By Tim Hepher
PARIS (Reuters) - Proxy advisory firms are threatening to block key financial resolutions at French aerospace group Safran (PA:SAF), opening a second front in a battle between the French government and institutional investors over a new corporate law.
The so-called Florange law is already at the center of a fierce debate over moves to introduce double voting rights for long-term shareholders in French companies to encourage stability.
Safran has been able to sidestep the row over "one share, one vote" at companies such as Renault (PA:RENA) because it already has a system of double-voting for long-term investors that operates smoothly.
But it is facing an investor revolt over a second, less publicized, provision of the law that grants more discretion to boards of French companies to repel takeover bids.
Proxies representing big investors say they will vote against resolutions granting share issuance authority at Safran's shareholder meeting on Thursday, because they fail to suspend board powers to issue shares whenever a bid is imminent.
Such share issues dilute a predator's stake and are seen by their critics as a form of "poison pill" that can hurt valuations. The government says clipping the wings of predators is part of its drive to focus on the "real economy".
"Poison pills limit the powers of decision of shareholders and it is not up to the board to decide for them," said Hugo Dubourg, corporate governance analyst at France's Proxinvest.
To many, the debate over Safran may seem academic: the maker of engines for France's nuclear missiles is already shielded by decrees protecting the defense sector from hostile bids.
It's not the only company where proxy firms are gearing up for a fight over board authority to issue shares, with construction firm Bouygues (PA:BOUY) also in the firing line.
But Thursday's Safran meeting is seen as a potential test case for companies where the French state has a direct stake, setting the scene for a new clash over the Florange Law which groups a number of measures to make the economy less volatile.
Safran and Bouygues declined comment.
POWER SHIFT
The debate follows a fundamental change of French policy on the power balance between boards and shareholders during bids.
Previously in France, the routine shareholder approvals allowing boards to issue shares were suspended in the face of a bid, under a principle known as "board neutrality".
The term can seem misleading since boards have always been free to make their opinions heard, but until now they could not deploy share defenses without new backing from stockholders.
Under the new law, a board can issue shares using existing approvals, even when a bid is imminent or under way.
"Before Florange, a board's hands were tied in the event of a bid and all powers were centralized in the hands of shareholders," said Hubert Segain, a Paris partner of international law firm Herbert Smith Freehills.
"This was the opposite of the Delaware principle, which gives primacy to the boards of quoted companies in the United States."
In an effort to soften the impact, resolutions to be put before Safran's AGM would allow the board to issue shares during a bid, but would limit this to 9.6 percent of the capital.
But firms like Proxinvest and French corporate governance association AFG want shareholders to be consulted on all takeover defenses as a matter of principle.
Institutional Shareholder Services, the world's largest proxy advisory firm, has urged investors in French companies to vote against financial resolutions "if they can be used for anti-takeover purposes without shareholders' approval".
Several French companies have added the limitation sought by proxy firms. Safran, in which the French government owns 18 percent, is the first state-backed firm to ask shareholders to approve the extra board freedoms set out in the new law.
Despite opposition, some say Safran's proposed 9.6 percent ceiling could reassure investors that the law can be enforced without driving a wedge between shareholders and the board.
"It's not so much a poison pill as a dose of cough medicine," said one French financial source.
(The story was refiled to fix a typo in paragraph 10)