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OUR DES COMPTES

Weaknesses of the

tate as

shareholder in industrial

defence companies

Disclaimer:

Summary

the Public Thematic Report

his summary is intended to facilitate the understan-

ding and use of the Cour des comptes report;

only the original report is legally binding on the Cour

des comptes.

The responses of organisations and government agen-

cies concerned are appended to the report.

April 2013

Summary

of the Public thematic report by the

Cour des comptes

Table of Contents

Introduction

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

The specific characteristics of the

tate as shareholder in industrial

defense companies.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

The

tate as sole key shareholder:

Safran, GIAT Industries and SNPE . . . . . . . . . . . . . . . . . . . . .1 1

The progressive increase in shareholder control exercised by

the private-sector Dassault group: Dassault-Aviation, THALES

and DCNS

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

A company under multinational public-sector control:

EADS

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Conclusion

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Recommendations

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

The report examines over the long-term the protection of the public interests of the

State in its position as a key shareholder in the majority of the major industrial defence

groups operating on French soil.

The subject is a contemporary one: the cutting of Western military budgets is restric-

ting national openings; the increasing strength of industries in emerging countries is rai-

sing competition ; industrial consolidations among French and/or foreign companies are

currently being attempted, although these often involve costs in terms of the job-losses

and site closures that they entail. The drafting at the end of 2012/beginning of 2013 of

a new White Paper on Defence and National Security further reinforces this current sce-

nario.

The report addresses all direct and indirect, majority and minority shareholdings,

wherever these are of sufficient scope to vest the State with significant powers of

control, either single-handedly or jointly with partners. In practice, these are:

- on the one hand, three industrial public-sector companies in the armament sector:

DCNS (naval manufacturing, 63.58% holding by the State in the group), SNPE (energe-

tic materials, 99.99% holding by the State), GIAT Industries (army weapons, 100% hol-

ding by the State);

- on the other hand, three private-sector industrial groups: Safran (supplier of

engines and landing gear for the airborne component of the deterrent force, missile pro-

pulsion, 30.20% State holding), THALES (military electronics, 27.08% indirect State

holding), EADS (ballistic missiles for deterrence force, helicopters, military aircraft, etc.

indirect State holding of 15% set to fall to12 %).

Furthermore, the State has an indirect holding in Dassault-Aviation (combat aircraft)

through EADS, the second largest shareholder, with a 46.32% capital holding, and in

MBDA (tactical missiles), also through EADS, joint largest shareholder along with BAE

Systems, with a 37.25% capital holding.

The Cour addresses in turn:

- the specific characteristics of the State as shareholder in industrial defence compa-

nies (chapter I);

- the State as sole key shareholder: Safran, GIAT Industries and SNPE (chapter II) ;

- the progressive increase in shareholder control exercised by the private-sector

Dassault group: Dassault-Aviation, THALES and DCNS (chapter III);

- a company under multinational public-sector control: EADS (chapter IV).

Summary

of the Public thematic report by the

Cour des comptes

Introduction

The specific characteristics of

the State as shareholder in

industrial defence companies

In the light of restricted bud-

gets for equipping the armed

forces, the average size of

French defence groups within

the context of international

competition often appears a

handicap.

In terms of defence budgets,

France holds 4

place in the world

and, with

€

45.7 bn in 2011, occupies

an intermediate position comparable

to that of the United Kingdom

(

€

45.4 bn) and Germany (

€

34.1 bn)

For its part, the United States, despite

increased budgetary constraints, pos-

sesses resources that are out of all

proportion to those of all other coun-

tries (

€

540.8 bn). Finally, rapid growth

has been observed in the military bud-

gets of the principal emerging coun-

tries.

For the main European military

powers, budgetary constraints naturally

weigh upon expenditure earmarked for

the equipping of armed forces, with

France annually allocating funds in the

order of

€

13 bn, an amount on a par

with the United Kingdom, whilst the

German budget for the equipping of

armed forces is rising –but with no

funds allocated for nuclear forces, it is

therefore greater in relative terms, as far

as conventional weaponry is concerned.

The reduction in the budgets of

Western powers and the simultaneous

growth in those of developing nations

(Brazil, Russia, India, China - BRIC)

intensifies the already significant pres-

sure on the industrial groups in ques-

tion. This pressure is naturally brought

to bear particularly acutely in the field of

exports and diversification, which are

the two main industrial responses to

changes in the global economic climate

in the area of defence.

The eight main French industrial

defence groups are average or modest in

size among the global top thirty: EADS

largest industrial defence group in

the world) and THALES (10

) are the

only groups that currently appear in the

list of the top ten military equipment

suppliers at the global level; MBDA

(13

), DCNS (14

) and Safran (16

)

hold average positions; GIAT Industries

(26

) and Dassault-Aviation (27

) are,

in relative terms, small groups in compa-

rison with their main foreign competi-

tors ; SNPE does not appear in the top

50 global defence companies.

