Laurent Mauduit writes: While researching this article I met with all the interested parties involved in this case, or their lawyers, all of whom agreed to speak to me. The quotations I drew from these interviews and used in the article were re-read by those who spoke to me, or by their lawyers. Under normal circumstances I am not happy with a system whereby quotes are re-read, but since the matter has taken a legal turn, I found it legitimate that each person should weigh carefully every word attributed to them.
To obtain clarifications I sometimes followed up these interviews with questions by e-mail. And each time I received answers. This was the unusual aspect of this particular research: nowhere did I find doors closed to me. Anyone who knows the business world will be aware that this is highly unusual.
In the article, so as not to further complicate the exercise of telling a story that is, in places, rather dense, I stuck closely to the core of the arguments made by the various people I interviewed.
But I want to present them fully here.
Massena’s arguments
I was able to meet at length with Massena’s legal counsels, Jean-Pierre Versini-Campinchi, and Professor Jean-Jacques Daigre. Extracts of our discussions appear in the article.
Jean-Pierre Versini-Campinchi also sent me the following note:
"September 2006: Massena subscribes in the name of three of its funds to the "Fonds Commun de Placement à Risques [FCPR, a type of fund investing at least 40% of its assets in unquoted companies] APEF III, which was set up and managed by Atria. Massena responds to several calls for funds without difficulty.
February 2009: In the midst of a generally sluggish market, Massena was called upon to contribute extra funds to a new investment and noted that this involved APEF III buying the last remaining industrial holding in the APEF I fund, which had to be wound up and liquidated in October because it had reached the end of its lifespan. This fund is also managed by Atria, and both funds have a number of investors in common, although this is not the case for Massena.
This transaction would allow APEF I to complete its liquidation process and to attribute considerable profits, in the form of carried interest, to the managers of Atria.
February 19, 2009: Massena, out of a concern to protect the interests of its investors, asks several precise questions, and in particular asks to be given:
-the full text of the recommendation from APEF III’s Advisory Committee, which is also its ethics committee;
-"the identity of the co-investor mentioned in the summary of the transaction, and a confirmation that there is no connection between this investor and APEF III, APEF I, Atria and its managers."
Then followed a sterile exchange of six letters.
Atria supplies the Advisory Committee’s recommendation only as an extract lacking precision, and still withholds the name of the third party co-investor.
July 27, 2009: at Massena’s request, the Chairman of the Tribunal de Commerce de Paris [Paris Commercial Court] appoints a legal expert charged with carrying out an inquiry into the transaction.
July 28, 2010: the legal inquiry concludes with the following assessment from the legal expert:
- "the dysfunctionalities suggest that this operation should not have been carried out in the way it was";
-"The transaction was carried out primarily in Atria’s interests."
-"the price paid for the investment was significantly higher than what could have been obtained in the market at the time";
-"there was a conflict of interest between the buyer and the seller."
Massena brought proceedings in the Paris Commercial Court to seek a judicial annulment of its subscription to the APEF III fund with the fault lying exclusively with Atria, and requested compensation including essentially the reimbursement of the investments it had made with a fund manager (Atria) which it considered to be highly partisan.
These proceedings name Atria and the three members of its executive committee, whom Massena considers to have committed misdemeanours of such a serious nature that they go beyond their professional functions.
The essential points of these grievances are as follows:
1/ The price was imposed on APEF III by APEF I even though the major part of this price (the carried interest) was banked by Atria’s managers;
2/ In breach of the rules, the managers interfered in the discussions and decisions of APEF III’s Advisory Committee. Present in the meeting room were two investor members of the committee and five Atria managers.
3/ Of the of seven members of APEF III’s Ethics Advisory Committee, Atria was prepared to overlook four of them having a conflict of interest, such as being investors in both APEF I and APEF III, even though the Committee voted to approve the deal by five votes out of seven.
4/ The third party investor whose identity was withheld from Massena by Atria, intentionally and over a period of five months, itself had an implacable conflict of interest: two of its managers had held "carried interest" shares in APEF I. They could have been remunerated for these shares by APEF III precisely on the occasion of this sale transaction.
It emerges from the minutes of the Advisory Committee which Atria supplied for the expert’s report that this situation of flagrant conflict of interest was concealed by Atria both from investors in APEF III and from members of its Ethics Advisory Committee.
