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Cablegate: France to Review Shareholder Law, Stock-Options Abuse

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UNCLAS PARIS 006394

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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#

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