The fight centers on deals, first disclosed in late 2010, by LVMH owner Bernard Arnault that have left the company with a roughly one-fifth stake in Hermes, its biggest competitor and producer of the iconic Kelly and Birkin handbags.
France's wealthiest man, Arnault has built LVMH into the world's largest luxury group by buying other brands over the last decade. He has said he is happy to remain a long-term shareholder, but some industry observers say he may be playing a long game in the hope of persuading Hermes' family owners to sell out.
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The owners have fought Arnault tooth and nail, however, since discovering that LVMH had built up an initial 14 percent stake.
Regulator AMF said Friday that LVMH's dealings in building its position in Hermes were opaque and represented grave misconduct that could be regarded as "fraudulent behavior."
LVMH, which now owns 22.6 percent of Hermes, surprised the stock market in October 2010, announcing that it had a 14 percent stake, gained partly via derivatives that allowed it to not declare its holding.
The regulator said that LVMH should have disclosed the size of its exposure to Hermes shares through equity derivatives acquired in 2008, as well as that it had a stake of just under 5 percent acquired in 2001 and 2002.
In France, companies are required to disclose when they take a stake worth more than 5, 10 and 15 percent of a company's capital if the target is listed on the stock market.
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Hermes is also challenging LVMH's stake-building in a separate court procedure. The AMF finding will not have any impact on the court case but represents a boost to Hermes.
The amount of the fine, 10 million euros ($13.05 million), is small change to a group with market value of about 70 billion euros, but the regulator's decision is a public relations setback for Arnault, who owns some 60 luxury brands.
Arnault owns Louis Vuitton, the world's biggest luxury brand in revenue, and a collection of fine wine and spirits makers, including Hennessy cognac and Moet & Chandon Champagne.
He has built the group into a global powerhouse in the space of 15 years by acquiring brands including Guerlain and Chateau d'Yquem. Hermes' spectacular growth into a brand with more than 3 billion euros in annual sales has whetted his appetite.
The hearing revealed that LVMH had as early as 2007 and 2008 mandated Lazard and Rothschild bankers to look into acquiring control of Hermes and to strike an alliance with some family shareholders.
Since making its Hermes holding public, LVMH has consistently denied seeking control and denied any wrongdoing in financial disclosure or transparency.
Hermes is controlled by three families (the Puech, Dumas and Guerrand), who together represent more than 75 descendants of Emile Hermes, who founded the company in 1837 as a harness and saddlemaker.
They responded to LVMH's buildup by creating a holding that controls 51 percent of Hermes, though the AMF inquiry also uncovered that the biggest Hermes family shareholder, Nicolas Puech, had sold some of his shares to LMVH. That calls into question Hermes' public assertion of a united front in the battle.
Earlier on Friday, the AMF said it would look into LVMH's call to invalidate the judicial process but it would not halt the process. The regulator's sanctions committee is slated to respond within a matter of weeks to the inquiry's findings and proposed fine.