The recent amendment to French foreign investment control rules
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Jacques Buhart
McDermott, Will & Emery, Paris
Stephan de Groër
McDermott, Will & Emery, Paris
France has, like many other European countries, tightened its foreign investment control rules in recent years. The last reform was implemented by Decree No 2019-1590 and a Ministerial Order, both dated 31 December 2019 ('the Reform'). The Reform came into force on 1 April 2020 and applies to all applications made by foreign investors following this date.
The latest changes to French regulation have, in particular: extended the strategic sectors subject to prior authorisation; widened the definition of a foreign investment; revised the clearance process; and reinforced the sanctions and the powers of the Ministry of Economy.
Expansion of strategic sectors
Foreign investments in France are generally unrestricted. However, to ensure the protection of French national interests, certain foreign investments in sectors considered strategic require prior authorisation from the French Ministry of Economy (MOE).
Such prior MOE authorisation is required for certain foreign investments (even for EU investors) in activities that: (1) participate in the exercise of public authority; (2) may affect public order, public safety or national defence; or (3) are related to research, production or commercialisation of weapons, munitions or explosive substances.
In order to improve visibility on the applicability of the foreign investment regulation, the French Monetary and Financial Code provides a list of ‘sensitive sectors’ which fall within the scope of the prior-approval regime. This list has been extended many times in recent years.
In 2014, in the context of the sale of Alstom’s energy business to General Electric, the so-called ‘Montebourg Decree’ added to the list of sensitive sectors, the safety and the continuity of the supply of water, electricity, gas, hydrocarbons and any other source of energy; the operation of transport services and telecoms; and activities related to ‘the protection of public health’.
In 2018, the legislator extended this list of sensitive sectors to include ‘sectors of the future’, such as research and development in artificial intelligence or robotics.
As of 1 April 2020, the following sectors also require prior MOE authorisation: (1) the production, transformation and distribution of certain agricultural products as far as they contribute to certain national food-security objectives; (2) the edition, printing or distribution political and general information print and online press services; and (3) research and development in energy storage or quantum technology. In the context of the Covid-19 pandemic, the French Government also added biotechnologies to the list in late April.
Broader definition of foreign investment
The prior authorisation regime, as amended by the Reform, applies to investments in strategic sectors from foreign investors, which result in any one of the following:
- the acquisition of control (within the meaning of article L 233-3 of the French Commercial code)[1] of a legal entity governed by French law;
- the acquisition of all or part of a business (branche d'activité) of a legal entity governed by French law; and
- the acquisition by non-European Union/non-European Economic Area (EEA) investors, directly or indirectly, alone or in concert, of 25 per cent or more of the voting rights of an entity governed by French law.
In the middle of the Covid-19 pandemic, the MOE has announced that the 25 per cent threshold will be lowered to ten per cent as regards investments carried out in listed companies until the end of 2020.
Note that all entities and persons within the chain of control shall be from (and domiciled in) an EU/EEA Member State in order for the investment to be considered to originate from the EU. Therefore, an investment conducted by a holding company incorporated in the EU, such as the Netherlands, but controlled by a non-EU investor would be considered as an investment conducted by a non-EU investor.
Revised clearance process
Since 1 April 2020, the clearance process for foreign investment has been divided into two phases (this is also the case for merger control processes). The MOE has 30 business days from the date of receipt of the application to notify the investor that the contemplated investment either: is not subject to the prior authorisation requirement; is authorised unconditionally; or requires further in-depth examination. In the case of an in-depth examination is required, the MOE has an additional 45 business days either to clear the transaction (potentially subject to certain conditions), or to disallow it. In practice, the conditions imposed by the MOE usually relate to the continuity of the company’s business, the safeguarding of jobs, keeping the supply chain in France, the absence of transfer of know-how and technology etc.
In relation to each phase, if no response has been received from the MOE within the stated time limit, the application is deemed to have been rejected.
Sanction reinforcement and increased Ministry of Economy powers
Until recently, the sanctions in cases of breaches of foreign investment regulations mainly consisted of the transaction being rendered null and void. Criminal sanctions allowed for (largely theoretical) imprisonment of up to five years, or a fine of up to twice the amount of the investment.
Owing to the review procedure and its outcome being confidential, there is no publicly-known precedent, but the risk of nullity was so high that many foreign investors sought comfort from the Ministry of Economy by requesting an advance ruling to know whether or not their contemplated foreign investment fell within the scope of the prior approval regime.
On 24 May 2019, the PACTE Law (loi relative à la croissance et la transformation des entreprises, or ‘the law on growth and transformation of enterprises’), which provides for additional sanctions, came into force. The law is aimed especially at strengthening the MOE’s powers and allowing it to adopt more diverse and tailored sanctions.
In particular, the Minister may now order the investor to: submit a request for authorisation; restore the original pre-investment situation at its own expense; or modify the investment.
The Minister’s decision may be accompanied by a per diem penalty and precautionary measures, such as suspending the investor’s voting rights and preventing the investor from disposing of assets or receiving dividends.
Conclusion
The strengthening of foreign investment control in France is part of a global trend taking place across Europe and worldwide. This trend has become even more evident in recent months, during the Covid-19 epidemic. The EU Commission called on Member States, that already have an existing screening mechanism in place to make full use of tools available to them under EU and national law, to prevent capital flows from non-EU countries that could undermine the EU’s security or public order. France’s Minister of Economy, Bruno Le Maire, said that ‘France is an economy open to foreign investments’, but that the government wanted to ‘make clear that you can’t do your shopping as you want today in France’.
A recent verbal notice of the Ministry of Finance rejecting the proposed acquisition of Photonis, a leading French company for night vision devices, by the US company Teledyne Technologies Inc illustrates this trend of reinforcement of foreign investment control in France.
Even if, in practice, the MOE has never officially issued a formal veto on a transaction, it is likely that the number of filings will increase and that the French government will make full use of its amended control rules to increase its scrutiny over anticipated foreign investments in sectors regarded as sensitive.
Notes
[1] Pursuant to article L 233-3 of the French Commercial code, a company is deemed to control another company: when it directly or indirectly holds a fraction of the capital granting it the majority of the voting rights at a general meeting; when it alone holds a majority of the rights in that company by virtue of an agreement entered into with other shareholders; when it effectively determines the decisions of the general meetings via its voting rights; (when it is a shareholder of that company and has the power to appoint or dismiss the majority of the members of that company’s administrative, management or supervisory bodies. It is also deemed to exercise such control when it directly or indirectly holds more than 40 per cent of the voting rights and no other shareholder directly or indirectly holds a fraction larger than its own. Two or more persons acting in concert are deemed to jointly control another company when they determine in fact the decisions taken at general meetings.