FRANCE: AMF fines LVMH for secretive France major shareholding stakebuilding in Hermes

Tuesday July 2 2013

The Enforcement Committee of the AMF has imposed a penalty on LVMH of €8 million for secretive France major shareholdings stakebuilding in Hermes. LVMH has been fined for having failed to inform the market of the preparation of its increase in the capital of Hermes and also having breached its obligation to inform the market on the occasion of the publication of its consolidated financial statements in 2008 and 2009.

The facts

In the first half of 2008, LVMH signed several Equity Linked Swaps (ELS) contracts through two of its subsidiaries, one in Luxembourg and the other in Hong Kong, which it controlled indirectly and which were consolidated within the group. These contracts, initially due to be settled in cash only and giving exposure to a rise or fall in Hermès` stock in the same way as if LVMH actually held the shares but without having to acquire them, were arranged with three separate banks, none of which had more than 5% exposure to Hermès. To hedge the risks associated with these contracts, including that of having to pay a significant capital gain to LVMH on settlement, the banks in total purchased in blocks approximately 13 million of Hermes` shares, most of which had been held by a single shareholder of Hermes, already having been previously identified by LVMH.

At the end of October 2010, LVMH and the banks settled the Equity Linked Swaps, not in cash as originally planned, but in shares. LVMH, which already had, since 2002, a 4.9% stake in Hermes, announced on 27th October 2010 a holding of 14.22% from 21st October 2010, and subsequently a holding of 17.07% from 24th October 2010.

Sanctions Committee decision

Considered in isolation, none of these elements infringed the rules on financial reporting, as cash-settled ELS at the time were not subject to the regulation of threshold crossings. The rules on disclosure of certain cash-settled instruments, including Equity Linked Swaps, were introduced in October 2012.

However, the Enforcement Committee, on an overarching approach, has stated that the search for financial profit was not enough to explain the unusual arrangements for the conclusion of the contracts in question, in particular:

• the unusual amount of ELS;
• their distribution among several banks to avoid reporting of crossing of thresholds;
• their conclusion by foreign subsidiaries of LVMH, which did not appear in the list of its consolidated companies until the 2010 annual report;
• indication to the banks, by LVMH, of the blocks of shares enabling them to provide cover for the ELS;
• the size of the guarantees provided to the banks by LVMH;
• measures taken in the consolidated financial statements of LVMH, to mask the concentration of ELS on a single stock.

The Committee considers that LVMH had acquired the means to conduct a “financial transaction” within the meaning of Article 223-6 of the AMF General Regulation which states that “Any person that is preparing a financial transaction liable to have a significant impact in the market price of a financial instrument, or on the financial position and rights of holders of that financial instrument, must disclose the characteristics of the transaction to the public as soon as possible.” LVMH was also held to have failed to have complied with its obligation to provide information in its consolidated financial statements for 2008 and 2009.

Click on the above link for the summary of the decision. Click here for the full decision of the Enforcement Committee (in French).