PARIS, France — LVMH Moet Hennessy Louis Vuitton SA will today respond to allegations by French market regulators that it breached disclosure rules in building a stake in rival Hermès International SCA.

LVMH will tell a Paris hearing of the Autorite des Marches Financier’s sanctions committee that it did nothing wrong after buying equity derivatives of Hermes shares in 2008, according to a representative for the company who declined to be named.

The AMF has been investigating for more than two years how LVMH acquired a stake in Hermès using cash-settlement equity swaps. The market authority informed LVMH in October that its board would recommend that the company be fined over the matter. LVMH won’t be forced to give up its stake.

The world’s largest luxury-goods maker announced in October 2010 that it held 17.1 percent of Hermès after converting the derivative instruments it bought from three banks in 2008 into shares. LVMH, which says it isn’t seeking control of Hermès, has since added to its holding and now owns 22.6 percent.

Chief Executive Officer Bernard Arnault said last month that the company didn't intend to become a Hermès shareholder, having bought the derivatives originally as an investment. LVMH planned all along to build a stake in Hermes using the swaps, Le Monde reported last week, citing an AMF document.

LVMH decided to convert the swaps into Hermes stock because it was concerned that settling in cash would mean millions of Hermès shares would be released onto the market, depressing the Kelly bag maker’s stock price and offering another competitor a way into its capital, LVMH has said.

Holding Company

Hermes’s family owners formed a holding company in 2011 to protect against a takeover by LVMH. H51 groups together 50.2 percent of Hermès shares held by family members and has right of first refusal on an additional 12.3 percent. In total, 52 family members own about three-quarters of Hermès directly.

Investors normally have to disclose holdings whenever they cross thresholds of 5 percent increments. While equity swaps were exempt from such rules, that doesn’t mean investors can ignore general principles of transparency and integrity in their financial communications, the AMF’s then Chairman Jean-Pierre Jouyet told Le Journal du Dimanche in November 2010.

The sanctions committee, while part of the AMF, is independent from the board that decides whether to pursue a case.

By: Andrew Roberts; Editors: Paul Jarvis, Tony Aarons