French foreign investment controls are on the whole fairly lenient, as financial relations between France and other countries are unrestricted, in principle.2 This freedom is subject to certain safeguards intended to protect national interests,3 which allow the government to require notification or prior authorisation of capital flows and foreign investments.
The rules on foreign investments evolve regularly, as the government may promulgate and modify legislation in the field with relative ease.4 The first law on foreign investment, Law No. 66-1008, was adopted on 28 December 1966. It has been supplemented by other laws (lastly by the Law PACTE enacted in May 2019)5 and several successive decrees6 (the latest in 2018)7 and orders8 (the latest in 2003),9 all codified in the Monetary and Financial Code.
According to the latest reports, the foreign direct investment inflows into France have increased (from US$50 billion in 2017 to US$56 billion).10 The year 2018 was also marked by a relative increase in projects announced by foreign investors in France: +1 per cent compared with 2017 (a total of 1,027 projects), with an average creation of 43 jobs per project. France has become the second most attractive European country in terms of number of announced projects.11
II FOREIGN INVESTMENT REGIME
With freedom as the guiding principle, foreign investments in France will not, as a rule, need to be authorised.12 However, the sensitive nature of certain investments justifies a departure from this principle. Thus, prior authorisation from the Ministry of Economy (the Ministry) will be required for all foreign investments that affect the exercise of public authority, or that involve an activity that may affect public policy, public safety or national defence, or an activity involving research into, or production or trading of, arms, munitions, or explosive powders or substances.13
This rather catch-all provision is detailed in regulatory provisions14 that, until May 2014, limited the scope of the Ministry's authority to 11 specific business sectors. Since the Decree of 16 May 2014, six new sectors have been added to this list, and the Decree of 29 November 2018 supplemented it with five new sectors.
Authorisation is required for any foreign investment (in the meaning of the regulatory provisions of the Monetary and Financial Code, for which see Section IV.ii) made by non-EU investors, and for foreign investment made by EU investors and consisting of the acquisition of all or part of a line of business of a company having its registered office in France in the following six sectors:15
- private security services;
- businesses involved in the research and development or manufacture of pathogens or toxic substances;
- wiretapping, mail interception and computer data capture;
- evaluation and certification services relating to the security of information technology systems and products;
- services relating to the security of information systems of public or private sector companies managing critical infrastructures; and
- businesses related to certain dual-use items and technology.
The definition of these sectors varies according to the origin of the investor, and is far broader for non-EU investors than for EU investors.
Most investments carried out by an EU investor in these sectors will be restricted only to the extent necessary to fight terrorism and criminal activities, although EU investors face tailored restrictions in certain sectors:
- in sectors related to private security services, where restrictions apply to companies intervening in public and private sector entities operating critical infrastructures to the extent necessary to protect these infrastructures; and
- in sectors where the national defence is at issue (for instance, the sector of dual-use items and technology).
Foreign investments in the gambling industry (except for casinos) are subject to prior authorisation only when they are carried out by non-EU investors.
Ten further sectors are considered highly sensitive; therefore, a uniform definition of 'sector' is applied to all foreign investors in:16
- activities related to cryptology or services connected to cryptology;
- activities carried out by companies privy to national defence secrets;
- activities involving research into, and the development, manufacture and marketing of, weapons, ammunition, powder and explosive substances used for military or war purposes, or other restricted materials;
- activities carried out by companies that entered into design or supply agreements with the French Defence Ministry; and
- activities that are essential to France's interest in matters of public policy, public security and national security in the following sectors:
- energy supply (energy, gas, oil or other energy sources);
- water supply;
- the operation of transport networks and services;
- the operation of electronic communications networks and services;
- the operation of a facility, installation or structure that is of vital importance within the meaning of Articles L1332-1 and L1332-2 of the French Defence Code;17 and
- the protection of public health.
The Decree of 2018 substantially expands this list of highly sensitive sectors, as it provides for the application of the foreign investment regime to the following five new sectors:18
- space activities;
- activities relating to the integrity, security and continuity of the operation of the electronic and computer systems necessary for the performance of the mission of the national police, of the national gendarmerie, of the civil security services or of the Customs authorities' public safety mission;
- certain research and development activities relating to cybersecurity, artificial intelligence, robotics, additive manufacturing, semiconductors;
- certain research and development activities relating to dual-use goods and technologies, when carried out as part of another listed activity; and
- data hosting activities whose compromise or disclosure is likely to harm the exercise of the above listed activity or interest (1) related to the supply of the French Ministry of Defence, or (2) essential to France's interest in matters of public policy, public security and national security, or (3) related to points (c) and (d) above.