Atria’s arguments
I also met at length with Dominique Oger, the chairman of Atria. Some of his arguments are therefore contained in the article.
Rather than sending me a contribution written either by himself or by his legal counsel, Georges Terrier, he preferred to reply to questions that I had sent him initially by e-mail, before our meeting, so as to explain his position at greater length.
Here are my questions (in bold) and his replies (in italics):
- As I understand it, the regulations of the APEF3 fund did permit the purchase of this holding, but on condition that another, independent investor came in and bought half or more of the holding. Was it as an independent investor that you contacted Pragma, which bought 50% of the stake in FPEE held by APEF1 for 30 million euros with APEF3? Is it your opinion that Pragma was an independent investor in the sense meant in APEF3’s regulations?
- Atria Capital Partenaires[Editor’s note: Partners] finds itself in a position where it has to reply to Mediapart, since it is taking up and echoing the harassment that Massena has practiced for nearly two years, which is the subject of a complaint Atria has lodged with the AMF [Autorité des Marchés Financiers: French stock market regulator]. Massena has 3% of APEF III and is one of 71 investors in the fund.
For the past two years Massena, which has chosen to exit several funds, has been putting on pressure to be bought out of its share of APEF III under conditions that are unacceptable.
There have been written documents attesting to this aim since 2008. Massena also mandated a company called Triago in May 2009.
When it was unable to achieve its ends, Massena contacted the 70 other investors in the fund in a bid to destabilise and disparage Atria and its managers, without success.
From that moment, Massena made it clear that in the absence of any negotiation, it would take the issue to the media, and that is where we are now.
Let us get to the facts.
The transaction to reorganise FPEE’s capital which APEF III took part in is perfectly in order and opportune for all the investors.
It was carried out in conformity with the prevailing regulations and professional recommendations that included validation of the price by an independent expert; authorisation from the consultative committee; and the presence of a third party investor.
Several other top class investors took part in this transaction under the same conditions.
- I understand that APEF1 made a major capital gain from this sale, and the carried interest from the sale was 11.4 million euros. I also understand that the two Pragma managers both benefited from a share of the carried interest of 1.198 million euros. Can you confirm this figure and explain the mechanism that allowed them to benefit from this sum of money? How was this sum – 1.198 million – shared between Jean-Pierre Créange and Gilles Gramat? Can you explain to me the relationship between this sum of money and the figure of 1.433 million euros which appears in the expert’s report attributed to an entity called SC Atria? Didn’t the fact that they benefited from this capital gain disqualify them from being considered independent investors? On this basis, why did you agree to carry out this transaction with them, a transaction that would in that case have infringed provisions prohibiting such conflicts of interest?
- Carried interest, or "C" shares, provides a way of associating management teams with both risks and rewards, and it allows the interests of the team to be aligned with those of the investors. Neither its existence nor any specific amount is guaranteed.
This practice, which is explicitly included in the regulations, is used throughout the whole world.
There is no mechanism: Mr. Gramat and Mr. Créange sold their C shares in APEF I, which they had held since 1999, prior to the transaction.
You also quote an expert’s report which was carried out in a unilateral and irregular way. Because of this it is the object of a legal action to render it null and void.
-Can you confirm that your share of the carried interest was 1.869 million euros?
- The carried interest paid as a result of this transaction results from a mechanical application of contractual rules.
- Would you be kind enough to tell me how the transaction was done: who decided on the terms of the transaction, which seem to contravene numerous provisions in the rules laid down by the market authorities, like the AFIC or the AMF?
-The question includes an accusation that we do not understand: this transaction does not contravene any provisions. The authorities you mention have not in any way suggested that it does.
- Can you list the members of the investor’s consultative committees for APEF1 and APEF3? Can you confirm that some of the members sat on both committees and therefore had a conflict of interest? Can you confirm that this was the case in particular for Axa Private Equity, which is your main sponsor and which invested in both APEF1 and APEF3?
- APEF III’s consultative committee includes seven investors who represent over 60% of the fund’s commitments. We can confirm that the members who sat on both committees did not have a conflict of interest.
