Foreign Investment Control in FRance
Approval Requirements For Foreign Corporate Investments in France
More and more countries are tightening regulations for foreign investors that intend to acquire stakes in companies. Maria Lancri (Attorney, Partner at Squair, Paris) and Amira Abaoub (Attorney, Associate at Squair, Paris) describe the legal situation in France and shed light on the consequences for corporate investments there.
The control of foreign investment in France has undergone several reforms in recent months. The mechanism was reformed by the Loi Pacte, which was subsequently supplemented by Decree no. 2019-1590 and an Order of 31 December 2019 to specify the scope of operations subject to French government control and extended the repressive powers granted to the Minister of the Economy. The mechanism was furthered modified in 2020 to take into account the consequences of the Covid crisis on international trade and business.
Thus, foreign investments are subject to prior authorization by the Minister of the Economy.
Article R151-1 of the French Monetary and Financial Code provides that a foreign investor is: 1° Any individual of foreign nationality; 2° Any individual of French nationality who is not domiciled in France within the meaning of Article 4 B of the General Tax Code; 3° Any entity governed by foreign law; 4° Any entity governed by French law controlled by one or more persons or entities mentioned in this 1°, 2° or 3°.
In order to be controlled, the transaction must constitute an investment as defined by Article R151-2 of the French Monetary and Financial Code:
1. To acquire control of an entity governed by French law; or
2. Acquire all or part of a branch of activity of an entity governed by French law; or
3. Crossing, directly or indirectly, alone or in concert, the 25% threshold of holding the voting rights of an entity governed by French law.
The 3rd point is not applicable either to a natural person who is a national of a European Union Member State or of a State party to the agreement on the European Economic Area that has concluded an administrative assistance agreement with France with a view to combating tax fraud and tax evasion and who is domiciled in one of these States, or to an entity of which all the members of the control chain, within the meaning of II of Article R. 151-1, are subject to the law of one of these same States or are nationals of and domiciled in one of these States.
The 3rd point derives from the application of EU Regulations whereby foreign investor’ means “a natural
person of a third country or an undertaking of a third country, intending to make or having made a foreign direct investment”.
An investment is subject to the authorization procedure in the case where the activities of the target company are potentially harmful to public order, public security or national defense interests, or if they involve research, production or marketing of weapons, munitions, powders and explosive substances, according to the list of activities provided in Article L.151-3 of the French Monetary and Financial Code.
The political objective of this regulation is therefore clear. It is to control activities that are sensitive for the security or the economy of the country. This purpose has been confirmed by the amendments that led to an extension of the rules during the first lockdown in Spring 2020, as confirmed by the press statement published on the website of the Ministry of the Economy: ” On April 29, Bruno Le Maire announced an adaptation of the procedure for controlling foreign investment in France (IEF), in the context of the current health and economic crisis. This crisis is weakening French companies, including those operating in strategic sectors. While most foreign investment operations represent opportunities for French companies, the volatility of the financial markets and the very sharp decline in the valuations of a large number of companies make them particularly vulnerable to possible hostile transactions, which requires increased vigilance. »
In this context, the Order of 27 April 2020 relating to foreign investments in France extended the notification regime to investments made in biotechnology. The government specifies as follows: “The addition of biotechnology to this list of critical technologies will give the State better margins of appreciation to examine operations in this sector”.
In addition, the ownership threshold conferring more than 25% of a company’s voting rights, even without a takeover, has been lowered to 10% for listed companies. The government explains this measure by the fact that these companies have a sometimes dispersed shareholding and that the acquisition of a stake, even a minority stake, can be destabilizing when it is hostile.
Initially, the decrease of the threshold to 10% was only temporary and was to end on December 31, 2020. However, in view of the persistent health crisis, the threshold lowering measure was extended until December 31, 2021, instead of December 31, 2020.
Once the application file has been submitted, the Minister of Economy has 30 working days to make a decision. By application of administrative law rules, if the Minister of Economy to fails to respond within this period, the application is deemed to be rejected.
At the end of the examination procedure, the Minister has the choice of (i) refusing the investment, (ii) authorizing it or (iii) attaching conditions to the authorization.
Where a transaction has been concluded without prior authorization or without complying with the conditions attached to the authorization, the Minister of the Economy may, depending on the shortcomings noted and their seriousness, request that an application for authorization be filed and then follow the review procedure. If the conditions of the authorization have not been complied with, the Minister may withdraw the authorization or impose compliance with the initial conditions or new conditions. This decision may be accompanied by a monetary sanction, precautionary measures such as suspension of voting rights, appointment of a proxy.
For example, in December 2020, the Ministry of Economy and Finance vetoed the acquisition of Photonis by an American group in view of protecting national strategic interests.
It has to be noted that a few weeks ago Couche Tard, a Canadian company expressed an interest in buying Carrefour, one of the leaders in the retail market and “main private employer in the country”.
Before any official procedure was launched by the parties, the Minister of Economy publicly said that he was opposed to such a transaction considering that the change of ownership of Carrefour to a foreign investor would jeopardize French food sovereignty. The Minister of Economy explained this veto by underlining that: “Food security is strategic for our country and therefore we do not give up one of the major French distributors“.