The State has either a direct or an

indirect holding in the capital of these

eight groups. As a key shareholder for

six of these, it must act taking into

account, on the one hand, the impera-

Cour des comptes

Summary

of the Public thematic report by the

Cour des comptes

Specific characteristics of

the State as shareholder in

industrial defence companies

Summary

of the Public thematic report by the

Cour des comptes

tive for national independence in terms

of the equipping of defence forces, on

the other hand, asset protection inte-

rests (State holdings in industrial

defence companies representing a total

value of some

€

12.25 bn as at 22

October 2012), and finally, taking into

account the key areas of employment,

external trade and regional develop-

ment, bearing in mind the burden for

the nation and for the regions affected

by these activities.

Within this context, the

function of the State as a

shareholder in defence

industries is highly specific

compared with its holdings

in the civilian domain.

It has specific priorities. The 2003

White Paper and the Ministry of

Defence divide armaments into three

categories:

- a first category, that it is imperative

to keep exclusively under national

control this encompasses those indus-

trial activities that are indispensable to

the independence of the nuclear deter-

rent force and « knowledge/anticipa-

tion» (government cryptology, informa-

tion systems security, etc.);

- a second category, in which indus-

trial interdependency with closely-allied

nations may exist –this is, for example,

the case with armament programs

conducted jointly with European part-

ners;

- the third armament activity

concerns equipment that can be purcha-

sed «off the shelf» with no dependency

risk– this may be the case for unsophis-

ticated equipment that is readily availa-

ble from a range of suppliers on the glo-

bal market.

In the first two cases, long-term

national control as regards keeping the

industrial

activities

concerned

French soil is a strategic objective.

The issue of shareholder control

over defence industries is not specific to

France. The principal military powers

operating within the framework of

international open market economies

have also had to resolve this issue in the

light of an increasingly global economy.

To this end, the United States has

the

Exon-Forio

Amendment, which, in

1988,

supplemented

the

Defence

Production Act

, granting the United

States President the power to veto

acquisitions deemed to pose a threat to

«national security», whether or not these

are in the armament sector, or to make

authorisation subject to the appoint-

ment of US Directors chosen by the

Department of Defence (exercising a

proxy

function, to provide a screen bet-

ween shareholders and operational deci-

sion-makers). The power of the

Exon-

Florio

mechanism resides in the fact

that the United States President is free

to determine what he considers to be

«strategic».

Summary

of the Public thematic report by the

Cour des comptes

Specific characteristics of

the State as shareholder in

industrial defence companies

Neither France, nor the European

Union have, thus far, been able to

implement a protective mechanism that

is not exclusively limited to a highly res-

tricted category of equipment pertai-

ning to national sovereignty. This is the

reason for the direct or indirect pre-

sence of the State in the position of key

shareholder in the capital of the princi-

pal industrial defence companies opera-

ting on national soil, whose activities for

the most part combine highly comple-

mentary civilian and military manufactu-

ring, constituting an unrivaled protective

mechanism for the main industrial acti-

vities that are strategic for national

defence.

The organisation of shareholder

thinking within the administration is not

sufficiently coordinated: since 2004, it

has chiefly been elaborated by the

French

Government

Shareholding

Agency (APE) within the Ministry for

the Economy, with the support of the

Armament

Procurement

Agency

(DGA), which is under the control of

the Ministry of Defence.

It was originally conceived largely

from an asset-protection standpoint,

with the aim of value-optimisation of

State shareholdings, but the APE’s mis-

sion was adjusted at the beginning of

2011, providing greater opportunity to

take into account other interests, specifi-

cally those of national defence.

Within the DGA, State holdings in

defence industries are overseen by the

Strategy Directorate, tasked namely with

keeping France’s «industrial and techno-

logical defence base» (BITD) up to date.

Currently, coordination of the posi-

tions of the APE and the DGA regar-

ding decisions to be taken by the State

as shareholder is not always assured, and

improved coordination would be desira-

ble.

The

tate as sole key

shareholder: Safran, GIAT

Industries and SNPE

Safran: the initially counted-

upon results of the Sagem-

SNECMA merger did not all

materialise, and control over

the fortunes of the group by

the State as shareholder is

now limited.

After the opening up of the capital

of SNECMA within the context of a

stock market flotation in the summer of

2004, the Safran group emerged from

the merger at the beginning of 2005, in

which SNECMA (aircraft engines, space

propulsion and associated services) was

acquired by Sagem (defence and consu-

mer electronics), resulting in the privati-

sation of SNECMA, with the new

group thereafter named Safran.

Although, based on market prices at

the time, the operation appeared sound

from an asset-protection standpoint for

the State in 2005, on the other hand,

industrial synergies between the engines

and electronics manufacturers proved

deceptive, and assets from Sagem cur-

rently only represent 10% of the group’s

value, compared with one-third in 2005.

