Image: Hermès

PART III – Upon learning of LVMH’s quiet 17.1 percent stake in the closely-held Hermès, the French financial services watchdog, Autorité des marchés financiers (“AMF”) initiated an investigation of LVMH’s investment in November 2007. The following year was occupied largely by a formal investigation by the AMF, as well as strongly-worded legal battles initiated by both LVMH and Hermès. In July 2012, Hermès – which called LVMH’s acquisition “the largest fraud in the history of the French stock market” – filed a criminal complaint against LVMH in a French court, accusing the luxury conglomerate of insider trading, collusion and manipulating stock prices.

LVMH responded by countersuing, citing claims of slander, blackmail, and unfair competition. 

A month after LVMH lodged its countersuit, the AMF – whose investigation was underway and separate from the Hermès and LVMH lawsuits – announced that it had uncovered evidence of “wrongdoing” on behalf of LVMH in its acquisition of Hermès stock, and requested that its sanctions committee decide whether to impose monetary penalties.

In the spring of 2013, the AMF sanctions committee confirmed that there was, in fact, insider trading and share price manipulation at play in LVMH’s acquisition of Hermès shares. The committee found that LVMH had secretly bought shares in rival Hermès in furtherance of a larger plan to build a stake in the Paris-based design house, despite chairman Bernard Arnault’s public claims that LVMH had, much to its surprise, come into its holding in Hermès.

Speaking at LVMH’s annual general meeting in Paris in April 2013, Arnault told shareholders: “We found ourselves owning shares in this company unexpectedly. We had not planned to be shareholders in this firm. We made a financial investment and that financial investment had an outcome that we had not expected.”

At Hermès’ own annual meeting shortly thereafter, CEO Patrick Thomas called foul on Arnault’s remarks, stating that “either LVMH is disorganized” for not knowing about the conglomerate’s growing stake in Hermès … or had acted “fraudulently.” Thomas declined to say which one it was, telling the group, “I’ll let you decide,” 

At this point, both LVMH and Hermès filed additional lawsuits.

Hermès filed suit, seeking the outright cancellation of the equity swaps that LVMH allegedly used to secretly acquire a significant portion of its stake in Hermès. Additionally, Hermès sought the annulment of the financial contracts, demanding that LVMH resell the shares back to three banks, Societe Generale SA, Natixis SA and Credit Agricole SA, so that they could be placed back on the market. Thomas said the “ultimate aim is to have the swaps declared [legally] invalid.” 

LVMH, on the other hand, initiated litigation against an unnamed manager at Hermès (almost certainly Thomas) in response to public comments that implied that LVMH had conducted “fraudulent” activity in its Hermès stake-building exercise. 

On the heels of LVMH’s filing, Pierre Godé, who, by June 2013, was serving in the role of LVMH deputy chairman, told Le Figaro, “Hermès is multiplying its campaign aimed at destabilizing us. Our patience has its limits. It’s time that the public learns the truth.” 

In July, the AMF sanctions committee reveal the truth, condemning the “unusual” way LVMH had amassed its shares, “buying equity swaps with a number of banks so as to avoid disclosure requirements and using foreign subsidiaries that were not listed as consolidated units until its 2010 annual report.” It ordered that LVMH pay $10.4 million in damages in connection with what it called the “seriousness of the successive breaches of public disclosure requirements, which consisted in concealing each stage of LVMH’s stake-building in Hermès.”

Thomas – who was met by the Hermès board with “a long ovation as the main figurehead in the bitter tussle with LVMH,” per the FT – praised the regulator’s findings as “confirm[ing] what we have been saying for the past two years.” 

Despite the ruling – which LVMH immediately announced it would appeal, citing a lack of proof that it had run afoul of the law – and within the same month, it was revealed with the release of LVMH’s first-half financial report, that the Paris-based luxury conglomerate had increased its stake in Hermès even further … from 22.6 percent to its final tally of 23.1 percent. 

“The Battle of My Generation”

The parties were unable to resolve their differences, which played out in French courts for years to follow, even after LVMH announced in September 2013 that it would distribute its 23 percent stake in Hermès to its shareholders and institutional investors (a transaction that was completed by December 2014), agreeing not to buy more shares in Hermès for the next five years.

Less than six months after that, in February 2014, Thomas retired, making way for Axel Dumas, a sixth generation of the Hermès family, to take over the role of CEO. Reflecting on the battle for his family’s company, Dumas called it “the battle of my generation.”

As for LVMH, its settlement agreement not to acquire additional shares in Hermès expires in 2018. 

* Deal Dossier is a multi-part series that documents some of the most significant fashion acquisition developments of the past and present.