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Cablegate: Gof Plans for Boosting Corporate Investment

This record is a partial extract of the original cable. The full text of the original cable is not available.

271006Z May 05




E.O. 12958: N/A

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.

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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

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

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

-- 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

-- 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

-- 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

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.


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"

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