Furthermore, the capital holding

retained by the State following the mer-

ger (30.20%) had been set taking into

account the fact that the State, counting

on obtaining double voting rights two

years later, would singlehandedly hold a

blocking minority, with almost 40% of

general assembly voting rights. In failing

to declare the exceeding of this limit to

the AMF (

Financial Markets Authority

)

in February 2007, the APE realised after

the fact that it would not be able to exer-

cise its rights, and that, at a maximum, it

would only have 29.5% of general

assembly votes. The recent disposal of

3.12% of the capital of Safran has not

significantly changed this fact.

Although remaining the largest and

only key shareholder, the State now has

only limited powers in Safran, as was

illustrated in 2012, when its Board of

Directors blocked an asset exchange

operation that was to enable the French

industry to be restructured and streamli-

ned

the

fields

optronics

(THALES) and avionics (Safran).

However, in April 2011, the State

successfully implemented a statutory sti-

pulation designed to limit the possibility

of hostile takeover bids.

Cour des comptes

Summary

of the Public thematic report by the

Cour des comptes

The State as sole key

shareholder: Safran, GIAT

Industries and SNPE

GIAT Industries: following

extensive restructuring, the

company appeared to have

been returned to health in

2006, although further clarity

is required going forward.

The GIAT Industries company,

created in 1990, was, upon incorpora-

tion, in possession of all of the indus-

trial facilities (fourteen manufacturing

sites) and personnel (almost 14,000

employees)

the

Groupement

Industriel des Armements Terrestres

(GIAT), hitherto managed within the

Government by the Land Armament

Division (DAT) of the Armament

Procurement Agency (DGA).

The company, which made a num-

ber of costly strategy and management

errors (site closures or personnel reduc-

tions that came too late, the signature of

loss-making export contracts, risky

diversifications, etc), had been unable,

prior to 2006, to fully utilise its

resources: financial years were closed

with considerable losses posted, arising

as much from operations as from provi-

sions for the financing of subsequent

corporate plans. A «GIAT 2006» turna-

round plan was initiated in April 2003,

with the dual objectives of tailoring the

size of the company to a substantial

decrease in activity and restoring its

competitiveness, through a drastic

streamlining of its industrial plant and a

major cut in employee numbers.

The company posted a profit for the

2005 financial year for the first time in

its history. Today, twenty-three years

after its creation, GIAT Industries,

which became Nexter excluding its

defeasance businesses at the end of

2006, with an employee base of around

2,700, appears finally to be on an even

keel and may now contemplate indus-

trial alliances with the potential to secure

its future.

As regards the exercising of share-

holder control, since the company is

100% State-owned, the Cour des

comptes observed that, within the

context of a tender offer for a 24.03 %

stake in the capital of the MNR group, a

holding vehicle of the Manurhin group,

on 13 February 2012 (subscription to a

€

2m capital increase), of the six

Directors representing the State, three

voted in favor, two abstained and one

voted against (the abstentions and the

opposition were from the three APE

representatives, and the vote in favor

was from the DGA representative): the

inter-ministerial cooperation mecha-

nism provided for by Decree No. 2011-

130 of 31 January 2011 was not, in this

instance, successful.

In general, although the order book

for GIAT Industries appears secure

until 2016, there is uncertainty surroun-

ding subsequent years, which will largely

depend upon developments in current

reflection on the French White Paper on

Defence and National Security and the

next Military Planning Act. Currently,

two major areas for industrial restructu-

Summary

of the Public thematic report by the

Cour des comptes

ring may be envisaged by the State as

shareholder:

- the first is the potential absorption

of SNPE by GIAT Industries with the

objective of securing the future of

Eurenco, the only strategic subsidiary

that has remained under SNPE control,

within a French or European context;

- the second area for restructuring

concerns the search for a French or

German partner for GIAT Industries.

SNPE: the Directors of this

public-sector company, set to

be sold as sub-units since

the AZF accident in

September 2001, have per-

manently blocked any

restructuring at the initiative

of the State.

The Société Nationale des Poudres

et des Explosifs (

National Powders and

Explosives Company

- SNPE) was crea-

ted in1971, by the disposal of powder

manufacturers

previously

managed

within the government by the Ministry

of Defence, whose previous monopoly

over civilian and military powders and

explosives was no longer tenable after

the entry into force of the Treaty of

Rome. Until 2001, the company did not

experience any major problems. The

company’s prospects were ruined by the

accident that occurred on 21 September

2001 at Total group’s AZF plant. It

became clear some years later that the

company would have to be sold off as

sub-units.

However, from 1999 onwards, the

State had envisaged a merger between

the solid propulsion activities, held on

the one hand by SNPE through its sub-

sidiary SME, and on the other hand by

the SNECMA group through its subsi-

diary SPS. The State was at that time the

main or the only shareholder in the two

groups. The Management of SNPE

opposed this operation for a number of

years. In November 2008, the State had

to terminate the tenure of the CEO in

order for this to be carried out. Even so,

it was not until 2011 that this consolida-

tion of the French solid propulsion sub-

sidiary took effect.

