The stakes for LVMH before the AMF

PARIS, France - Two and a half years of investigation and a 115-page report — the Financial Markets Authority (AMF) has examined in depth the procedures used by LVMH in its discreet accumulation of Hermès shares. Saturday, October 23, 2010, LVMH announced it owned 14.2% of the leather goods brand in the rue Faubourg Saint-Honoré and would soon increase it to 17.1%. Hermès has been listed on the stock market since 1993, but the majority of its shares are owned by the heirs of founder Thierry Hermès. The world’s number one luxury company officially held a 22.6% stake in Hermes on December 31, 2012.

Bernard Arnault, chairman of LVMH, denies harboring any ambition to take control of the brand, recently commenting: “We did not expect to be shareholders of Hermès. We made a financial investment and it played out in a way that we had not expected.”

However, according to Le Monde, the AMF has reached an entirely different conclusion. LVMH teams are said to have orchestrated complex financial deals using financial derivatives. The group was thus reportedly “in violation of international norms,” to a degree that the financial investigators began sanction proceedings.

On Friday, the objections against LVMH will be presented at a public hearing before the sanctions committee of the AMF. Witnesses are expected to be called. And for the first time, LVMH will publicly present its defense.

The AMF report cited by Le Monde accuses LVMH of having secretly organized share acquisition in Hermès since 2001 through foreign subsidiaries and three banks, without the company explicitly noting in its financial statements that it held Hermès shares and derivatives linked to Hermès stocks. These financial instruments, what are called equity swaps (ELS), avoid any obligation of financial reporting at certain thresholds (5%, 10%, 15% ...). The AMF also believes that LVMH was slow to inform the market of its financial statements and did not comply with certain provisions of the Monetary and Financial Code. For its part, "LVMH vigorously contests the conclusions of the report, both in the regularity of the procedure and the materiality of the facts and their legal standing."

A calculated risk

If a sanction is issued, it will not be announced before the summer. And, given LVMH’s power, any penalty would remain modest. While the AMF increased its maximum sanction to 100 million euros at the end of 2010, the facts in the case Hermes-LVMH predate that change, limiting any possible sanction to a ceiling of 10 million euros. LVMH is quick to point out that the charges do not relate to a breach of insider trading or stock price manipulation, in other words no criminal complaint.

A look at the history of AMF sanctions shows that the biggest penalty totaled 7.8 million euros for manipulating stock prices and that, on average, the sanction for insider trading is set at 1.5 million euros.

With the growth of the Hermès stock price, the unrealized gain on Hermès exceeds one billion euros. Consequently, the case appears less to be a financial issue than one of image for the LVMH group, especially since Hermès also filed a court case against LVMH in March. A judicial inquiry is thus ongoing.