PARIS - Leading institutional investors are sensing victory in a fight to halt French government plans to strip nickel-mining interests from Paris-based Eramet S.A. without fair compensation.
In a major corporate governance test, the College Retirement Equities Fund, New York; Fidelity International Investments, Boston; Mercury Asset Management PLC, London; and Societe Generale Asset Management Corp., New York, have submitted a bevy of shareholder resolutions designed to protect minority shareholders in Eramet and place pressure on the French government.
Key to the dispute is whether the French government, whose Paris-based Enterprise Recherche d'Activite Petrole holding company owns 55% of Eramet's stock, can continue to direct the company's strategic decisions even though partial privatization occurred in 1994.
If so, future French privatizations might pay the price. While there were reports of threats to boycott future privatizations, notably by officials at Fidelity and Templeton Investment Management Ltd., Edinburgh, another major shareholder, officials at the firms say their comments were misconstrued.
The real issue, investors say, is whether political interference will lead to a lower premium being paid in future stock sales.
Government interference would be "another kind of risk that has to be put in the muddle," said Ken Cox, a portfolio manager for Templeton.
A wrong move by the government "clearly . . . would affect the price we would be prepared to pay" for future sell-offs, a Mercury spokesman said.
But, he added, "there are quite good signs the French government has stepped back."
Still, with France Telecom's privatization expected in the near future - despite election promises by new Prime Minister Lionel Jospin to prevent the sale of the phone company - a lot is on the line for both the French government's empty coffers and for institutional investors seeking to maximize their returns.
The Eramet dispute centers on whether the French government will force Eramet - the world's third-largest nickel producer - to swap its Koniambo mining deposit in northern New Caledonia for a less valuable concession in Poum, located in the southern part of the Pacific island territory.
The Koniambo concession, which accounts for about 25% of Eramet's nickel reserves, is not now being mined. The French government is seeking to appease separatist Kanaks, who live in the northern part of the island where unemployment is high. They want ownership transferred to a Kanak-controlled entity, in conjunction with creation of a nickel-smelting plant in the north.
But Yves Rambaud, Eramet's president and general manager, resisted the swap, demanding a fair deal for the company and minority shareholders. Uncertainty over the fate of the Koniambo concession has caused the stock price to plunge from a peak of 406 francs in May 1996 to a low of 229 francs last October.
Tensions escalated this spring. In early May, Erap - now headed by Remy Chardon, a former aide to ex-French President Jacques Chirac - summarily replaced Mr. Rambaud.
Erap officials also said they would vote in a majority of board members on the Eramet board. The Eramet board now has only four Erap representatives.
In response, at least two of Eramet's non-French directors threatened to quit.
In a tactical move, the Eramet board postponed its annual meeting from late May until after the French general election. Meanwhile, outside directors continued to press for reinstatement of Mr. Rambaud. The annual meeting now has been set for July 31.
The election of a Socialist Parliament in France might have turned the tide in the Eramet dispute. Mr. Jospin reportedly said minority shareholders at Eramet would receive fair compensation.
What's more, Eramet announced July 9 that Mr. Rambaud would be nominated for the board, in a move that likely will lead to his reinstatement. In addition, two New Caledonians - one on each side of the independence debate - were nominated for board seats.
In response, the stock has bounced back to 301.5 francs July 17, from the closing price of 267 July 4.
Before the change in the French government took place, however, institutional shareholders - who own 40% of the stock - had submitted an array of resolutions designed to protect minority interests.
Four resolutions jointly submitted by Fidelity, with 4.7% of Eramet's stock, and Mercury, with 2.66%, were published. Meanwhile, nine resolutions from CREF and SocGen, with 1.33% and 2.3% of the stock respectively, were included in the annual meeting agenda published last week.
The resolutions focus on protecting minority shareholders' rights. Recognizing they were unlikely to beat Erap's 55% vote, the strategy was to publicly make it difficult for the government to tread on shareholders' rights, one major investor said.
Key issues cover disclosure of conflicts of interests - clearly aimed at Erap directors - as well as total or majority control by minority shareholders of the nomination and compensation committees, and adoption of the French Vienot report's code of corporate governance.
Both groups of shareholders focused on appointment of independent experts to value the mines involved in the proposed swap.
What's more, both groups are pushing for complete privatization of Eramet - by 1998, in the case of Fidelity and Mercury. CREF officials also would be amenable to re-nationalization, or even spinning off the controversial New Caledonian mine, but say the status quo can't remain.
Institutional investors are sanguine that a deal will be cut. Eramet's own proposals give them some hope. The company's board proposed that a swap could be carried out, with an independent panel to value the assets.
The board also proposes adopting an internal code of practice covering director's behavior. Included are a duty to abstain where any director has a conflict of interests, and an obligation by each director to point out conflicts held by others.
The code could be akin to the widely publicized mode adopted by General Motors Corp., and including regular reports to shareholders and disclosure of conflicts, noted Sophie L'Helias-Delattre, president of Franklin Global Investor Services, a Paris-based proxy consultant who represents CREF and SocGen.
"The standard here is very high," she added.
In addition, the board called for a minimum of five independent directors - three more than recommended by the Vienot report -in the newly expanded 18-member board, which also will include three elected employee representatives. The board now has 15 members.
"We feel we have made significant progress on some key issues," said Peter Clapham, senior vice president and chief counsel for TIAA-CREF. "Independent valuation and also key corporate governance concerns to a degree have been addressed," he added.
Still, CREF officials are waiting to see further progress on privatization, and recognition by all parties that minority shareholders should be protected, Mr. Clapham said.