Summary

of the Public thematic report by the

Cour des comptes

The State as sole key

shareholder: Safran, GIAT

Industries and SNPE

Over the last thirty years, the

Dassault-Aviation group, once majority-

controlled by the State, has for the most

part slipped out of the State’s control.

However, it has progressively acquired,

either directly or indirectly, holdings in

the capital of THALES and DCNS, in a

partnership that radically curtails the

room for maneuver of the State as sha-

reholder.

The progressive loss of all

shareholder control by the

State over Dassault-

Aviation

In 1979: the State acquired a capital

holding in Dassault-Aviation

. Sogepa

(société de gestion des participations

aéronautiques -

management company

for aeronautics holdings

) was created in

1978 at the initiative of the Prime

Minister in order to acquire, on behalf

of the State, a holding in the capital of

Société des Avions Marcel Dassault

(AMD-BA, now Dassault-Aviation).

In 1981, Dassault-Aviation was very

briefly nationalised

. In 1981, the State

theoretically took control of the com-

pany by increasing its capital stake to

45.76%, which, owing to the existence

of double voting rights, which were

immediately contested by certain of the

group’s private-sector partners, in prin-

cipal gave it 54.72% majority voting

rights. Since this period, oral agree-

ments, adopted upon signature of an

agreement on 8 October 1981, made

provision for self-limitation of the

powers of the public-sector. Suddenly,

the State’s voting rights fell below the

50% threshold, with no discernible

compensation in exchange.

1996,

the

attempted

Aérospatiale/Dassault-Aviation merger

desired by the State was unsuccessful

. In

1996, the Government sought a merger

between

Dassault-Aviation

and

Aérospatiale, which would make the

family

holding

company

Dassault

(GIMD) a minority shareholder in

Aérospatiale. This plan was not imple-

mented, since the National Assembly

was dissolved and legislative elections

were held some weeks later.

In 1998, a transfer of State holdings

in Dassault-Aviation was effected in

favour

Aérospatiale,

then

the

Lagardère group and then EADS

. At

Cour des comptes

Summary

of the Public thematic report by the

Cour des comptes

The progressive increase

in shareholder control

exercised by the private-

sector Dassault group:

Dassault-Aviation, THALES

and DCNS

the beginning of 1998, the Government

transferred to Aérospatiale all State hol-

dings in Dassault-Aviation (i.e. 45.76%

of the capital). A Decree authorising the

cession of Aérospatiale to Matra Hautes

Technologies (MHT), a subsidiary of

the Lagardère group, was enacted at the

beginning of 1999.

Currently, the former State holding

in Dassault-Aviation is directly held by

the Dutch law holding company EADS

NV, which has

de facto

no shareholder

control. The aircraft manufacturer

Rafale now has EADS as its main mino-

rity shareholder, which jointly manufac-

turers

Rafale’s

main

rival,

the

Eurofighter aircraft.

In 2008, the State decided to share

the shareholder control of THALES

with Dassault-Aviation

. In May 2008,

Alcatel-Lucent made known its inten-

tion to dispose of the 20.9% holding in

THALES that it had held since privati-

sation

Thomson-CSF.

The

Government

Shareholding

Agency

(APE) and the Armament Procurement

Agency (DGA) jointly examined a num-

ber of scenarios, and concluded, on the

basis of an in-depth analysis, that, com-

pared with other possible solutions,

substituting Dassault-Aviation in place

of Alcatel was technically the least

favourable option. Without following

the recommendations of the relevant

departments, the Government opted for

the solution of ceding the Alcatel share-

holdings to Dassault.

The mechanism opted for consisted,

on the one hand, in getting Dassault-

Aviation to sign a consent agreement by

virtue of which it would replace Alcatel-

Lucent in the shareholders’ agreement

existing between this latter and the

State, and, on the other hand, in exten-

ding an agreement on the protection of

national strategic interests in THALES.

Alongside the shareholders’ agreement,

Dassault-Aviation dropped its right of

veto firstly in the event of DCNS exer-

cising an option it had held since 2007

to increase its stake to 35%, which

option was in fact exercised by

THALES at the beginning of 2012, and

secondly over asset exchanges with

Safran, desired by the State, concerning

optronics activities, inertial navigation,

electricity generation and the field of

missiles systems and equipment.

In terms of capital stakes and the

percentage of voting rights held, and in

the light of a number of developments

( namely Dassault-Aviation obtaining

double voting rights in 2012), the posi-

tion of the State and its partners has

been changing since 1998, as is shown

below:

The progressive increase in

shareholder control exercised by

the private-sector Dassault group

Summary

of the Public thematic report by the

Cour des comptes

The progressive increase in

shareholder control exercised by

the private-sector Dassault group

Summary

of the Public thematic report by the

Cour des comptes

Table: respective holdings of shareholders’ agreement partners in

THALES capital

Source: French Government Shareholding Agency (APE)

The balance of shareholder control

in THALES has therefore progressively

been tipped against the State, and cur-

rently consists merely in the holding of

a blocking minority favouring the public

sector in terms of voting rights, and the

fact that it is not possible for Dassault-

Aviation to exceed the public sector in

its capital stake, and/or to hold more

than 30% of the voting rights, without

being required to propose a tender offer

for the whole of THALES.

