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Last Updated: Wednesday, 28 June 2006, 23:00 GMT 00:00 UK
France's shareholder revolt
By Henri Astier
BBC News

CEO Guy Dolle (right) and other Arcelor top executives
Guy Dolle and other Arcelor chiefs are feeling the heat
France has a long history of uprisings, but the latest social group to rebel was not previously known as troublesome - shareholders.

France's traditional brand of capitalism - dominated by a small elite with strong links to politicians - ensured that government-backed managers called the shots and shareholders suffered in silence.

But in recent months there has been a whiff of revolution in the air, and some boardrooms have looked like Bastilles ripe for storming by angry investors.

At Arcelor, a steel group based in France and Luxembourg, shareholders forced the board to agree to a takeover bid by Indian rival Mittal which managers had fiercely resisted.

At EADS, an aerospace giant, shareholders are incensed that top managers cashed in on stock options shortly before bad news wiped off a quarter of the share value.

Shareholders are waking up to the fact that they can impose their point of view
Pascal Salin
Economist
Many want the chief executive's head and are suing to recoup their losses.

But as was the case in 1789, it is not yet clear whether this is a mere revolt - or is turning into a full-blown revolution.

Pascal Salin, France's most prominent free-market economist, is among those who think the Arcelor saga could signal the end of the "ancien regime".

"It is the first time in recent economic history that owners have used their power," he told BBC News.

"Shareholders are waking up to the fact that they can impose their point of view."

Aux armes, shareholders

The Arcelor deal, of course, is not done yet, and plenty of things could still go wrong.

Severstal, a Russian steel group with which management had tried to arrange a last-minute marriage to keep Mittal at bay, is angry at being beaten to the altar and may well sue the fickle bride for damages.

And of course, Mittal's 25bn euro ($31bn; 17bn) offer has yet to be approved by Arcelor shareholders.

Jean-Nicolas Caprasse, head of ISS Europe, an investment consultancy that advises many Arcelor investors, is cautious.

Lakshmi Mittal
Lakshmi Mittal is smiling - and so are many Arcelor shareholders

"We have yet to determine the quality of Mittal's corporate governance after the transaction," he says.

But it is hard to see shareholders rejecting an improved bid from Mittal, the partner they imposed on hostile managers.

Above all, it is clear that Arcelor's fate is now in the hand of value-seeking shareholders.

Big hitters

That, in itself, is a big change.

In the past, says Mr Caprasse, "reference shareholders" - that is, those favoured by governments - dominated shareholders' meetings.

Typically these were men who shared the same outlook and background, had often been classmates at elite schools and sat on each other's boards.

In such a system "private investors and institutional investors were marginalised," Mr Caprasse says.

"But today this tendency is being reversed. French-style capitalism is on the wane and institutional investors are more and more numerous and exercising their right to vote intelligently."

One reason for the change is the increased weight of large pension funds, notably from the US, in the shareholders' registers of continental companies. Their role in the Arcelor revolt was crucial.

This is unprecedented in France - a de facto alliance between the shareholders and the attacker in defence of their common interest
Colette Neuville, Association for the Defence of Minority Shareholders

"The institutional investors tipped the scale," says Frederik-Karel Canoy, a Paris-based lawyer who specialises in defending shareholders.

"They were worried about lack of transparency in the Severstal deal."

Anglo-Saxon influence

Colette Neuville, chairman of the Association for the Defence of Minority Shareholders, agrees that the small investors she represents were not the main driving force behind the insurgency.

"The new shareholder activism was initiated by Anglo-Saxon investors," she says.

"Their banker, Goldman-Sachs, played a key role in this. Without the resources of Goldman-Sachs, the revolt would have been impossible.

"This is unprecedented in France - a de facto alliance between the shareholders and the attacker in defence of their common interest."

Fly the flag

France's old regime, however, will not surrender to the hated "Anglo-Saxon" model without a fight.

And according to some analysts the outcome remains uncertain.

"Economic patriotism" - the determination to prevent foreigners from acquiring controlling stakes in key sectors - remains strong in France.

In February, the French government moved quickly to tie energy group Suez to Gaz de France, so as to prevent Suez from taking up Italy's Enel on a takeover offer.

"All European governments are prone to economic nationalism," says Geoffrey Wood, who teaches economics at London's Cass Business School, "but the French are notorious repeat offenders."

The key factor, he argues, is not whether firms are controlled by domestic or foreign shareholders: it is government interference.

EADS co chief Noel Forgeard
Noel Forgeard has come under fire from shareholders

In a lightly-regulated economy, Mr Wood says, "you can have a domestic shareholder base that is open to change" while a state-heavy economy such as France's foreign shareholders will be hemmed in.

The Arcelor saga, he adds, has shown just how prone to meddling the Paris government is, with ministers condemning the Mittal deal early on.

Class action?

The French government, admittedly, did not get its way in the Arcelor case. But the company is a pan-European one, with its headquarters in Luxembourg.

Shareholders in key, purely domestic French companies may face more hurdles if they want to sell to foreigners.

Mr Canoy, the lawyer who advises EADS shareholders, also points to legal obstacles to full-blown shareholder democracy in France.

The case launched against the EADS managers accused of insider trading - a claim they reject - is commonly described as a "class action" lawsuit.

But, Mr Canoy says, the label is misleading. France does not allow US-style class action suits, where a lawyer can act on behalf of a group and those who want to stay out have to say so.

"In France every single member has to launch proceedings," he says. As a result Mr Canoy and his clients have to hunt down individual investors and convince them to join - a task made more difficult by the fact that they are banned from advertising.

As a result, he can only act on behalf of a small sample of a firm's shareholders - typically less than 1% - who are rarely viewed as a threat by managers.

But you cannot fault French shareholders for trying. And the Arcelor case is undoubtedly good news for them.

As Mr Salin notes, France's "tight-knit, mutually-reinforcing elites no longer have the powers they used to enjoy".




SEE ALSO
EADS boss waits to hear his fate
27 Jun 06 |  Business
Severstal may sue over steel deal
26 Jun 06 |  Business
India applauds Mittal take-over
26 Jun 06 |  Business
Steel firm opts for Mittal offer
25 Jun 06 |  Business
Woes continue at embattled EADS
20 Jun 06 |  Business

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