JURIST Guest Columnist Larry Eaker of the American University of Paris says that EU law on the free movement of capital may significantly complicate the efforts of the French government to keep Societe Generale in French hands in the wake of the recent "rogue trader" episode that cost it billions in assets…

"Société Générale is a great French bank and will remain a great French bank."

РPrime Minister Fran̤ois Fillon

While Soci̩t̩ G̩n̩rale is a major player in international banking Рas evidenced by its recent takeover of Russia's Rosbank Рit remains nevertheless a very "French bank." With retail banking facilities on almost every Parisian block, Soci̩t̩ G̩n̩rale remains dear to the hearts of Madame and Monsieur Dupont Рand, one can add, dear to the heart and electability of French politicians. Thus, following release of the news of the billions in so-called "rogue-trader" losses, the French government quickly announced its intention to do whatever it found necessary to keep Soci̩t̩ G̩n̩rale in French hands.

Wish that it were so easy! As many other protective European Union (EU) Member States have recently discovered, the EU's financial services sector has now come under the glaring spotlight of EU authorities. These authorities are strictly and consistently imposing the principles of non-discrimination, transparency, and proportionality upon Member States when dealing with proposed takeovers of home financial institutions by "undertakings" from other EU Member States. Accordingly, in the Soci̩t̩ G̩n̩rale situation it did not take too long for the office of Charlie McCreevy Рthe EU's Internal Market Commissioner Рto react to the French Prime Minister's statement and to "read the law" to French government officials.

Limiting "Golden Shares" & Special Rights Regimes

The body of EU law concerning the Free Movement of Capital and Right of Establishment (Articles 56 and 43 of the EC Treaty, respectively) has, over the past decade, greatly restricted the right of EU Member States to place obstacles in the path of further EU economic integration. Over a long line of judicial rulings, culminating in the famous 2007 Volkswagen Law case decision, the European Court of Justice (ECJ) has consistently thwarted Member States' attempts to maintain for their respective governments a privileged status within a wide array of private economic sectors. Almost all of the so-called "Golden Shares" and other special rights regimes have been swatted away. One can cite, by way of limited example, the U.K.'s attempt to shelter the British Airport Authority, the Netherlands' "Golden Shares" status in KPN/TPG, and, most recently, the Spanish government's restrictions on foreign holdings within her nation's energy sectors.

In one of the few examples of judicial approval, the Belgian government was allowed to retain special rights in the form of ex post facto review and approval of certain management decisions concerning the sensitive energy sector in a case dealing with the firm Distrigaz. It must be pointed out, however, that the court went to extraordinary lengths in evaluating the special rights granted the Belgian government in order to ensure compliance with the court-imposed condition of proportionality (including a strong dose of transparency and effective judicial review).

A Continuing Political Dispute

Not only do these efforts at "Economic Nationalism" create intricate legal disputes, they also engender deep-seated and long-lasting political strains between EU Member States. While France has just announced record-breaking inward foreign direct investment of over €107 billion in 2007, the Bank de France has simultaneously declared a record amount of outward foreign direct investment of over €160 billion. Included in these figures (and those of recent years) would be the takeovers within the energy sectors of other EU Member States by French government-protected Electricité de France and Gaz de France – something which greatly riles the political classes of those other EU Member States. The recently announced interest of Electricité de France in the Spanish energy company Iberdrola has, alas, only added more fuel to these political fires.

Concerning the Société Générale controversy, one must conclude that the French government has chosen an inopportune time and economic sector over which to pick a fight with EU authorities. In effect, responding to serious concerns over the comparatively low amount of cross-border consolidation within the EU's financial sector (as outlined by the EU's ECOFIN 2004 meeting in Scheveningen, Netherlands), the EU has recently adopted a Directive to provide more transparency and legal certainty in the assessment processes utilized by Member States when evaluating cross-border financial sector takeovers. It seems several Member States had been imposing upon potential acquirers from other Member States assessment criteria which had caught the eye of EU authorities. In particular, the EU Commission had initiated so-called "Infringement Proceedings" against Portugal (involving the Spanish Banco Santander's takeover bid for the Antonio Champalimaud Group) and against Italy (involving the Dutch ABN Ambro's takeover bid for Banca Antonveneta and the Spanish BBVA's bid for Banca Nazionale del Lavoro) challenging the lack of transparency within their respective legal regimes imposing assessment procedures.

The EU Commission made it clear to both Portugal and Italy that while Article 58 of the EC Treaty permits the restriction of the Free Movement of Capital and Right of Establishment for the "prudential supervision" of financial institutions, this exception is to be narrowly applied and should never constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital. In order to reduce such disputes in the future, the new Directive, which must be transposed into national law by March 2009, establishes five clear criteria to be used by Member States in assessing the suitability of the acquirer and the financial soundness of the acquisition, namely: (a) the reputation of the acquirer; (b) the reputation and experience of any person who will direct the acquired institution; (c) the financial soundness of the acquirer; (d) the continued compliance with relevant EU Directives, and; (e) the risk of money laundering or terrorism financing. Needless to say, the national origin of the potential acquirer is not included as a legitimate criterion.

The Banking Industry as a "Sensitive Sector"

Some Member States have also relied upon the right of governments to protect their financial sectors on the basis of "overriding requirements of the general interest" as recognized by the ECJ in various decisions (e.g., the protection of consumers). It is settled case law, however, that "economic grounds" alone cannot serve as justification for obstacles to the Free Movement of Capital and Right of Establishment. In addition,
the ECJ has ruled that commercial banks are not undertakings whose objective is to provide public services as embodied in the EU's concept of "Services of General Economic Interest." Accordingly, Portugal's attempt to restrict foreign ownership of Portuguese banks under the guise of general interest protection was disallowed by the ECJ. It should be noted, in this regard, that the legally-challenged 2005 French law controlling foreign investment within certain "sensitive sectors" does not include, as such a sensitive sector, the French banking industry.

Finally, as the French government is well aware, one of the considerations identified by the ECJ as such improper "economic grounds" is the decision of the Member State in choosing an economic partner. Thus, it appears that the French government Рlike other EU Member States Рwill be held to the requirements of non-discrimination, transparency, and proportionality in any attempts to restrict the fundamental EU law principles involved in the cross-border consolidation of the EU's financial sector. While the French authorities may succeed in arranging a marriage between Soci̩t̩ G̩n̩rale and BNP Paribas (or another possible French suitor) in the coming weeks, it is highly unlikely that any such "Economic Nationalism" will successfully escape the disapproving eyes of EU legal authorities if subjected to challenge.

Larry Eaker is Associate Professor of International Law at the American University of Paris
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