Within this context, whereas Alcatel

had adopted the position of sleeping

partner, Dassault-Aviation was of the

opinion that «the State […] must make

concessions to the other shareholders

and no longer can it decide everything,

and

decide

everything

alone».

Consequently, the State, whilst remai-

Shareholders’

Agreement

% THALES capital

% voting rights

1998

Public Sector

46.94

Alcatel

16.36

Dassault-industrie

6.00

2006

Public Sector

31.26

42.97

Alcatel-Lucent (2)

9.46

13.00

2009

Public Sector

26.51

41.67

Dassault-aviation

25.93

20.39

2012

Public Sector

27.08

36.86

Dassault-aviation

25.96

29.68

The progressive increase in

shareholder control exercised by

the private-sector Dassault group

Summary

of the Public thematic report by the

Cour des comptes

ning the largest shareholder, is for the

most part powerless over the gover-

nance and industrial defence strategy of

the THALES group. Indeed, it may be

noted that:

- regarding the increase from 25%

to 35% of THALES’ stake in the capital

of DCNS in 2012, Dassault-Aviation,

whilst complying with its undertaking

not to oppose this, publicly expressed

doubts over the validity of the State’s

strategy, consisting in pursuing an

increase in THALES’ stake to 35% of

DCNS, without, as a result, guaran-

teeing its prospects of acquiring an

absolute majority ;

regarding

the

planned

optronics/avionics asset exchange bet-

ween THALES and Safran desired by

the State, Dassault-Aviation points out

that it supported the Management of

THALES in its refusal to cede its com-

puter systems activity to Safran.

Ultimately, therefore, the decision to

substitute Dassault-Aviation in place of

Alcatel Lucent ran counter to the desires

of the State in what it felt was a major

component of its industrial defence

strategy.

Between 2007 and 2012, THALES

acquired an increasing stake in the

control of DCNS. In terms of control

of the governance and industrial stra-

tegy of the DCNS group, the make-up

of its corporate bodies now means, par-

ticularly for key industrial defence stra-

tegy decisions, an agreement with

THALES and therefore, to comply with

the stipulations of the shareholders’

agreement,

with

Dassault-Aviation.

However, the issue of a subsequent

change in the make-up of the capital of

DCNS is not currently a pressing one:

the main prospect for industrial restruc-

turing, in the naval armament sector,

would

involve

opening

European partner.

Summary

of the Public thematic report by the

Cour des comptes

A company under multina-

tional public-sector control:

EADS

The mechanism for control

over EADS has, from the

outset, consisted in a sha-

reholder partnership pur-

suing divergent and even

competing strategies.

The initial terms of the cession of

Aérospatiale

Matra-Hautes

Technologies (MHT), owned by the

Lagardère group, and of the subsequent

merger of the whole with the German

DASA and Spanish CASA groups to

create EADS were themselves unfavou-

rable in terms of protecting the State’s

assets, since France occupied the posi-

tion of buyer vis-a-vis its two main part-

ners. As far as transactions at parity were

concerned, only twice was Aérospatiale

parity

with

Matra

Hautes

Technologies (MHT) and only once,

some months later, was Aérospatiale-

MHT at parity with DASA (political

parity required by the German party).

These parities certainly did not reflect

the value of the respective industrial

offerings,

the

detriment

Aérospatiale. However, leaving aside any

doubts that the Cour des comptes may

have expressed about the relative

strengths of the negotiating positions of

the parties, the terms of exchange suffe-

red, on creation of EADS, owing to the

structural weakness of the capital of

Aérospatiale, particularly when compa-

red with the strong cash position that

DASA at that time enjoyed.

The shareholder control mechanism

that emerged from these negotiations,

the position of which, at end-2012, is

set out in the figure below, quickly pro-

ved ill-suited, and required a number of

adjustments, particularly in 2007, and

more recently at the end of 2012/begin-

ning of 2013:

A company under multinational

public-sector control: EADS

Summary

of the Public thematic report by the

Cour des comptes

Figure - Shareholders’ Agreement - EADS

Source: French Government Shareholding Agency (APE)

A number of agreements and

accords existed between the group of

shareholders controlling EADS at end

2012, specifically containing stipulations

regarding:

- make-up of the EADS Board of

Directors;

- restrictions on the transfer of

EADS shares, and the preemption and

joint exit rights of Daimler (DASA sha-

reholder), Sogeade (holding vehicle

jointly comprising the State and the

Lagardère group), Lagardère, and the

State (through Sogepa);

- specific rights of the French State

(allowing for a minimum of indirect

control over certain strategic decisions);

- curtailing of the rights of the

French State, namely the limiting of its

stake to 15% of the capital, and the pre-

vention of the French partners from

appointing a serving civil servant to the

EADS Board of Directors, etc.

