GOF PLANS FOR BOOSTING CORPORATE INVESTMENT

UNCLAS SECTION 01 OF 04 PARIS 003679 SIPDIS PASS FEDERAL RESERVE PASS CEA STATE FOR EB and EUR/WE TREASURY FOR DO/IM TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER USDOC FOR 4212/MAC/EUR/OEURA E.O. 12958: N/A TAGS: EFIN ECON PGOV FR SUBJECT: GOF PLANS FOR BOOSTING CORPORATE INVESTMENT REF: (A) PARIS 1822; (B) PARIS 1231; (C) PARIS 2721 ¶1. SUMMARY. Despite GOF predictions of economic disruption if France votes against the EU constitution in the May 29 referendum, the GOF itself is doing little to prepare for such a contingency. The GOF has introduced two bills to encourage corporate investment and small businesses, but any positive impact is unlikely to be felt immediately. Deputies will examine the bill on June 6. END SUMMARY. -------------- The Government Rationale for Reform -------------- ¶2. Over the last few months, Finance Ministry experts have explored ways to tinker with economic policy to boost growth, primarily measures to help corporate investment. Finance Minister Thierry Breton emphasized that "Despite very healthy banking conditions and high profits in 2004, there are still many companies that have problems financing their investment plans. " Measures proposed by experts have been grouped into two bills, "the Breton bill" (named for the Finance Minister) for confidence building and modernization of the economy, and "the Jacob bill" (named after the Minister for Small and Medium-sized Companies - SMEs) in favor of SMEs. Why two bills? According to Breton, "for consistency." According to Jacob, who fought to get measures in favor of SMEs in a separate bill, the measures were too numerous to be included in one bill. ¶3. Breton introduced his bill on April 13, a few days after Prime Minister Raffarin admitted that the GOF might not fulfill its commitment to reduce the unemployment rate to 9% by the end of 2005 from a five-year record of 10.1% in early 2005, one of the major causes of public discontent with the GOF. Main provisions, detailed in paragraphs 4-17 below, focus on modernizing corporate governance rules, increasing financing sources available to companies, easing company access to stock markets, restoring investor confidence, stimulating consumption, and achieving European financial harmonization. -------------- Modernizing Corporate Governance Rules -------------- ¶4. One group of provisions in "the Breton Bill" is designed to modernize corporate governance rules by developing the use of remote transmission (video conferencing and conference calls) in order to facilitate more frequent and cheaper holding of boards of directors, oversight councils, and ordinary and extraordinary shareholders' general meetings. Of note, remote transmission will also make it easier for foreigners to participate on the board of directors of French companies. If passed, this part of the Breton bill will require a decree by the Council of State, the supreme administrative court, to guarantee the authentication of administrators, the reliability of votes, and the effectiveness of dialog. Nonetheless, boards of directors will still have to meet "in person" at least once per year to examine annual and consolidated accounts, and to decide about dividends to be distributed to shareholders. ¶5. Another provision makes reaching a quorum easier for publicly traded corporations. Quorums would be lowered for shareholder's general meetings (for example, thresholds are lowered from one third to one fourth of shareholders for initial extraordinary meetings). Unlisted companies could have their own quorum rules, since shareholders of those companies generally are not scattered like those of large companies. ¶6. Interestingly, "the Breton bill" includes a provision about the age of company chairpersons, allowing state-owned company's chairpersons to work beyond the age of 65. This measure could help Francis Mer, the former Finance Minister and the former chairman of steel company Arcelor, who could not be appointed as the chairman of the electricity utility EDF because he is over 65. -------------- Developing New Types of Financing Sources -------------- ¶7. Another group of measures develop financing sources available to companies, depending on their projects: -- In a new scheme favorable to companies involved in plans to revitalize depressed regions (with high unemployment), the GOF would select and authorize some businesses to grant partial guarantees to credit institutions making loans to companies and local authorities involved in revitalization. Currently, companies participating to revitalization have access to two financing sources, which provide a sizeable, but apparently insufficient source of funds: (a) participating loans made by businesses that cover 100% of associated risks, and (b) loans made by credit institutions with the specific guarantee of OSEO-Sofaris, a state-owned specialized financial institution that may cover part of risks. -- Companies with large industrial programs, and potential research and development objectives, may benefit from the support of the new Industrial Innovation Agency ("Agence pour l'Innovation Industrielle"). The agency has the status of a state-owned industrial and commercial establishment ("Etablissement Public a Caractere Economique et Financier - EPIC"),and will operate in line with European subsidy regulations. -- Of note, companies and individuals hoping to finance real estate would have two "Anglo-Saxon" schemes: renewable mortgages ("hypotheque rechargeable") and loans associated with mortgages with a life annuity ("viager hypothecaire"). Consequently, the real estate safety regime ("regime des suretes", which has not been modified since 1804) will be reformed to improve the readability of regulations, and to simplify seizure procedures. -------------- Simplifying the Access to Stock Markets -------------- ¶10. Another important aspect of the bill facilitates access of small-size companies to financial markets: -- by allowing issuers with small investment plans to raise capital on financial markets by reducing issue costs of their financial assets. Currently, high costs make SMEs' investment unprofitable, or discourage investing plans, including for business startups. -- by providing easier access of SMEs to stock markets through the development of new stock markets. In some ways, this legislation trails what is already happening on the markets. On May 17, for example, Euronext launched "Alternext," an unregulated stock exchange for companies that do not have access to the Eurolist (ref A). "Alternext" offers companies a new organized market (yet unregulated based on legal definition of the European Financial Services directive) open to all European companies. The new market offers more consumer protection than the "Marche Libre", which will continue to operate. -------------- -------------- Reinforcing Investors' Confidence by Implementing Some European Financial Directives -------------- -------------- ¶11. Gaining or preserving investors' confidence in financial markets is a key issue in the Government's strategy to have company