Hamon, Ham-off. How the Loi Hamon hurts startups

May 5, 2015
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If you believe (like many Canadians I know) that everything is better with bacon, the Loi Hamon will disappoint you. Despite its shared namesake with the Filipino word for ham, France’s Hamon law feels more like eggs benedict without the bacon… and with rotten eggs for that matter.

I finally had my first direct brush with the Loi Hamon in a venture-backed startup. Fortunately, it was a near miss, as the company in question escaped the jaws of Hamon on a technicality. Before you accuse me of being a cold-hearted capitalist that is against the proletariat, let me state right up front that I am wary of the Loi Hamon exactly because I believe it runs counter to the interests of the very employees the law was conceived to protect.

Here’s an oversimplified recap of the Loi Hamon for those of you with better things to do with your time:

The ESS law (aka the “Loi Hamon,” named actually not after the ham but rather former Minister Benoît Hamon) represents another measure in the government’s war on unemployment. While the main thrust of the law is to bolster the non-profit sector, the Hamon law broadly aims to restore power to employees. Specifically, company directors planning to sell their firms to a third party are 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.

I’ve written before about how such a law that sounds good in theory presents so many practical challenges that it’s implementation will be a nightmare. My favorite is the compliance with stock market regulations: French public companies must now disclose potentially sensitive and confidential M&A discussions with their entire workforce, janitors and all. No risk of insider trading there, of course.

The good intentions of the Hamon legislation are clear: give employees of a target company a chance to mount a counter offer to a potential big bad outside acquirer feared to take control and restructure to the detriment of existing employees.

Beyond the implementation practicalities, here’s the problem for employees: Laws like this one render it more challenging for outsiders to conduct business in France. Ask any global business leader what their perception is of doing business in France, and I submit that you’ll often receive an answer like: “It’s complicated.”

Why is this a problem for rank-and-file employees, you ask?

Well, like it or not, business today is global. Successful firms find ways to operate in multiple markets. Unlike the U.S., China, or perhaps even Japan, the world’s top three economies, France is not a sufficiently large market for a company to restrict itself to its home turf. Inevitably over time, companies that are inwardly-focused on France alone will cede ground to global competitors. The day of reckoning is particularly acute in the high-tech sector, where time horizons are rapidly shortened and a winner take all dynamic is often at play.

A French company’s very survival — and the jobs of its workforce — may depend on its joining of forces with a foreign company. Teaming up may trigger the Hamon law, which would then throw up an arbitrary two-month roadblock to such combinations. Waiting in suspense for two months for an uncertain outcome may make the whole endeavor a non-starter.

Or perhaps in anticipation to avoid such a fate, a French company may consider relocating to a jurisdiction where the Loi Hamon cannot apply. How does a commute to Luxembourg sound ?

La loi Hamon est une véritable catastrophe

So were the words of a highly respected business lawyer in Paris. Unsurprisingly, clever attorneys are already devising workarounds. One such solution involves encapsulating the company inside a new holding company shell which has none or few direct employees. Since this encapsulation process would trigger the Loi Hamon, it would in theory be done well before any potential outside sale opportunity presents itself. Then at the time of the real sale to a third party, only the employee(s) in the Holding need be consulted for a waiver.

I’ve heard other variations of this too, the kind of intellectual challenge that gives a smart lawyer a rush. Although I’m not endorsing any solution that arguably violates the spirit of the law Hamon, I have to admire the creativity.

Still, it’s a shame such legal gymnastics are required. I never thought I’d utter these words: let’s get Back to Bacon.

angry_bacon