Daimler’s desire, which was reitera-

ted in the governance reforms of 2007

(known as the

Apple

Agreements), had

been for the governance of the com-

pany to resemble as closely as possible

that of any other company listed on

several European bourses and having

undergone a major flotation, and parti-

cularly to shelter it from any influence

from public-sector shareholders.

Looking back, it may seem regretta-

ble that these terms were not better

subordinated, during initial negotiations,

to a stability undertaking, as regards the

capital of the new group, by private

industrial partners who had demanded

such restrictions.

A company under multinational

public-sector control: EADS

Summary

of the Public thematic report by the

Cour des comptes

The withdrawal of the

industrial partners quickly

revealed the weaknesses of

the shareholder mecha-

nism implemented.

In 2006, when the EADS share

price was higher, the Lagardère and

Daimler groups had both simulta-

neously begun to exit from the group.

This latter was to undergo marked tur-

bulence shortly afterwards, accompa-

nied by a crisis of governance linked to

the Franco-German doubling up of res-

ponsibilities at various echelons of the

senior management hierarchy, imple-

mented after the merger. Within the

context of the 2007

Apple

Agreements,

intended to resolve the governance

issues and to allow Daimler to cede a

second block of shares to institutional

investors through the « Dedalus» car-

rying vehicle without unbalancing share-

holder parity between France and

Germany, a preemption right over these

shares was granted to the German State,

even though it was not an EADS share-

holder.

Since Daimler decided to dispose of

a new block of EADS shares, before the

end of December 2012, the German

State, which was still not a shareholder

of EADS, made known its desire to

acquire the block of shares held by the

German partners in the agreement,

through the publicly-owned investment

bank Kreditanstalt für Wierderaufbau

(KfW)

, before the end of 2012. The

German State then intended to replicate

in Germany the organisational model

used in France between the State and

Lagardère.

From a French point of view, the

announcement by Lagardère that it

would continue with its withdrawal ris-

ked undermining the State’s position

within the French-German-Spanish

agreement: at the end of 2012, Sogeade

was still 66% indirectly held by the State

and 33% directly held by SCA, but a

number of clauses meant that the lion’s

share of the prerogatives for participa-

tion in the EADS Board of Directors

remained in the hands of the privately-

owned group, and were even supple-

mented,

following

the

Apple

Agreements. Notably, the respective

capital commitments of Mr Arnaud

Lagardère and the French State in

EADS were disproportionate. Since

2006, the State had entirely funded its

publicly-owned 15% stake, whereas

from 2006 to the end of 2012, only

7.5% of the Lagardère group’s stake was

funded by Désirade; Désirade being

held by Lagardère SCA, in which Mr

Arnaud Lagardère held a mere 9.62 %

of the capital, the main shareholder

being Qatar Investment Authority,

which controlled 12.83 % of the capital.

On a like-for-like basis, at the end of

2012, the capital commitment of Mr

Arnaud Lagardère was only 0.72% of

EADS. Furthermore, this commitment

was « carried», as at 31 December 2011,

by a negative net cash position of the

Summary

of the Public thematic report by the

Cour des comptes

A company under multinational

public-sector control: EADS

Lagardère group of 1.27 bn, and was

therefore financed by borrowing.

As a result of this, the carrying

mechanism of the respective stakes of

the State and the Lagardère group

ended up giving priority to Lagardère

SCA in the expression and representa-

tion of the State’s shareholder interests

the

EADS

group,

whereas

Mr Lagardère, the financed parter, indi-

rectly held a mere 0.72% of the capital

of EADS, compared with the State’s

15% indirect capital stake, and additio-

nally the State was exposed to the failure

of a heavily indebted partner.

Accordingly, by the end of 2012, the

set-up initially accepted in 1999 was loo-

king increasingly fragile, with the

balance tipped against the State, which

was the largest EADS shareholder at

parity with Daimler, whereas this latter

enjoyed all of the prerogatives associa-

ted with its holding.

The failure of a planned

EADS-British Aerospace mer-

ger delayed the conclusion of

a new shareholders’ agree-

ment by a number of weeks

Reflections on the changes to be

made to the EADS shareholder control

mechanism were temporarily interrup-

ted, between July and October 2012, by

the examination of a proposed EADS-

British Aerospace merger.

A EADS/BAE systems merger,

proposed

June

2012

the

Management of the two groups, was, on

the face of it, in keeping with the «vision

2000» strategy, pursued by EADS for a

number of years, which made provision

for development of its defence activities

and commercial expansion towards the

United States, and would have allowed

for the creation of an industrial aero-

nautics and defence group occupying a

global leadership position in its field.

From an industrial perspective, the

synergies would, however, have been

limited, and the planned merger was

predicated more on a «conglomerate»

rather than an « industrial» logic.

