At the beginning of the 21st century, France was still considered a leader in the world of business. As the 2nd largest economy in Europe, the country was able to greatly influence the biggest trade bloc in the world. Investing in France for the long term, seemed to make sense as it was recognized that there were a number of French companies considered world class. The country’s stock market at that time, (CAC-40) contained 5% of the global total of shares traded. The future of the nation although somewhat diminished, seemed to be secure.
A decade later a dramatic change has occurred. Only 1 French firm remains in the top 50 companies in the world, as ranked by market value. Only 3% of the shares traded in global markets are now conducted in France. Companies that were distinctly French, were being bought up at an alarming rate. The economic global shift in power from Europe to Asia, Latin America and elsewhere, was now quite evident to the dismay of French political and business leaders.
In order to defend these companies and their French shareholders, the government passed the Florange Law in April of last year. This legislation will come into full force in March of 2016. The supposed purpose of this new mandate, is to protect French firms from corporate raiders and speculators in general. Although popular in France and in other parts of Europe, it attempts to change the laws of capital and investment.
The French government in essence, intends to give traditional shareholders much more clout in the destiny of companies that are headquartered and or do the majority of their business in France. Furthermore, the hope is that it will allow these firms to have more clout in the global economy, by keeping them free from the constant fear of being taken over by other entities.
In theory, the law will allow corporate managers to be able to make decisions that will benefit the company in the long term, rather than be held hostage to short term gains and profits. It will permit making investments in company endeavors that will keep the firm competitive, even to the disadvantage of shareholders if need be. More revenue could then be used for research and development, rather than dividends and yields in the form of payouts.
How the new law will operate is rather simple. Investors that have held stock in a listed French company for at least 2 years, will automatically be given double the voting rights that they were previously entitled to. The only way to avoid the new mandate, is for the company to change how it will be managed. This is the exact opposite of how a corporation does business at present. At the moment, a company has to explicitly choose to enhance the power of a select group of their shareholders.
This of course gives added voice to insiders, at the expense of new investors. It has been estimated that two-thirds of the companies trading on the CAC-40 index today, have a durable strong investor. These can be a family that has held company stock for years, a wealthy tycoon or as is often the case, the French government itself. The power of all three of these groups will be much enhanced under the implementation of the Florange Law.
Many investors insist it will spectacularly strengthen the power of the French state, which continues to have large holdings in many companies across various sectors of the economy. The same can be said for the French trade unions, who typically end up controlling the voting rights on their members.
Knowing that the law comes into full effect in less than a year, many large investors in French firms have asked corporate leaders to disavow the new law and to take steps now to prevent this dramatic change in company guidance. Their reasoning is that it changes the traditional rules of business and will not be to the benefit of shareholders, who rightly expect regular returns for their investment.
Regardless of the intent, the new law in truth is just another form of protectionism. Is not the objective to give an unfair advantage, to a certain class of shareholders? Many business analysts think so. Unexpectedly, the new law is not as popular with companies that although public, are still family owned. If minority stakeholders will now have an enhanced position, will they truly do what is in the best interest of the company? There are already several movements already in place, to try to get the largest corporations in France to commit to an opt out policy.
The French government argues that the legislation was designed to promote even greater long term investment and that it is not protectionist, because all shareholders regardless of nationality can qualify for double voting shares. Plus a company’s shareholders have the option of voting to not participate in this new business organizational law.
The movement is not just confined to France. A similar plan of action was being attempted in Italy. The same principle was being applied, offering double voting rights to long term investors. There were to be called loyalty shares. Basically if just 50% of shareholders agreed to the new provision, it could then be enacted. At present one would need a two thirds majority, to change the corporate structure. It created such a ruckus among the business class in Italy, that the government had to abandon the scheme.
Of course in any new law that deals with business, there is always the unintended consequences that such measures usually produce. In this case, France will likely lose more foreign investment and will find that it will be more difficult to raise capital, for future corporate endeavors. Since 46% of all widely held French companies do not currently prohibit double-voting rights, the impact on the French economy will be striking.
There is the additional problem of cost. The voting power that is being confiscated on already listed firms, has a monetary value. Shares that are sold that do not have any voting rights, will need to be traded for less money. The price reduction could be as much as 10% and even higher, if the directors of the company are not generating confidence.
The Florange law also does away with the usual principle of company board neutrality, during offer periods. This in reality gives these entities a great deal more discretion, in taking thwarting actions without advance approval from shareholders.
Some analysts will argue that companies under the new law will continue to perform as well as most competitors, regardless of the change in shareholder power arrangements. Of course, this will depend on the company and what business policies are practiced. In other words, there is now way to really know. It could just as well reinforce mediocrity.
In response to the law, a number of France’s largest companies are preparing a resistance movement, to the present socialist government of the country. They are doing this at the annual corporate meetings, where management attempts to convince shareholders to maintain the traditional one share one vote principle. If they are successful in this undertaking, they can then amend the by-laws of the company to opt out of the new mandate completely.
The French corporate resistance is being assisted in their efforts by the PhiTrust, which has the backing of 19 different institutional investors that manage a total of $2.5 trillion USD (United States dollars) or 2.3 trillion Euros. They originate from different countries around Europe and include noteworthy investor nations in addition to France, like Germany, Switzerland and the United Kingdom.
The reputation of PhiTrust carries weight in the French business community. Since the founding of this asset management company in 1999, the firm has been able to formulate specific methodologies in corporate governance that have worked rather well. These specific policies demonstrate best business practices with a positive cooperation with shareholders. The company has been quite successful with mutual funds invested in the stock market.
The Florange Law simply adds another hurdle in doing business in France. The resulting higher price of capital will of necessity, apply to all French companies. The lower valuations will hurt the very French firms that are supposed to be helped under the mandate. It will give an added advantage to their competitors, that may well reside in a less regulatory and more investor friendly environment. Finally, it will make the issuance of upcoming shares to pay for corporate expansion, much more problematic. Where will these firms get new investment from, to finance future research and development?
If one adds this to the exceptional high personal tax rate now at 50.30%, (only Spain has a higher bracket at 52.00%) and the 75% tax on millionaires (repealed after a year) along with a corporate tax charge of 33.33% (the highest in Europe among major countries) an investor might question whether it is worth the risk. This is in addition to a sales tax rate of 20%, rigid labor laws, as well as the endless regulations and rules that France is notorious for.