investment plans financed. Most provisions fit within the European financial services directives: -- by providing adaptable financial information obligations depending on markets (regulated and unregulated),and the type of securities issued. The idea is that regulated markets have to offer investors the best protection, while rules applying to unregulated markets may be less strict since investors on these markets are more used to speculative risks. -- by setting out, in line with the EU's Prospectus Directive, the initial disclosure obligations for issuers of securities that are offered to the public or admitted to trading on a regulated market in the EU. To become a real "European passport" that enables issuers to raise funds across the EU on the basis of a single prospectus, the prospectus is submitted to the approval of the French SEC counterpart "Autorite des Marches Financiers - AMF" that controls the quality of information (comprehensiveness, understandability, consistency, accuracy of developments affecting issuers). Listed companies no longer would need to publish a prospectus when they repurchase equities. AMF has already submitted its project of transposition of the EU's Prospectus Directive since all EU members have to transpose the directive by July 1, 2005. -- by reinforcing AMF's role in extending AMF's activities, notably in the field of injunctions and sanctions. Provisions adapt definitions of inside trading, false information, and stock price manipulation. -- by involving AMF further in the supervision of financial recommendations to the public in transposition of the EU's Abuse Market Directive. The objective is avoiding undesirable immediate impacts on prices of securities traded on regulated markets of recommendations "to buy", "to sell" or "to keep" provided by non-financial analysts, notably the press. The GOF, which wants to respect the press/media's freedom, favors "auto-regulation" by this sector. -- by submitting companies to periodical information rules. Companies have to publish annual and half-year reports and quarterly financial information, and to send in copies to AMF. AMF sets information rules in line with the EU's Transparency Directive. AMF and its European counterparts may exchange confidential information related to the respect of periodical information rules. -- by creating three new thresholds (15%, 25% and 95% of capital and voting rights) in the notification to the public by shareholders acquiring shares in listed companies. Currently, stockholders are required to reveal themselves to company management and the authorities when their holdings total 5, 10, 20, 33 or 50 percent of the capital of the company. Individuals with a significant number of voting rights (notably with authorizations) are subject to regular notifications as they can have a significant influence on the control of a company, while markets are not informed. -- by providing AMF the option to supervise a price guarantee procedure on financial instrument markets (other than regulated markets) at the request of the manager of markets. The guarantee allows small shareholders to sell their equity in a company, upon a change in the controlling shareholder, at the same price as the assigner, which protects minority shareholder interests. -- by extending public offering rules related to the control of a French or Foreign parent company to subsidiaries listed on regulated markets in the European economic space or on a regulated foreign market when the parent company is a French company. Based on current French regulations, an individual taking control of a parent French or Foreign company that holds more than one-third of capital or voting rights in a subsidiary having shares listed in France, has to make a public offering on the subsidiary when the subsidiary is an essential part of the parent company's asset. -------------- -------------- Reorienting Savings to Boost Consumption and Develop Financial Culture in Companies -------------- -------------- ¶12. Provisions to boost consumption, and thus economic growth, include the extension of "Sarkozy" exemptions of fees on gifts to descendants. The exemption has been extended to donations up to 30,000 euros from 20,000 euros in 2004. ¶13. Heads of small companies (with less than 100 employees) are encouraged to negotiate profit-sharing agreements with staff. The maximum profit-sharing income paid to each employee would be limited to the highest wage in the company. ¶14. The Government encourages employees' shareholding by authorizing companies to grant a 20-30% discount on unlisted equities to their employees. Currently, only employees working in listed companies benefit from a discount. ¶15. Miscellaneous provisions aim (1) to clarify the transfer of private or collective enterprise savings plans to new plans, notably when companies are put into liquidation, repurchased, merged or absorbed, (2) to evaluate securities in savings plans held by employees in unlisted companies, (3) to improve information provided to employees on savings plan opened unilaterally by employers and (4) to provide a tax credit on corporate profit to small companies (with less than 250 employees, sales lower than 40 million euros or assets lower than 27 million euros) that offer a training on economic life and enterprise savings plans to employees, a measure designed to reinforce the knowledge and the attractiveness of plans. ¶16. French trade, insurance, consumption, and monetary and financial codes will be modified to reflect changes associated to provisions. -------------- Amendments are Expected -------------- ¶17. Minister Breton is expected to resume promoting his bill on May 30. The National Assembly's Finance Commission will examine the bill in early June, but already some amendments have been quietly introduced, for example, a provision to allow workers to work on Sundays. Deputies will start debating in an emergency procedure on June 6. The bill may be amended to include new rules for withdrawing funds for profit-sharing schemes. -------------- Comment -------------- ¶18. The provisions of the "Breton Bill" are consistent with measures previously announced by former finance Minister Herve Gaymard (ref B),and the GOF objective to develop new financial culture (ref C). They could help the economic future of France and European financial integration. That said, the bill, which is likely to be passed in June, is unlikely to have any immediate impact on corporate investment and unemployment. Currently, most companies are in wait-and-see mode before the May 29 referendum, not sure of the consequences for GOF economic policy. This mode on its own has had the effect of slowing economic and investment activity. For anyone who takes the trouble to look at the details of the GOF economic policy, it is apparent that these supply side reform proposals are exceedingly modest. It is also apparent that the GOF has no real "plan B" waiting in the wings, since, to some extent, French export growth would benefit from a weaker euro, the most likely immediate but temporary consequence of a "no" vote. WOLFF#