The creation of a company 60%

controlled by EADS and 40% control-

led by BAE Systems would have requi-

red the dissolution of the EADS share-

holder grouping: a relatively complex

mechanism

would,

however,

have

enabled the legal structures of the two

groups to be retained, in principle, in

order to keep within them the corres-

ponding national strategic assets of the

States involved in the merger.

The proposed structure would have

entailed the giving up by Britain of its

preexisting share in BAE, and, on the

Franco-German side, would have meant

dissolution of the EADS shareholder

grouping, including Sogeade (and there-

fore the stipulations enabling this latter

to demand consultation and even a vote

by the Board of Directors, on certain

contracts pertaining to defence), in

exchange for statutory preference shares

granted by the EADS general assembly

enabling the three States in question to

oppose any change to the statutes on

certain points.

Summary

of the Public thematic report by the

Cour des comptes

One further issue was where to

locate the group’s various decision-

making centres, out of the United

Kingdom, France and Germany: nego-

tiations were cut-short before a mutually

agreed plan acceptable to all parties was

arrived at by the three States concerned.

There were a number of reasons for

the failure:

- the preliminary contracts were in

any event required to be kept confiden-

tial, since exchange-traded groups were

involved, but the failure to provide the

two groups’ key shareholders with any

prior information no doubt undermined

the

plan

developed

their

Managements;

- for the public-sector partners, the

issue of where to locate the various acti-

vities of the two groups was a major

consideration that was difficult to nego-

tiate in such a short space of time: as

was somewhat logical, it was the State

whose sites were most directly threate-

ned in the medium-term that had to take

responsibility for the failure in the eyes

of the European public.

The agreement of 5

December 2012 rebalanced

and consolidated the EADS

group shareholder control

mechanism, whilst updating

group governance.

The agreement of 5 December

2012, confirmed at the general assembly

of 27 March 2013, provides a response

to most of the previous difficulties.

Specifically, it resolved:

- the issue of the Daimler and

Lagardère exits;

the

maintaining

France/Germany parity in the sharehol-

der control of EADS.

Owing to the strictures of Dutch

stock exchange law, as soon as total or

partial substitution of Daimler by KfW

brought about a change to one of the

partners in the French-German-Spanish

grouping, any new agreement could

only encompass more than 30% of total

voting rights if a tender offer was made

for the entirety of the capital.

In view of the restrictions enumera-

ted above, the three Governments sta-

ted at the outset of final negotiations at

the end of October 2012 that the com-

mon objective should be to enable the

exits of Daimler and Lagardère and at

the same time increase the stake of

KfW, in order to create a structure gran-

ting voting rights for the future share-

holder groupings of 12 % of votes to

France, 12 % Germany and 4 % to

Spain.

As soon as the agreement of

5 December 2012 was signed, Daimler

would be able to dispose of 7.44% of

the capital of EADS on the open mar-

ket. At the same time, KfW would be

authorised to acquire10% of EADS

from the German stakeholders in the

shareholders’ agreement. The remainder

of the agreement, to be implemented at

a later stage, was validated on 27 March

2013 by an extraordinary general assem-

bly voting with a qualified majority.

A company under multinational

public-sector control: EADS

Summary

of the Public thematic report by the

Cour des comptes

A company under multinational

public-sector control: EADS

Figure - EADS - Figure showing the shareholders’ agreement provided

for in the agreement of 5 November 2012

Source: French Government Shareholding Agency (APE)

The stipulations of the new agree-

ment made provision for a twelve-mem-

ber Board of Directors (instead of ele-

ven in the previous mechanism), two of

which were to be approved by the

French State and two by the German

State. One of the two Directors appro-

ved by the French State, whilst not being

an active civil servant, may report to the

State (chief executive officer of a publi-

cly-owned company, etc.), thereby cor-

recting one of the major imbalances in

the previous mechanism.

Two lists of decisions, the first

imperatively to be put before the Board

of Directors and the second to be sub-

mitted not only to the Board of

Directors but also requiring a qualified

majority, confers upon those sharehol-

ders who are party to the agreement the

right to exercise control over key issues.

Moreover, a special agreement

ensures that the French State is authori-

sed to acquire a share in Astrium

France, and a clause in the statues of

Astrium must ensure that voting by its

general assembly is unanimous where

any strategic defence issues are concer-

ned.

Finally, the statutes have been chan-

ged to prevent any shareholder from

obtaining more than15% of the voting

rights of EADS. This is a standard

clause to guard against take-over bids.

The same extraordinary assembly

authorised the buy-back by EADS of a

maximum of 15% of its shares, thereby

activating an «accretion» mechanism on

those shares not bought back (i.e. a pro-

portional increase in the share of the

capital that they represent), which, spe-

cifically, allows Germany to hold a 12%

Summary

of the Public thematic report by the

Cour des comptes

A company under multinational

public-sector control: EADS

capital stake whilst buying only 10% of

the shares.