You talk about a "sponsor" of APEF III: there is no pre-dominant investor or sponsor in the fund. Axa Private Equity is an investor at the same level as four other financial institutions.
Pragma’s arguments
I also met at length with Nina Mitz, who is responsible for the company’s communications, and its lawyer, Maurice Lantourne. Part of my exchange with Mr. Lantourne is included in the article.
Before this meeting I sent questions to the two Pragma managers, Gilles Gramat and Jean-Pierre Créange, to which they replied. The following is the full text of this exchange, with my questions indicated in bold, and his replies in italics:
-I believe the regulations of the APEF3 fund authorised the purchase of this holding, but on condition that another, independent investor came in and bought half or more of the holding. Was it as an independent investor that Pragma, your company, bought 50% of the stake in FPEE held by APEF1 for 30 million euros?
-Pragma wished to invest in FPEE after carrying out an in-depth analysis of the company. The company has solid fundamentals and outlook and this did indeed convince us to back it, as it is a company we believe in. Incidentally, FPEE’s results confirm this. It is worth adding that we were in competition with other candidates who sought to invest as part of a competitive process.
-I understand that APEF1 made a major capital gain from this sale, which produced carried interest of 11.4 million euros. I understand that you benefited together from a share in this carried interest of 1.198 million euros. Can you confirm this figure and explain the mechanism under which you benefited from this sum? How was this sum shared between the two of you?
- Carried interest is inherent to the profession of being an investor. All funds all over the world use it, and in particular, it aligns the interests of the management team with those of investors in the fund. Regarding our own position, the shares in the carried interest held by us were sold prior to the transaction, and at a lower price than would have been the case had we held these shares until the transaction was carried out.
-If this is indeed the case, can you explain how you were able to come in as an independent investor to buy this holding in concert with APEF3, as well as having an interest in the capital gain reaped by the seller, APEF1, which contravenes APEF3’s regulations?
-It seems you are taking on Massena’s theory. We would first remind you that it is not for Pragma to comment on Atria’s regulations. We nevertheless note that according to those same regulations, over and above the agreement of the Advisory Committee, it is expected either that the price be validated by an independent expert in valuations, or that a third party investor should take part in the transaction. It so happens that an independent expert was called in. From that point, the condition of having a third party investor was rendered unnecessary. It remains clear that Pragma is a third party in relation to Atria.
After my interview with Maurice Lantourne, I realised that a few things were still unclear. I therefore sent more questions to the two Pragma managers by e-mail, and they replied to these. This is the full text of this e-mail exchange:
-Mr. Lantourne confirmed that you did in fact sell the share of carried interest that Atria obtained on its APEF1 fund back to Atria at a 20% discount. But I did not understand what your entitlement to this carried interest derived from. Since shares in the carried interest can only be held by those who play a role in a fund’s management, should I conclude from this that you were involved in the management of APEF1 in one way or another? Or is there another reason?
- In 1999 Crédit Agricole sponsored Atria’s Fund 1 and because of this, it was entitled to carried interest. At the time the management of the group attributed it to UI’s Executive Committee.
-Can you confirm that payment for these shares in the carried interest was made following the transaction to transfer the asset, as the expert’s report says?
-The shares of the carried interest were irrevocably sold prior to the report on the transaction, with payment being made over time in the usual timeframe.
- Can you make available to me the minutes of the Pragma Advisory Committee which authorised making the investment with the APEF3 fund? I am asking this because I would like to know whether you thought it was necessary to inform Pragma’s investors that you held shares in the carried interest from APEF1.
- Since the shares were sold before the transaction was looked at, Pragma 2’s Advisory Committee was not convened.
Pragma’s legal counsel Maurice Lantourne also sent me the following note which summarises the company’s point of view:
"The PRAGMA is not part of the litigation between MASSENA and ATRIA.
PRAGMA took a stake in a well- performing, well-managed small company whose personnel have recognised expertise.
The price of the purchase was very fair and is below the ratios in use at the time, as the Argos index shows.
The acquisition was carried out at less than five times EBITDA (earnings before interest, tax, depreciation and amortisation).
This company’s performance since the acquisition suggests that a significant capital gain can be hoped for.
PRAGMA’s management team and its investors are therefore very satisfied with this acquisition.
