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PARIS — The enforcement committee of France’s stock market regulator, AMF, on Monday imposed its highest fine ever on LVMH Moët Hennessy Louis Vuitton over the way the luxury conglomerate acquired a 17 percent stake in rival Hermès International.
The committee, in charge of sanctions, ordered LVMH to pay 8 million euros, or $10.4 million at current exchange. The decision not only deals a blow to the group headed by Bernard Arnault but could set a precedent for other companies in France, since it has wide implications surrounding a firm’s obligation to report its strategic intentions — thus potentially creating confidentiality issues that have not existed in the past.
LVMH said it would refer the matter to the Paris Court of Appeals as soon as possible. “The very principle of the sanction and, even more so, the amount of the fine are completely unjustified in this case,” it said.
Hermès had no comment on the ruling, which came after a marathon hearing last month during which the AMF board recommended imposing the maximum applicable fine of 10 million euros, or $13 million. The AMF committee handed down its decision on June 25, but the information was only made public on Monday.
Lawyers for LVMH present at the hearing had called for the entire procedure to be annulled, arguing that it was impossible to have a fair trial because Hermès had been waging a damning media campaign against it. LVMH is separately embroiled in a series of court battles with Hermès over its stake-building.
LVMH said Monday that the AMF ruling in no way called into question the legality of its acquisition of Hermès shares. Arnault, LVMH’s chairman and chief executive officer, has repeatedly stated he has peaceful intentions and wishes to cooperate with the family-controlled maker of Birkin bags and silk scarves.
The AMF recalled that LVMH was accused of “failing to inform the market that it was preparing to raise its stake in Hermès and of having breached its disclosure requirements when publishing its consolidated financial statements for 2008 and 2009.”
LVMH surprised markets in October 2010 when the company revealed it had amassed a 17.1 percent stake in Hermès via cash-settled equity swaps that allowed it to circumvent the usual regulations requiring firms to declare share purchases. As of Dec. 31 last year, the luxury group had raised its stake in Hermés to 22.6 percent.
The AMF noted that failing to declare the settling of the swaps in shares did not constitute an infringement of disclosure rules at the time.
“However, the enforcement committee adopted an overarching approach and judged that the search for financial profit alone was not enough to explain the unusual way in which these swaps had been arranged,” it added, listing a series of factors.
Among these, it noted the “unusual amounts” of the swaps; the fact that they were divided among several banks “to sidestep disclosure reporting rules,” and the fact that they had been entered into by foreign subsidiaries of LMVH that were not listed as consolidated companies until the 2010 annual report.
The AMF maintains that LVMH should have made public the transaction it was preparing on June 21, 2010, the date of a phone call between one of its employees and a financial institution allegedly discussing the implications of the potentially growing stake, should the equity swaps be converted into Hermès shares.
“Circumvention of the rules intended to ensure transparency, which is so vital to orderly markets, must be punished to the same extent as the disruption it causes,” the AMF committee said in its ruling.
LVMH insists it did not decide to convert the swaps into shares until October, and the AMF’s decision therefore is not justified.
“LVMH is surprised by the great weakness of this decision, both in legal terms and in terms of the totally erroneous analysis of the facts on which it is based,” said the company, which owns brands including Louis Vuitton, Fendi, Givenchy, Guerlain and Sephora.
French law on declarations concerning equity swaps has since changed, as has the maximum fine, which is now 100 million euros, or $130 million.
The AMF’s investigation, launched in November 2010, suggested LVMH began building its stake in Hermès as far back as 2001 via various offshore subsidiaries. The company resumed its quiet accumulations in 2007 via equity derivatives through financial intermediaries, according to the AMF.
Hermès filed a criminal complaint against LVMH last year, accusing its rival of insider trading, manipulating share prices and dissimulating its investment in the company.
LVMH in turn filed a suit against Hermès for slander, blackmail and unfair competition.
Hermès executives have repeatedly urged LVMH to reduce its shareholding. Last year, Hermès grouped family-owned shares into a nonlisted holding company to gird it against further advances by LVMH. The Dumas, Puech and Guerrand families collectively own more than 70 percent of the shares in Hermès, a limited partnership structure that guarantees they keep control of management.
The H51 holding company groups 50.2 percent of the firm’s capital and has priority purchasing rights on the remaining shares held by the family members participating in the initiative — some 12.6 percent of capital.