Alongside this set of mechanisms, a

special security agreement has been

concluded between the State and

EADS. This agreement provides for the

creation of a sub-holding «umbrella»

structure to hold French industrial

defence assets, with the State holding a

share in the capital. Two EADS

Directors, representing French defence

interests, are to be approved by the

State. Finally, EADS is ceding to the

State a share in Dassault-Aviation, and

the State has an agreement with EADS

providing for compulsory consultation

and a preemption right in the even of

the disposal of Dassault-Aviation by

EADS.

Conclusion

Summary

of the Public thematic report by the

Cour des comptes

The State in the position of primary shareholder, either alone or jointly with

French or foreign industrial partners, has overseen the modernisation of the French

industrial defence apparatus, positioning it among the best in the world in the sec-

tor:

• it has transformed a former monopoly (powders and explosives) and former

arsenals (of the navy and army) into commercial companies, making industrial part-

nerships possible;

• it has also been involved, as a key shareholder, in the national and internatio-

nal development of the THALES, Safran and EADS groups.

But the State as shareholder has shown weaknesses on a number of occasions:

• in some instances it was at risk of losing control over industrial activities that

are at the heart of national defence –for example the risk for EADS of an unexpec-

ted withdrawal of the heavily indebted Lagardère group, or the risk of a hostile take-

over bid for Safran, whose activity is 90% civilian;

• it agreed to dilute its power without really obtaining anything in exchange from

its partners:

- on the one hand, in terms of the size of its capital holding: for example the

State’s holding in Dassault-Aviation, which rose to 46.5% in 1981, is now parked in

EADS, of which it controls only 15% (and only 12% from 2013); also, Aérospatiale

was opened up to Lagardère, and then to EADS, yet in the final analysis, only a 15 %

stake in the international group was obtained, without the State even securing direct

representation on the Board of Directors;

- on the other hand, in the exercising of its rights in proportion to its capital hol-

ding: for example, replacing Alcatel with Dassault-Aviation in the capital of

THALES meant, in real terms, if not in law, a significant curtailment of its role as

key shareholder, whereas the State continued to be the group’s principal sharehol-

der; by the same token, it was not legally able to exercise the double voting rights

that it had counted on ultimately possessing in Safran during the Sagem-SNECMA

merger;

• it had difficulty judging between interests that were sometimes contradictory:

- its interests as customer and its interests as supplier as a shareholder in these

companies;

- asset-protection interests, that were not necessarily consistent in the short or

medium-term, and the strategic interests of industrial defence policy;

• it sometimes found itself incapable of getting its decisions enforced by the

Management of the companies that it controlled, for example:

- failure of the planned asset exchanges between THALES and Safran in optro-

nics and avionics ;

- the dragging on of consolidation in the solid propulsion sector («Herakles» -

13 years between the initial decision and finalisation).

Summary

of the Public thematic report by the

Cour des comptes

One alternative or addition to public shareholder control would be the imple-

mentation, jointly with the European partners, of a mechanism equivalent to the

United States’ Exon-Florio Amendment. The State could pursue this objective to its

advantage. In any event, it needs to address the weaknesses observed over the last

thirty years in the discharging of its shareholder prerogatives.

More recent developments have been encouraging.

The agreement of 5 December 2012, reorganising the EADS shareholders’

agreement, resolves both the issue of the exit of the Lagardère group and that of

direct representation of the State on the group’s Board of Directors, whilst provi-

ding the State with a preemption right over the 46.5% holding in Dassault-Aviation

in the event of EADS seeking to dispose of this holding.

Conclusion

Summary

of the Public thematic report by the

Cour des comptes

Recommendations

–

define a core strategy for:

- improving the protection and

monitoring of strategic State interests;

horizontal

restructuring

(«Franco-French», European, global),

in which it needs to monitor both

asset-protection (parities) and strategy

preservation (location of activities);

- vertical restructuring, in which

the same interests must be safeguar-

ded, but which may furthermore

include certain commercial restric-

tions,

demonstrated

the

THALES/DCNS merger;

–

set in place a formal mechanism

that brings together, under the autho-

rity of the Prime Minister and at regu-

lar

intervals,

the

Government

Shareholder Agency (APE) and the

Armament

Procurement

Agency

(DGA) to enable joint steering, that

currently does not exist, of State capi-

tal holdings in industrial defence

groups;

–

step-up monitoring, within the

Armament

Procurement

Agency

(DGA), of shareholdings in defence

industries;

–

Also within this context, pro-

pose a long-term strategy for partner-

ships with the Dassault group. This

immediately concerns THALES and

DCNS, but could extend to GIAT

Industries, SNPE and even Safran;

–

avoid, notwithstanding very

well-founded exceptions, stipulations

having the effect of limiting the State’s

shareholder rights to a level below that

which is conferred by its capital hol-

ding (as was the case with EADS, and

to a lesser extent, with THALES).