Veto Could Address French Defense Ownership Concerns

By Amy Svitak
Source: Aviation Week & Space Technology
April 22, 2013
Credit: Dassault Aviation

France has maintained a degree of state control over its strategic defense industries for decades, but government bungling in managing its shareholdings has led to calls instead for U.S.-style veto power over ownership changes on national security grounds, a regulatory shift that is anathema to European Union anti-protectionism rules.

Over the past 10 years, the French state has often proved unable to act with a single voice, and in some instances displayed rank incompetence in handling its equity interests in key defense groups, according to France's audit agency, the Cour des Comptes, an approach that has left the government in a weakened position as shareholder in the very companies it wants to influence.

As it privatized and reorganized the country's aerospace and defense industry, the French government kept significant shareholdings in key companies in a bid to protect an industrial base it viewed as essential to national security. But occasionally poor stewardship of its holdings has gradually eroded the state's ability to achieve that goal, the report reveals. The government's role has deteriorated to where competing companies have become entangled with each other, and with the nation's strategic interests.

European aerospace giant EADS—co-builder of the Eurofighter Typhoon—now is the biggest minority shareholder in Dassault Aviation, builder of the Rafale, the European fighter's main competitor. Dassault, in turn, controls a blocking minority stake—through its holding in electronics supplier Thales—in shipbuilder DCNS, a mostly state-owned company essential to France's nuclear deterrent. A blocking minority gives the minority shareholder rights to reject certain transactions voted by the majority.

“The maneuvering room for the government as a customer of the defense industry is an important parameter for the future of the industrial fabric,” says Didier Migaud, president of the Cour des Comptes, which this month released a report: “Weaknesses of State Shareholdings in Defense Companies.” To maintain strategic influence, the state needs to adopt a comprehensive strategy for dealing with its industrial partners, he says.

Antoine Gelain, a defense industry analyst with Octagon Partners in London, says that combining a coherent technology and industrial strategy with so-called “golden shares” or other specific control mechanisms could address what has become a conflict of interest between the French state as shareholder and its role as a customer.

“Government ownership in defense companies is an approach that is out of date, all the more so as the French state does not have any kind of industrial strategy, so they cannot use their shareholdings to influence the industry because they do not know what direction they want the industry to go,” Gelain says, adding that government ownership undermines the value of these companies by limiting managerial freedom to maneuver. “It penalizes not only the companies, but also the French government as a shareholder.”


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