PARIS - Institutional investors are irate at an Elf Aquitaine S.A. proposed bylaw change that would double voting rights for long-term shareholders.
The proposal, which will be considered at the French oil giant's annual meeting May 31, could provide virtually an unstopable block to any threat to management.
The amendment "purely entrenches management," warned Sophie L'Hlias, president of Franklin Global Investor Services, Paris, a corporate governance firm.
Even though many foreign institutional investors, who own 27% of Elf's stock, generally oppose such anti-takeover provisions, it appears unlikely they will be able to derail the proposal. (Elf's employees, with a 4.7% stake, also have voiced opposition but cannot vote their shares directly.) Elf's board must win at least two-thirds of the votes cast to pass the amendment.
Still, the vote is significant because it provides the first major test of a voting rights limitation in France in the past two years, said Stephen Davis, director of the Investor Responsibility Research Center's global shareholder service, Washington.
During the past year, French government and corporate officials have awakened to the importance of corporate governance issues, meaning Elf probably will run into greater resistance than others have in the past.
The board of Elf, which is one of the world's largest oil companies, proposes doubling the voting rights of shareholders whose shares are registered and have been held for at least three years. Institutional investors typically hold their shares in bearer form, assuring anonymity. Plus, no shareholder would be able to cast more than 10% of the votes at an annual meeting (20% for double voting rights), further hindering an outside challenge.
Double voting rights irk foreign investors, who say the proposal would violate the concept of "one-share, one-vote" that is widely accepted in Anglo-Saxon capital markets.
French companies have been turning to voting restrictions and other methods to ensure they are not vulnerable to foreign takeovers.
As major French companies - including Elf - have been privatized by the French government, actions have been taken to protect corporate managements. Lacking domestic pension funds to buy up the stock, the government and companies have looked to other means to keep French companies in French hands.
In many companies, the government has retained a "golden share," which enables it to block stock acquisitions in privatized companies above certain levels.
In addition, the government has leaned on major banks and industrial companies to become core shareholders, agreeing to hold shares in a privatized company for a set period of time. These "noyaux dur" are designed to ease the transition to the private sector. But others worry they reduce market discipline.
Restrictive voting rights also have been adopted at numerous companies, including Total, Alcatel Alsthom, Group Danone S.A., Lafarge Coppee, Schneider Electric S.A. and Credit National.
At Elf, which was privatized in February 1994, core shareholders hold 10% of the company's stock, while the government retains a 13% stake (soon to be reduced to 11%).
Combined, the voting rights of employees, core shareholders and the government would double to about 50% under the proposal. If those shareholders proved loyal to Elf management in a fight, that would give management a lock, warned Ms. L'H lias.
Some shareholder experts believe the provision barring any shareholder or a group working together from voting more than 10% of the votes represented at a meeting is more onerous. The provision would prevent a major shareholder from blocking passage of capital increases or other major items, which require two-thirds approval.
Colette Neuville, an activist for minority shareholders, said the proposal means a shareholder could arrive at a meeting not knowing how many shares he or she could vote.
These provisions would come in addition to the state's existing golden share, which enables the government to prevent any shareholder from amassing a 10% or greater position. The state also retains veto rights over sale of major assets and has two board seats, according to the IRRC analysis.
On top of golden share, the double voting rights proposal is overkill, Ms. L'H lias said.
A company statement explains the proposed bylaws amendment is designed to encourage long-term ownership.
Foreign pension funds are expected to oppose the amendment. With a collective 27% holding, that could prove to be a sizable vote. U.S. and U.K. investors dominate the foreign institutional holders, and are more likely to resist the proposed amendment.
But many shareholders don't bother to vote their shares. Meanwhile, Elf executives have been campaigning in favor of the proposal. With major institutions such as Union des Assurances de Paris, Banque Nationale de Paris, and Societe Generale de Belgique in the company's core group, it will make it hard for domestic institutional investors, with their 14% combined stake, to resist the pressure.
Still, some will. Michele Giovannetti, a portfolio manager with Fimagest, Paris, said the proposal would hurt investors with large Elf positions. Fimagest, with a modest holding, will vote against the amendment, she said.
But Murray Davey, director of European equities at Kleinwort Benson Investment Management Ltd., London, said he doesn't believe the double voting rights proposal will have much effect on the company, given its size and the realities of management entrenchment in France.
"If one is realistic in France, I'm not going to be able to get (management) out," he said.
Some investors might not be too exercised about the vote because Elf management has been willing to restructure. The company took a writedown of 8.7 billion francs ($1.64 billion) last year, mainly on North Seas and U.K. assets, driven in part by adherence to U.S. accounting rules. That caused the company to record a loss last year of 5.4 billion francs, down from a profit of 1.07 billion francs in 1993.
Elf also has started selling off non-core businesses, wanting to scale back to its core businesses of energy, chemicals and healthcare.
Elf executives also want to reduce corporate debt, although the net debt to equity ratio only edged down to 46% at the end of 1994 from 49% the year before.
Gordon Gray, European energy analyst for Salomon Brothers Inc., London, believes Elf's stock is "fundamentally undervalued." Elf has the lowest price to cash flow ratio among integrated energy stocks, according to a Salomon report. Salomon analysts also expect Elf's earnings to rebound to 28.4 francs per share next year from 12.7 francs in 1994.