FRANCE TO REVIEW SHAREHOLDER LAW, STOCK-OPTIONS ABUSE

UNCLAS PARIS 006394 SIPDIS 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: FRANCE TO REVIEW SHAREHOLDER LAW, STOCK-OPTIONS ABUSE ¶1. Summary: The National Assembly plans to review the law on employee shareholding in October. The government is anxious to address the issue before the June 2007 presidential elections, since it wants to promote investment as well as address the abuse of stock options by company executives, which has caused several high-profile scandals. A lively debate is likely, as the law affects the pocketbooks of company executives, employees, and investors. END SUMMARY. Scandals Related to Stock-options -------------- ¶2. On September 20 the GOF announced its decision to address the issue of stock options in parliament. The debate was sparked a few months ago when it was discovered that Airbus head Noel Forgeard had sold his own stock options and those of his children just before the announcement by the company of delays in the delivery of the A380. Airbus stock prices fell after the announcement. A similar move by the CEO of Vinci, Antoine Zaccarias, created a strong backlash. ¶3. In June, former center-right PM Edouard Balladur proposed that heads of companies should not use stock options during their tenure, rallying 178 deputies behind his measure. However, Finance Minister Thierry Breton recently confirmed in a press conference he favors more flexibility. He suggested that heads of companies should be required to hold a minimum of 25-30 percent of their stock options during their tenure. Breton would let boards of directors decide the precise percentage, and proposes to submit the decision to shareholders' votes, aware that shareholders are already wary about executives' earnings. Legislators Will Examine the Shareholding Law -------------- ¶4. The stock option reform will be examined by the National Assembly in October as part of the employees' shareholding law ("Loi sur la Participation"). The plan of Breton and Labor Minister Borloo is to launch a wide debate on the economic and social role of investing. In a move to encourage employee shareholding, Breton wants to promote the distribution of free shares by companies to employees, suggesting companies could benefit from tax deductions. ¶5. Jean-Michel Dubernard, the head of the Social Affairs Commission at the National Assembly, applauded Breton's project. However, his counterpart Patrick Ollier, the head of the Economic Commission, called the project "too timid." He suggests mandatory shareholding in companies with fewer than 50 employees, and a requirement that employees hold shares at least three years, as opposed to the five years proposed by Minister for Small and Medium-Sized Companies, Gerard Larcher. Larcher explained he did not want companies to use shareholding as a substitute for effective wage increases. He warned that shareholding in companies with fewer than 50 employees would require sector negotiations. Analyst Reactions -------------- ¶6. According to commentators, the main risk is that the debate about stock options may overshadow the discussion about employees' shareholding. For her part, Collette Neuville, the influential head of the Association of Small Shareholders, acknowledges that former PM Balladur's proposal fits well with good corporate governance rules, but would not keep company executives from pressuring earnings committees ("Comites de Remunerations") to get as many stock-options as they want. She also warned that the proposal would not prevent heads of companies from ignoring limits set on the holding of stock options, arguing that banks would find new financial techniques that would allow this to occur. "This is only more work for banks," she opined. Not surprisingly, Neuville suggested giving more power to shareholders over the award of stock options to company executives. COMMENT -------------- ¶7. Nine months before Presidential elections, the government is clearly concerned about being seen as protecting the interests of both businessmen and employees, while calming electors who might be critical of the government for tolerating financial scandals. Debate on the measure at the National Assembly will be lively. The Socialist and Communist opposition is likely to fiercely defend employee shareholding, and to call for making stock option rules stricter. The center-right majority appears divided about practical ways to implement any new legislation. STAPLETON#