The price of luxury
2 April 2001
30 January 2014
9 December 2013
10 February 2014
9 January 2014
12 May 2014
Corporate battles often make the headlines, but in the case of LVMH and Pinault-Printemps-Redoute (PPR), it got personal. LVMH is owned by Bernard Arnault, whose empire includes Givenchy, Krug and perfume giants Chaumet and Christian Dior. His arch rival Francois Pinault owns PPR, which comprises the Printemps store group and the La Redoute mail order business.
The acrimonious tussle between the French luxury goods houses over Dutch-listed Gucci has shaped the litigation landscape in the Netherlands for two years. And at the centre of it stands a Dutch court, which by a series of radical rulings has altered the complexion of the corporate battle.
In January 1999, LVMH built a 34 per cent stake in Gucci. Gucci, unhappy at LVMH's move, issued shares to an employee stock holding trust as part of an employee stock option plan (ESOP). The result was to dilute LVMH's stake to 30 per cent. Gucci then completed a white-knight deal with PPR, LVMH's great rival. PPR was handed a controlling 42 per cent of Gucci stocks for $3bn (£2.1bn) - and so the litigation began. Because Gucci is listed in the Netherlands, LVMH went to the Amsterdam courts, claiming that the new share issue was devised simply to thwart it. It argued that PPR should have made a full bid at a premium price.
Harmen de Mol van Otterloo, a corporate lawyer for Dutch law firm Nauta Dutilh, which acted for LVMH from the beginning, says: "In court, we argued that the ESOP was a sham. We said the intention of the ESOP was not to serve the interests of employees but to neutralise the voting rights acquired by LVMH. It is noteworthy that the number of shares issued to the foundation was exactly the same number owned by LVMH."
Within two weeks, the Netherlands' Enterprise Chamber, one of five special divisions of the Amsterdam Court of Appeal using recently authorised powers to rule on provisional measures, issued an interim ruling stating that it had questions about the legality of the ESOP.
This sparked a litigation frenzy. Court cases remain pending in the Netherlands and France, and investigators are expected to report on alleged mismanagement at Gucci in September. The report, which is expected to lead to further court battles, is the result of an 8 March ruling at the Enterprise Chamber and the result of months of brow-beating by lawyers.
One of the biggest shocks to the Dutch legal system was the series of first instance rulings at the Enterprise Chamber. Little more than two weeks after the chamber had ruled on the ESOP, and hours before LVMH was due to meet with Gucci to negotiate an agreement not to interfere with Gucci's supervisory board and management, Gucci issued 39 million shares to PPR in exchange for $2.9bn (£2bn). LVMH claims that the transaction was concluded without approval from Gucci's shareholders and without making a public offering.
Three days later, the Enterprise Chamber intervened. It ruled that Gucci had failed to act in good faith, as it carried out the PPR deal when it should have been handling negotiations with LVMH. Gucci rejected all of LVMH's subsequent proposals and in its third ruling the Enterprise Chamber barred Gucci from spending a penny of PPR's $2.9bn.
So far, the Enterprise Chamber had not behaved particularly controversially, but in its short-lived fourth ruling it made legal history. On 27 May 1999 its five-judge panel annulled the ESOP as it violated Dutch law, and ruled that Gucci was guilty of mismanagement in terms of the timing of the PPR deal. However, it neither annulled that transaction nor called for an enquiry.
This ruling was a bombshell for the Dutch legal establishment. Nauta Dutilh's Paul Storm, who heads the team for LVMH, says: "It was the first case in which the Enterprise Chamber had dealt with a takeover. This is quite significant as the Anti-Protective Measures Bill 1998 is pending before parliament which makes it possible to do away with protective devices barring takeovers. This is a very controversial bill and yet the Enterprise Chamber took the initiative by acting on its own before the act was put into force."
On 27 September 2000, the Supreme Court of the Netherlands overrode this fourth ruling and held that the Enterprise Chamber had overstepped its authority by its qualification of mismanagement without ordering an investigation. But the Supreme Court did not reject the Enterprise Chamber's other rulings and this was a sore point for Gucci. De Brauw Blackstone Westbroek litigation partner Peter Wakkie, who is Gucci's chief outside counsel, says: "Because the Supreme Court had to reverse the Enterprise Court's ruling on a procedural point, it followed that it should cancel its previous rulings - but it did not do so."
The Enterprise Chamber had already gained a reputation for radical decision-making. After all, LVMH had chosen not to file its case against the ESOP and PPR transactions at Amsterdam's district courts - the more obvious choice - and opt for the Enterprise Chamber. The court's president Judge Willems, one of the five judges presiding during the court's four rulings, had also become a controversial figure.
Nauta Dutilh's de Mol van Otterloo says: "As a result of Willem's appointment as president, the court has become a more important institution in Holland. Willems invites companies to address themselves to his court, as he is willing to stick his neck out for them. If you have a cautious judge you will be less inclined to address yourself to the court."
Judge Willems was indeed navigating new territory. Marius Josephus Jitta of Dutch law firm Stibbe says: "Under development is a test as to how certain powers can be used that are deemed to be defensive measures against a large shareholder which Gucci doesn't want on board. PPR argued that its transaction was a strategic move but the Enterprise Chamber placed some doubt on this. This decision will have influence on what companies do in hostile situations."
Finally, on 8 March this year, the Enterprise Chamber ruled that an investigation should take place into mismanagement at Gucci. Josephus Jitta says: "It is the first inquiry in Dutch history which has been ordered into a listed company which is healthy. There have been other inquiries but into much smaller firms, and usually because it has gone bankrupt."
The ruling states: "The substantive terms of the PPR transaction raise doubts as to whether the justifiable interests of Gucci shareholders were sufficiently taken into account."
The three Dutch investigators, Jan Rijkels, Aad Jacobs and Professor Harny Honée, will report in September and it is then up to the parties to decide how the matter will be pursued. A Gucci source says that he is confident of a favourable result: "I believe that they will clearly understand that the way Gucci defends itself is totally legal. Independent shareholders, excluding LVMH and PPR, voted overwhelmingly in favour of the PPR transaction."
PPR is also confident that its transaction will not be cancelled. Corporate partner Jan Willem van der Staay of Freshfields in Amsterdam, which is advising PPR, says: "We believe it benefits all shareholders. The Enterprise Chamber is heading to the same result as two years ago when its ruling was cancelled for procedural reasons. We have pleaded that this matter is dealt with by the district court although it is comprehensible that the Enterprise court should want to keep it after having had five hearings already."
The battle is by no means over, but the Enterprise Chamber's rulings are important to the Netherlands' undeveloped takeover law. The Gucci case has already set all manner of precedents. n