Some French equities are more equal than others
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The French government received a gift from its 13.4 per cent stake in telecoms group Orange in April: overnight, the voting rights attached to the holding increased to more than 20 per cent.
The seemingly magical increase, which also affected holdings in the group by other state entities, happened courtesy of France’s so-called Florange law, which made double-voting rights automatic for long-term investors in listed companies unless shareholders specifically voted to opt out.
Yet more than two years on from the controversial bill’s approval, and as long-term shareholders start to reap the rewards of their holdings this year, broad opposition remains.
The law — which took its name from the dispute between France’s Socialist government and ArcelorMittal after the Luxembourg-based steelmaker tried to shut a mill in the north-east commune of Florange — was supposedly designed to reward and encourage long-term shareholders. The hope was that this would give greater stability to boards to set company strategy and governance.
Last year, a throng of France’s largest listed companies voted on the issue at their annual shareholder meetings. Double-voting rights were adopted at companies such as Renault, Engie and Vivendi but shot down at other groups such as BNP Paribas and L’Oréal.
Overall, however, the number of companies with double-voting rights changed only slightly because such provisions have long been commonplace in French business. Before the law, 22 members of the CAC 40 had double-voting rights, compared with 26 after the law came into force.
Loïc Dessaint, chief executive of Proxinvest, which advises investors on votes and corporate governance, argues that the relatively small change was the result of relentless communication from his company to investors over what he considered to be the negative effects of double-voting rights.
“We spent a lot of time explaining things in France and abroad, and everyone realised that they would be diluted,” he says. “It was clear in the minds of most investors that it was a terrible move.”
Mr Dessaint and other critics of the law argue that double-voting rights favour big investors over small. He adds that they often lead to minority shareholders eventually controlling companies with relatively small stakes.
“The large shareholders end up controlling the main bulk of the voting rights,” he says. “It does not promote long-term investment but instead promotes big owners who, most of the time, are French.”
One of the biggest beneficiaries of the law was French industrialist and billionaire Vincent Bolloré, who managed to have double-voting rights passed at his media and content group, Vivendi.
More than half of Vivendi’s shareholders voted to strike down double-voting rights at last year’s annual general meeting, but that was still below the two-thirds majority that the Florange law requires to block its implementation.
As a result, Mr Bolloré, who has ramped up his Vivendi stake over the past two years and is by far the group’s biggest shareholder, will have 29 per cent of voting rights by next April, according to his Bolloré Group. But that should rise significantly in the coming years even if he keeps his equity stake the same since more of his equity holding qualifies for double-voting rights.
Shareholders in several large French groups voted against the introduction of double-voting rights. As well as L’Oréal, the cosmetics company and one of the country’s biggest businesses, property developer Unibail-Rodamco and construction group Vinci were among them.
But Veolia, the water and waste management group, Engie, the energy company, and Orange were among a handful of businesses that opted to take up double-voting rights.
So did Renault, the French carmaker, in which the government controversially bought an additional 5 per cent stake to boost its holding to about 20 per cent. It did this in the run-up to the company’s annual meeting to try to guarantee that double-voting rights were implemented.
Some 60 per cent of the company’s shareholders voted against the Florange law — a clear majority but still shy of the 66 per cent required to stop double-voting rights being implemented.
Catherine Salmon, a Paris-based executive director at proxy voting adviser Institutional Shareholder Services, argues that the fact the government was a significant shareholder in each case is far from coincidental.
“The French state is a big beneficiary of the law because it allows it to reduce its holding in the companies while keeping its voting rights,” she says.
The French government is under pressure from Brussels to reduce its fiscal deficit to bring it in line with EU rules. It is also committed to participating in planned capital raisings at majority state-owned utility EDF and energy company Areva.
As a result, the French government is looking for additional sources of income.
The French government has yet to sell its stakes in its portfolio of 77 companies, which was worth more than €77bn last April, according to APE, the holding company for the state’s investments. But it has already hinted that it may do so in future.
The changes may benefit the French government in the form of providing greater flexibility to reduce its shareholdings, but Mr Dessaint has no doubt that it is a bad move in the long run.
“It’s a terrible sign for investors because it looks very protective,” he says. “When you have double-voting rights in place, it is a sign that you don’t want to play by market rules.”