Tuesday, June 30 will be held the Annual Meeting of Alstom. Proxinvest poses here to the company and to the AMF four questions as to the company’s compliance with legal requirements regarding shareholders information and the treatment of the CEO special remuneration.
Alstom announced in 2014 a major asset sale to the US General Electric. Hereby Proxinvest asks four questions on the regularity of the Extraordinary Shareholders General Meeting of December 2014, on the legality of the information given on the nature of the misconduct which resulted in fines by the US DoJ, on the legality of the information provided on the proposed special remuneration for the CEO and about a possible withdrawal of this remuneration in view of its legal risks and in view of the company performance.
I Our first question concerns the legality of the shareholders EGM of December 2014 asked to rule on the sale of the Alstom Power (electricity generation) and Grid (Networks)), and renewable energy businesses to General Electric.
According to the notice of the Extraordinary General Meeting and under the Purchase Agreement, « the completion of the Transaction is subject to approval by the general meeting of shareholders of the Company by a majority of two thirds of the votes cast (the « Majority »). However, Alstom informed only the day before the General Meeting about a substantial change in the selling price: the US announced fines for acts of corruption, which was, to be borne by the purchaser, was not as the Plea agreement prepared with the US DOJ had just stipulated that no part of the fine could not be transferred to General Electric as part of the planned disposal: In the words of CEO at Assembly, the $ 772 million dollar (720 M. €), representing the bulk of the loss recorded for the group in fiscal year 2014/2015 would be offset by commercial arrangements… Moreover, reading the joint ventures organized conditions with General Electric and the odd arrangement between Bouygues and the State it appeared in 2015 that what was presented as a 50-50 joint venture an alliance or an association between equal partners was inevitably shifted into a differed sale of Alstom’s assets to GE at preset prices.
Therefore, Proxinvest, which despite reservations had recommended a positive vote, regretted publicly for the first time in its history to have issued this positive recommendation, calling it unacceptable given the unexpected change in the transfer price and the inaccurate conditions of this agreement.
In view of a substantial change on the eve of an extraordinary general meeting in the conditions of the operation as reported by the Board and the breach of French legal rules on the agenda setting including Article R225- 83 (*) is the vote recorded to be considered as void and should it not require, the project being modified and maintained, a new shareholders consultation, this ime in line with the latest recommendation of the AMF ?
II Our second question is on the quality of the information given on the nature of the misconducts that resulted in substantial fines.
In 2010, the US Department of Justice (DoJ) had begun investigating the Group’s subsidiaries on the facts of corruption and prosecutions have resulted in fines imposed to the Group for approximately $ 772 million, the exclusion of subsidiaries of tender procedures and may lead to further costly civil actions for the group and its shareholders.
A subsidiary of Alstom, Alstom Network Schweiz AG (formerly Alstom Prom AG) agreed to plead guilty to violation of US anti-bribery rules and Alstom SA pleaded guilty to failure to comply with the FCPA provisions on bookkeeping accounting and internal control (« The Defendant did knowingly falsify its books, records, or accounts such that its books, records, or accounts did not fairly reflect the transactions and dispositions of the assets of the Defendant »). The « Plea agreement » (Case 3: 14-cr-00246-JBA Document Filed 12/22/14 Page 5 2 and 3) says that [1] « The Defendant did knowingly fail to implement a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions were executed in accordance with management’s general or specific authorization; (ii) transactions were recorded as necessary (l) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (ll) to maintain accountability for assets; (iii) access to assets was permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets was compared with the existing assets at reasonable intervals and appropriate action was taken with respect to any differences.” » The Defendant is pleading guilty because it is guilty of the charges contained in the Information. », » The Defendant admits, agrees, and stipulates that the factual allegations set forth in the Information are true and correct, that it is responsible for the acts of its officers, directors, employees, and agents described in the Information… »The Defendant failed to voluntarily disclose the conduct even though it was aware of related misconduct at Alstom Power, Inc… »
However, the only explanation in French that we find on the fines for the shareholders in the Annual Report is included in the risk factors chapter « Thus, the violations covered in the agreement with the DOJ are essentially the use of external consultants Alstom paid these according to the success of the projects in support for the internal sales teams. »
We also observe that if the Chairman’s report on internal control procedures and risk management has grown considerably in recent years to almost ten pages, it does not refer to the admitted control breaches, nor the Report of the external Auditors prepared pursuant to Article 225-235 of the Code appears to us to have been the same and unchanged for ten years. But we have seen above, that the parent company, which does not seem to have it, directly employed external consultants, has fully admitted his guilt on various breaches of control and diligence.
