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

271006Z May 05

UNCLAS SECTION 01 OF 04 PARIS 003679 
 
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:  GOF PLANS FOR BOOSTING CORPORATE INVESTMENT 
 
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. 
 
¶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 
harmonization. 
 
-------------------------------------- 
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 
companies. 
 
¶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 
risks. 
 
-- 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 
regulations. 
 
-- 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 
directives: 
 
-- 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 
company. 
 
¶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. 
 
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Comment 
------- 
 
¶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" 
vote. 
WOLFF#