gucci faced the possibility of being delisted for having broken NYSE's rules, it might rescind the PPR transaction. Gucci had quite clearly run afoul of the rule that bars companies from issuing more than 20 percent additional capital without shareholder approval, But, as PPR had been telling LVMH, NYSE rules permit foreign issuers to use the rules of their home country in lieu of shareholder approval requirements set forth in the listing standards.
And it was back to court.
After three interim decisions, the Enterprise Chamber issued its final ruling on May 27, 1999. First, the panel struck down the Gucci Stichting. By setting up the ESOP as it had, Gucci had violated basic standards of conduct and was therefore guilty of mismanagement.
So far, for LVMH, so good, if so moot, since after PPR got its tranche of target stock, the Stichting's stake was largely irrelevant. The court then found that Gucci had also acted improperly by granting PPR a large percentage of company stock. Gucci, the court ruled, had run afoul of Article 2:8 of the Civil Code, which requires corporations to act in accordance with "the requirements of reasonableness and fairness." Even better news for LVMH. Then came the bad news.
The PPR transaction would not be unwound. Although Gucci had not acted fairly at a time when the court had strongly suggested that the two sides return to the negotiating table, there had been no absolute decree that talks had to continue. LVMH was a competitor and Gucci was entitled to keep it at bay. PPR, on the other hand, had agreed to maintain Gucci's independence and to enter into a standstill agreement for five years. LVMH had repeatedly refused to make an offer for all its target's shares and should have been aware that Gucci could rightfully defend itself by issuing more of its stock. LVMH appealed to the Dutch Supreme Court.
The Dutch Association of Securities Owners and the French Association for the Defence of Minority Shareholders, both of which had joined LVMH in the action, saw their arguments dismissed as well. These two entities had asked the court to agree that the share issuances to both the Stichting and the PPR should have been put to the general meeting of shareholders for approval. Not so, said the Enterprise Chamber. Gucci had been given the power by its shareholders to issue shares back in 1995. Gucci was also under no obligation to demand a full offer from any recipient of a large percentage of stock. Says NautaDutilh's Paul Storm: "It was a very odd decision. I think they just didn't dare do anything."
John Finley of Simpson Thacher, who was not involved in the deal, also found the decision a bit peculiar at first glance: "Although the Enterprise Chamber refused to unwind the transaction, it reached a seemingly inconsistent result by opining that by issuing a significant block of shares to PPR, Gucci had violated elementary principles of proper business conduct which qualified as mismanagement. This holding, however, related to Gucci's decision to enter into the PPR transaction while the entire matter was subject to court review and the Enterprise Chamber had recommended that Gucci and LVMH meet to try to resolve their differences. The mismanagement related to the timing of the transaction rather than the substance of the transaction itself. Accordingly, the Enterprise Chamber upheld the substantive action and refused to rescind the issuance of shares to PPR because this action could have been taken in the future, provided that due deference was given to Gucci's duty to negotiate with LVMH."
In October of 2000, the supreme court held that the Enterprise Chamber had been wrong to make any conclusions without an official inquiry. Says Paul Storm of the latest decision of the Enterprise Chamber: "This opinion is a long and well-reasoned one. The court found indications of mismanagement with respect to many actions by Gucci, including the substance of the transaction between Gucci and PPR--the issuance of shares to a single shareholder that gave it virtual control with no premium paid to all shareholders."
LVMH went back to the Enterprise Chamber, seeking an order for an inquiry. On March 8, 2001, the court granted the request, and appointed two prominent Dutch lawyers and a former CEO of a large financial institution as the official investigators.
In September 2001, the panel was about to issue findings, which, Mr. Storm believes, were likely to be critical of Gucci.
Katz disagrees, saying that the investigators had spent a significant amount of time focusing on the extensive record put together by Gucci that he says strongly supported the actions taken by the Gucci board. Storm says that the imminent publication of the report spurred Gucci to reach a settlement with its white knight and its attacker, but advisors to PPR say that had nothing to do with it. It is clear that none of the parties particularly wanted the investigators to have to issue their report.
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