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The Future of the Renault-Nissan Alliance : Catch-22 ?
by Pininvest Analysis • Dec 25, 2018
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Nissan top management plotted the arraignment of Mr. Ghosn and voted his immediate dismissal from the company's chairmanship, as we discussed in l'affaire Carlos Ghosn
A joint press release of the Alliance (Renault-Nissan-Mitsubishi) has been published Nov. 29, 2018, as follows
"Over the past few days, the Board of Directors of Groupe Renault, Nissan Motor Co., Ltd and Mitsubishi Motors Corporation have all – individually and collectively – emphatically reiterated their strong commitment to the Alliance.
The Alliance has achieved unparalleled success in the past two decades.
We remain fully committed to the Alliance"
In a Dec. 17 response to Renault's request to call a shareholders meeting following the indictment of Mr. Ghosn, the Nissan CEO Saikawa informs Renault that the request was rejected by 'a majority of Nissan's board', according to a WSJ Dec.23 article (paywall)
What can Renault, Nissan's partner in the 'Alliance' and majority shareholder (43.4%), be expected to do now?
We are not privy to the secret covenants backing the agreements giving form and substance to the 'Restated Alliance Master Agreement' (RAMA) between the two companies, nor to the contracts complementing the 'Stabilization Agreement' of December 2015
But by leading a violent operation against its chairman, Nissan's top management – in a sense – showed its hand …
Renault has to manage two very different perspectives, the involvement of the French government and the long term demands of the car industry
The French government has repeatedly confirmed the public interest in maintaining a minority control over Renault
The future of the mass segment of the car industry relies on volume to compensate for middling profitability – and volume is achieved by the Alliance, not by Renault
Nissan aims at
rebalancing the Alliance of which they are effectively the senior partner in terms of sales and possibly the main contributor, especially in terms of R&D
the creation of a global car group in which Renault relinquishes its controlling stake in Nissan and in which the shareholding of the French state all but disappears
We are suggesting that imprisonment of Mr. Ghosn had a specific purpose, which is to deprive the Alliance of his arbitrage, potentially (and probably) attempting to bring cooperation within the Alliance to a halt and forcing Renault (and the French State) to the negotiating table
Renault- Nissan Alliance cross-shareholding
The long arm of the French State
Currently, Nissan detains 15% Renault shares but is deprived of voting rights because, pursuant to French law, Renault owning 43.4% of Nissan shares, Nissan votes would qualify as 'auto-control' (by Renault) – and consequently are frozen
The stake controlled by the French State has actually gone down over time, since the original 1999 Alliance Master Agreement between the 2 companies
From 43.8%
to 37.2% following the sale of 15% stake to Nissan, approved by the French authorities as of March 2002
down to 25% and later to 15%
back up to 19.73% (April 2015) - following the acquisition of an additional 4.73% stake by the French state, to secure a majority of votes and to be in a position to force the extension of the 'Florange law' to Renault (giving double voting rights to long term shareholders – aka the French state) by blocking the 'opt-out' resolution planned by the company
down again to 15% following the sale of 4.73% (November 2017)
The 2015 tensions
From the April French 'raid' to the December 'Alliance Stability Covenant'
The increased shareholding by the French State in April '15 was perceived by Nissan as a critical overreach by the French authorities
Renault stated that the increase in share capital combined with the dual vote put the State in a position to exercise nearly 34% of Renault's voting rights
As a matter of principle, nothing in the agreements between the two companies and with the French state was constraining public French ownership (which has come down from 37.2%). But the psychological impact was poor
Ultimately, a covenant, named 'Stabilisation Agreement', updating the previous agreements was painstakingly negotiated and approved at the Shareholders General Assembly of April 29, 2016 (Approval of a regulated agreement governed by Article L. 225-38 of the French Commercial Code between Renault and Nissan - Resolution n°6)
Key provisions
A cap on the voting rights of the French stake at 17.9% (and 20% in specified situations), although the principle of double voting rights of the Florange law is confirmed. Presumably, this implies that the French authorities could reduce their stake to 10% and still exercise their 20% votes in special cases
A contract between Renault and Nissan committing Renault to noninterference in Nissan's governance
It is further specified that "Renault's non­interference in Nissan's governance shall include Nissan shareholders' decisions on the appointment, dismissal and compensation of Nissan Board members and motions from a shareholder not approved by Nissan's Board"
This is the ground of current Nissan top management to reject Renault's request to name a new board member
The commitment of 'noninterference' was the real prize for Nissan and was roundly questioned during the 2016 Renault Shareholders meeting
To add a further wrinkle to the complex legal arrangement, a wire agency feed, published by LiveMint, states
According to Japanese corporate law, Renault's voting rights could be canceled if Nissan raises its shareholding to more than 25% in the French carmaker....
A Catch-22 ?
A careful reading of the December 2015 public one-page Stability Covenant suggests that
Nissan may have gained the upper-hand with formal recognition of non-interference by Renault but…
the same Covenant mentions 'exceptional circumstances' such as changes to or the termination of RAMA (Restated Alliance Master Agreement)….' and the passing of the 15% threshold by Nissan (or others) as cases under which the 'cap' limiting the voting rights of the French authorities will not apply
In so many words, Nissan cannot change or terminate the RAMA, or increase its shareholding beyond 15% because such an action would allow the French government to take majority control of Renault and possibly of Nissan
Nissan top management appears to have not only shown its hand but overplayed its hand as well
Confident in their advance in R&D, a department Nissan leads for good reason because of the launch of multiple electrical vehicles on the Chinese market, and possibly in engineering, Japanese top management is likely to seek majority control over the Alliance
Since this would be a 'change' to the RAMA agreement, France would be free to take majority control of Renault – and Renault would probably consider the non-interference in Nissan affairs to be moot…
We doubt any secret contracts between the two parties for the implementation of the covenants could be opposed to our analysis, which is based on public agreements, duly approved by the shareholders
We conclude that Renault should urgently change nothing to the Alliance agreement, accept to discuss nothing and make very clear a lack of collaboration within the common departments of the Alliance would be interpreted as a 'change' freeing Renault – and the French state – to act
The web, tightly drawn by Mr. Ghosn, has more than one merit,
not only in bringing the companies and their expertise together
but in depriving the companies of the freedom to leave as well…
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