The descendants of founder Thierry Hermes set up a holding company structure to thwart an eventual LVMH takeover last year, after the global luxury retailer increased its stake in Hermes to more than 20 percent.
But by changing the group's structure the family members, who collectively hold more than 73 percent of Hermes, had laid themselves open to a possible obligation to buy out all minority shareholders.
The holding company needs to control over 50 percent of Hermes to block a hostile takeover but under French rules, any shareholder acquiring more than 33 percent of a listed company must offer to buy the other shares.
The AMF markets regulator said in January it had decided not to enforce this requirement, prompting small shareholders' association Adam to launch an appeal, which was rejected on Thursday.
The Hermes family welcomed the ruling, saying in a statement it would create the new holding company in the coming weeks.
"This will provide lasting comfort to the Hermes group's independence, the continuing of its strategy of creativity and hand-crafted excellence and the respect of its values," it said.
Hermes boss Patrick Thomas said from Shanghai that the move would ensure the group's independence for the next 20 years.
The holding company "is a signal that the Hermes family would like to send to the house's employees and to the outside, including to LVHM, about its unity," Thomas said.
The minority shareholders association had argued that the fact most owners of a company belong to a family should not allow them to escape their legal obligations to other shareholders when transforming a group.
Minority shareholders can benefit from a contested takeover as the bidder or bidders will likely increase the price paid in order to overcome the target company's opposition.
The head of Adam, Colette Neuville, said she was "disappointed" by the ruling and "worried about the exercising of minority rights".
Her organisation will look at the ruling to decide what to do next, she said, adding that "this is a complicated matter that calls important rights into question."
Adam has two months to decide on whether to take the case to the supreme court.
Thursday's ruling said the creation of a holding company could be seen as "a reclassification between people belonging to the same group, without any impact on control of the Hermes business."
The AMF's original ruling in January "does not harm equality between (Hermes) shareholders or the principles of transparency, integrity and loyalty," the appeals court said
The court ruled that Hermes family claims that "the existence of a family group is unquestionable and has always been public knowledge... are not without significance."
Family shareholders have implemented "a common, continuous and repeated policy at Hermes, whose strategic direction they determine."
LVMH said when it hiked its Hermes stake to 20.2 percent that it would continue to buy more shares as appropriate but it did not seek control of the company and nor would it make a public offer.
The group, owned by French billionaire Bernard Arnault, said the investment in Hermes was "strategic and long-term."
LVMH, the world's leading luxury group, controls brands such as Louis Vuitton, Givenchy, Dom Perignon and Dior.
LVMH today controls 21.4 percent of Hermes' capital. Trading in Hermes shares was suspended pending the appeals court decision and is set to resume on Friday. Its shares closed up 2.48 percent at €268.30on Wednesday.