A mESS in the diaper

October 8, 2013

Regular readers of this blog know that I generally don’t do politics. I prefer to spend my waking hours helping my portfolio companies, and by extension, the French startup ecosystem in general.

It is in this latter category that when I detect legislation that could seriously imperil our ecosystem, I feel an obligation to openly share my point of view which I suspect is unique (to my knowledge, nobody in government is a foreigner with hands-on experience in both startups and VC), albeit me being just one miniscule data point in an analysis that should be broad and rigorous.

When both the Medef and CGPME unite in their opposition to something, it’s a red flag that something might be amiss.

This seems to be the case with the draft law on l’Economie Sociale et Solidaire (ESS) which will be voted on next month.

The ESS law – also known as the loi Hamon – represents another measure in the government’s war on unemployment. The law endeavors to bolster the “Economie Sociale et Solidaire” sector, loosely translated as the non-profit sector, which currently counts 2.4 million employees in France among the various charities, associations, cooperatives, foundations, social entreprises, etc. Its principal method seems to be to clarify the status of such non-profits in order to improve their visibility and eligiblity for relevant sources of financing.

It’s more the law’s secondary objective that strikes me as problematic. Here’s a direct excerpt from the government’s web site:

Le projet de loi va également redonner du pouvoir aux salariés. Les chefs d’entreprise souhaitant céder leurs sociétés devront désormais en informer leurs salariés deux mois en amont. Les salariés pourront ainsi s’organiser afin de, s’ils le souhaitent, reprendre leur entreprise eux-mêmes.

In translation, the draft law will also restore power to employees. Business leaders planning to sell their companies will be required to inform their employees as such two months in advance. Employees will thus be able, if they so wish, to prepare a buyout offer for the company.

As a supporter venture-backed startups, I tremble when I read this.

First, it sounds like an administrative nightmare. What is the effective date for the two-month countdown ? Two months prior to the closing date of the sale ? Two months prior to the signing date of the stock purchase agreement ? Two months prior to the date of the letter of intent ? Two months prior to the company’s board deciding to explore a sale ? Or two months before company management’s intention to sell ?

But more severely, throwing up an arbitrary two-month roadblock could discourage potential acquirers of the company. As any investment banker will explain, companies are bought, not sold. It is the universe of potential acquirers, i.e. the market, that dictates the terms of any potential sale, not the other way around. To craft a law reflecting a belief that a company intending to sell simply launches a sale process while retaining full control over timing and conditions is naive.

There’s also the nagging question of securities regulations. With the ESS law, a publicly-listed company entering into a sale process is suddenly required to disclose its confidential m&a negotiations to all company personnel. That would require a lot of sealed lips to avoid running afoul of any insider trading laws. And even if its entire workforce, janitors and all, could keep an airtight secret, would the company’s potential acquirer, such as one bound by Sarbanes-Oxley compliance, afford to take such a risk ?

Jean-Paul Raillard wrote an opinion in Le Monde last week favoring the ESS law for its ability to credit the often undervalued employee stakeholders of a firm being sold. It’s not surprising that Raillard would extoll the virtues of this draft law (Raillard is the Directeur Général of Syndex, an audit firm that advises employee union representatives and thus, a direct beneficiary of a law like this). That being said, Raillard’s firm claims to intervene in some 2000 management/employee conflicts per year, so would have some firsthand awareness of the conflictual relationship that can develop between employee stakeholders with their companies.

Yet rather than supporting detrimental legislation that would further isolate French companies, and by extension, the employee stakeholders, here’s a Rude idea: Encourage reform of the conventional management practices of traditional French corporations so as to actually empower employees rather than so-often treating them like crap.


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posted in technology, venture capital by mark bivens

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