Can we therefore consider as accurate, sincere and exhaustive that the breaches admitted by the company came from only « essentially the use of external consultants » and can it be said as do the reports of the President and commissioners accounts that there has been no breach of the group’s control procedures?
III Our third question concerns the legality of the information on the proposed exceptional remuneration for the CEO Patrick Kron:
The valuation of the outstanding contingent remuneration for Patrick Kron, approved by the Board of Directors (the counter-value of 150 000 shares as on the date of completion of the transaction with General Electric), is a variable compensation according to the Code, but its amount does not appear for the year 2014-2015 in the Summary of compensation table. The absence of this remuneration decided in 2014 payable in 2015 as part of the 2014-2015 pay is not in line with the Article L 225-102-1 and it reduces from € 6.5 million to an official amount of € 2.5 million the pay of Patrick Kron for 2014. The accounting provision, which we must be found in a footnote on page 143 of the consolidated accounts only amounts to € 2,771,000 whereas the current price stands at € 4,026,000.
There is a failure to comply with the Article L 225-102-1 as well with the completeness required by the Code in its recommendation 23.1 renewed by recommendation 24: « A comprehensive information must be given to shareholders so that they have a clear understanding not only of the individual compensation paid to executive officers, but also the policy of determining compensation is applied. » While Code Recommendation 25 asks the company to provide an explanation when a recommendation is not applied, the omission of the compensation paid by Alstom is nowhere justified in the document. Recommendation 24.3 on the Consultation of the shareholders on the individual remuneration of executive directors requires that it covers the elements of compensation due or awarded for the year ended on each executive director including « advantages any kind ‘. This special remuneration for Patrick Kron is mentioned but is amount is not included in the Board’s report for the Say on Pay vote : on the Exceptional compensation line is indicated oddly « No amount payable in respect of the year”.
Our question therefore is: does such deliberate concealment or spreading of a major compensation item proposed for the CEO for the financial year 2014-2015 in violation of the law, constitute or not an inaccurate and misleading information on the CEO remuneration?
IV Our last question is about the appropriateness of a withdrawal of this exceptional remuneration both in view of its legal risks and its lack of alignment with the performance of the company.
The elements of irregularity and non-compliance mentioned above are associated with a diversion from the legal rule applicable to severance payments.
Recall that the company originally had decided for a severance payment for the CEO subject to the « recognition of the beneficiary’s performance conditions assessed in relation to those of the Company. » The Board took note on 4 May 2009 of the resignation of the CEO Patrick Kron to such indemnification. Then Patrick Kron at the end of 2014, announced his departure at the closing of the strategic transaction announced and confirmed this decision in the Reference Document. It is clear that this voluntary departure could have been associated either to with an exceptional additional variable remuneration regularly declared or to the grant of a conditional severance payment within the legal framework of Article L225-42- 1 But in the latter case, the compensation should be both subject to performance conditions and to a prior approval of the general meeting with a specific resolution under Article L. 225-40. As recalled by the AFEP MEDEF code « The law gives a major role to shareholders submitting such predefined allowances paid to the cessation of executive Directors functions. It requires full transparency and submits severance to performance conditions. These performance conditions should be assessed on at least two years. »
Nothing thus prevented the Board to choose this route in 2014, but Patrick Kron is also Director of Bouygues, and the leading shareholder of Alstom would not have validly participated in the vote of such severance pay.
The Board decided for the easier formula of an exceptional bonus within the meaning of Article 23.2.3 of the AFEP-MEDEF Code, which was not reported as we have seen above, in line with legal rules. This exceptional compensation was capped at twice the total remuneration in 2014/15, Patrick Kron, or € 4,936,000: this reminded the AFEP-MEDEF ceiling of severance pay when subject to performance conditions and to special vote.
The procedure finally chosen and looks like a diversion from the legal proceedings under Article L225-42-1, but it also appears that the amount create concerns. This amount does not seem to fully satisfy the recommendation 23.2.3.du reference code, since its magnitude does not seem « balanced ». Capped at € 4.9 million, it is at he current stock price a percentage of 400% of the fixed remuneration part, and in Alstom shares, representing it represents almost ten times the personal investment of Patrick Kron (16,011 shares). This amounts appears not aligned to the changes investment value as perceived by shareholders as the Alstom stock price after a happy surge following the 2003 State support and the and the arrival of Patrick Kron declined steadily for eight years since 2008 and is now less than half of its 2008 level.
Our final question is: In view of the irregularity of the remuneration adopted procedure, which puts in risk the company and the unjustified amount in the current context, should the CEO of Alstom, upon the example of his predecessor, renews its 2009 waiver to any severance pay?
June 25 Th 2015