PRAGMA is not involved in this litigation since it has no contractual relationship with MASSENA.
Regarding the transfer of a holding from one fund to another, the particular conditions applicable to such a transfer are governed by ATRIA fund regulations.
PRAGMA was in competition with other potential buyers.
PRAGMA was undeniably a third party in relation to ATRIA.
This litigation is even more absurd because MASSENA does not contest the fact that this was a timely acquisition which will allow a capital gain to be realised."
Axa Private Equity’s arguments
I met at length with Vincent Gombault, and his legal counsel, William Bourdon. My discussions with them appear in the article.
I also asked each of them if they thought it would be useful to send me a written presentation of their position so as to put it forward in the most detailed way possible. They preferred me to publish the full version of the e-mail that Vincent Gombault sent me before our meeting. Here is the message:
"I am writing in response to your e-mail which replied to an e-mail sent to you by Mr. Jérémie DELECOURT in his capacity as Director of Corporate Communication.
We find the information supplied by Mr. Jérémie DELECOURT sufficient. But since it seems that questions remain, and since I am myself "accused" in an expert’s report that you raise (for the first time),I wish to bring the following facts to your attention:
1/We are involved in only an extremely peripheral way in the transaction that interests you.
2/It was presented to you in a deliberately, seriously inaccurate way. I represented AXA PRIVATE EQUITY on the Advisory Boards (of the two companies ATRIA and PRAGMA).I would draw your attention to something which it appears cannot be deduced from your questions, the fact that these committees are not in way any supposed to give an opinion on decisions to invest in a company, nor, by extension, on the price of the transaction, which is only incumbent on the investment committees.
The sole mission of these advisory boards is to ensure that the procedure followed in an investment transaction is valid, and this in a transparent way and in strict adherence to the rules fixed by the AMF and both French and European professional associations. In addition, PRAGMA’s advisory board never convened in the case of the transaction that interests you.
3/AXA PRIVATE EQUITY is not represented on the investment committees and, like the other members of the advisory board, noted that this transaction was validated by an expert independent of all parties. The advisory board is thus strictly limited, in line with its function, to ratifying the validity of the procedure followed. In no way did it influence the decisions taken during this transaction in any way at all. In these circumstances it is obviously not serious to infer the existence of some kind of conflict of interest, or even that there could be a risk of conflict of interest.
4/You raise the question of an expert’s report, which I understand may have led you to misunderstandings beyond the general presentation of the transaction made to you. Indeed, contrary to all the principles that apply, and in particular the adversarial principle, this expert’s report was done without my even once being questioned or asked to supply explanations, and of course, without my being asked to participate in it. These are serious deficiencies which explain why we find the conclusions of this report inadmissible, and explain notably why a request was made by ATRIA to the Paris Commercial Court that it be declared null and void. On this point, ATRIA will be able to give you more precise explanations, because, once again, we are not party to the procedure.
5/You state in your last e-mail that the questions raised by this affair are serious. They are indeed, to the extent that your interest in this transaction has been elicited in an artificial and opportunistic way by those representing MASSENA, who, by contacting you, put into practice a threat contained in a letter sent by that company to Mrs. Dominique SENEQUIER on October 1, 2010 (of which a copy is attached). This letter came after various approaches that Massena had made to me.
We draw your attention to the following fact:
-For us, this letter is typical, and this is unusual enough to be noteworthy, of what could be considered as attempted extortion. This is in any case what emerges from the direct threat MASSENA made when their request was not satisfied, to initiate a media campaign and if necessary, to bring the matter before the judicial authorities. The gravity of such behaviour should not escape you, and we are sure that you understand the highly unusual context in which MASSENA and/or its proxies took this initiative towards you.
6/In your last e-mail you no longer return to the subject of carried interest. You have surely understood that this question could not involve us in any way. Indeed, it is because of a false presentation of this transaction that you believed initially, and thus in error, that you should question us on this point. I think that this reply should bring to a close the queries that MASSENA sought to share with you in a highly biased fashion.
Even so, I am nevertheless still available should you require any further information and if necessary, I am prepared to speak with you, or even meet you, should you find this appropriate.
Yours faithfully,
Vincent Gombault
Axa Private Equity
Managing Director."