The impact of the “Florange Law” on French companies raises major issues and has sparked lively debate between companies, asset-management professionals and institutional investors. The “Florange Law” effectively changes the legal status of two fundamental shareholder rights:
- Double Voting Rights. All listed companies will automatically benefit following their 2016 annual general meeting (AGM). Companies wishing to do so can propose a shareholder vote to adopt single voting rights in their by-laws (requiring a qualified majority of 66% of shareholders present or represented at the AGM).
- Board neutrality during takeover bid periods. Boards may take decisions “to thwart a takeover bid”. Until now, it is the Board’s duty to remain neutral during takeover bid periods in order to respect equality between all shareholders.
These two provisions significantly modify shareholder rights in France through the standardised application of their measures in order to “protect” French companies, as the debates in the French parliament have highlighted. It would appear however that the legislator has failed to take into account the requirement for shareholders to hold registered shares in order to benefit from double voting rights, which automatically excludes all UCITS and most pension funds, for the legal or technical reasons familiar to all market professionals. Nor does the legislator seem to have taken into account that France, like a number of other countries (excluding Germany), has signed a reciprocity agreement which enables a company targeted by a French company to deploy the same means of countering a takeover bid.
Twenty two of the CAC 40 companies already practice double voting rights and we have written to these companies to remind them of the “one share, one vote” principle and requested that they install mechanisms to ensure shareholder equality. We effectively consider it important if double voting rights exist, that ALL shareholders can benefit to avoid the risk of undeclared creeping control.
We simply asked the thirteen companies with no double voting rights to state their intentions and we were surprised to hear that most of them are greatly attached to their single voting rights. GDF SUEZ recently announced that its Board plans to propose a resolution to maintain single voting rights, which would very probably be refused as the French government owns 32% of the capital and has stated that it is in favour of double voting rights in order to reduce its stake, whilst maintaining the same number of voting rights. It is also likely that the introduction of double voting rights will disrupt the balance of the Renault/Nissan agreement, as Nissan has no voting rights despite owning 15% of the shares, whilst the French government, which also owns 15%, could halve its stake and maintain the same power in terms of voting rights.
Some observers may consider us irresponsible investors as French listed companies are at risk due to their lack of capital and the adoption of double voting rights would provide protection. In the case of Lafarge however, the main shareholder benefitting from double voting rights publicly campaigned for the merger with Holcim. This will lead to the group being absorbed by a Swiss company, which will therefore modify corporate governance and cause the company’s registered office to change location, while forcing out French retail investors who will no longer be able to hold Lafarge Holcim shares in their personal equity plans.
This clearly demonstrates that double voting rights are also a means of securing control, that each company’s individual situation is different, with a specific balance of relative shareholder power, and that the generalisation of this policy will perturb some companies as certain shareholders will increase their weight. It will probably encourage French or foreign investors to rapidly secure control, incurring a risk of destabilising the fragile equilibrium in place.
Similarly, the question of neutrality may cause a Board to take action in the event of a takeover bid that shareholders would not necessarily have accepted. Would Vivendi shareholders have validated the sale of 70% of the group’s business for example?
Foreign investors currently hold majority stakes in our companies. The best protection is provided by the quality of strategy deployed, in parallel with governance which includes all shareholders in major decisions via the AGM. There is a major risk that certain investors reduce their French equity exposure as they consider that the companies in question no longer comply with their governance requirements, chiefly the principle of “one share, one vote”.
Our duty as a minority investor is to warn all companies and investors of the risks incurred by such modifications, so that they can make a considered decision in accordance with their strategy and existing shareholders. We are convinced that as responsible investors, we are simply fulfilling our role as a shareholder and that it is up to the shareholders of each company (and not the government) to decide on a case by case basis, as a function of their own situation. Our companies’ futures are at stake, as they depend on all of their shareholders to provide the means for growth.
Olivier de Guerre
PhiTrust Active Investors