III TYPICAL TRANSACTIONAL STRUCTURES
There are no specific restrictions on takeover bids by foreign investors in France. However, the French market regulator may make the opening of the acceptance period (that is, the time from which shareholders may tender the offer, not the completion of the offer) subject to the receipt of mandatory regulatory approvals, including ministerial approval for foreign investments in sensitive business sectors.
Foreign investors are free to enter joint ventures in France, with or without a domestic partner.
IV REVIEW PROCEDURE
i Scope of application
The French authorisation regime initially relied on a very broad definition of investments subject to control, thereby affording the Ministry a wide margin of discretion. This approach was condemned by the European Court of Justice on the grounds that it was incompatible with the EU Treaty rules on the free movement of capital.19 Law No. 2004-134320 and subsequent decrees have addressed this concern by refining the concept of 'foreign investor' and by setting down a precise list of the business sectors that are subject to the regulatory authority of the Ministry.21
ii Categories of foreign investor
France's foreign investment regime has been gradually liberalised for EU investors to comply with the EU Treaty rules on the free movement of capital, with the result that there are substantial differences in the treatment of EU investors and third-country investors.
The qualification of 'EU investor'22 applies to any person who is a national of an EU Member State,23 to any legal entity that has its registered office in an EU Member State24 and to French nationals residing in another EU Member State.25 Investors who do not fall under any of these headings are considered 'non-EU investors'.
The Decree of 201226 introduced a new category of foreign investor subject to ministerial scrutiny: the foreign-controlled French investor (FCFI). This category encompasses all entities that have their registered office in France and that are controlled27 by a citizen of a country other than France, and companies whose registered offices is located outside France or a French citizen residing outside France.28
iii Forms of foreign investment subject to authorisation
Non-EU investors in all 22 sectors under the Ministry's authority must seek authorisation prior to any of the following operations:29
- the direct or indirect acquisition of a controlling stake30 in a company that has its registered office in France (stock transfer test);
- the acquisition of all or part of a line of business of a company that has its registered office in France (asset transfer test); or
- the acquisition of more than 33.33 per cent of the stock or voting rights of a company that has its registered office in France (threshold test).
Foreign investment controls are somewhat less stringent for EU investors and FCFIs. The threshold test does not apply to EU investors.31 The stock transfer test and the asset transfer test apply to EU investors only with respect to the 15 business sectors that are considered particularly sensitive.32 For the remaining seven strategic sectors, EU investors are required to seek authorisation only if they trigger the asset transfer test.33
Investments made by FCFIs will only be subject to authorisation if they trigger the asset transfer test.34
The Decree of 2012 removed certain transactions from the purview of the Ministry's control, such as the grant of loans or guarantees, the purchase of licences or patents, the execution of commercial or technical assistance agreements in connection with the acquisition of a French company by a foreign investor, and investments relating to casinos.
In the event of uncertainty as to the application of these rules, the Ministry encourages foreign investors to present a written request to the Ministry to determine whether a transaction requires prior notification.35 Since 1 January 2019, target companies can also request a preliminary ruling from the Ministry.36 Although the law provides for a two-month delay for the Ministry to respond, a response is usually given within three to four weeks in practice (the absence of a reply does not imply that the transaction is exempt).
iv Safe harbours
Several types of transactions are exempt from the authorisation regime, such as intra-group investments (i.e., between companies where more than 50 per cent of the stock or voting rights are held, directly or indirectly, by a common shareholder).37 This exemption will not apply if the proposed transaction is intended to transfer all or part of a strategic line of business abroad (investment triggering the asset transfer test).
Investors who have been previously authorised to acquire a controlling stake in a strategic sector company will also be exempt if they increase their ownership interest beyond 33.3 per cent of the stock or voting rights of said company.38
v Contents of the authorisation request
The request for authorisation must contain information about the investor, the recipient of the investment and the investment itself:39
- if the investor is a legal entity, the names, addresses and information about the individuals and public legal entities with ultimate control are required. If the investor is a listed company, it will need to report the identity of the shareholders known to have more than 5 per cent of the stock or voting rights, and the names and addresses of the board members. In the case of a fund, the identity of a fund manager will be required;
- the recipient company's corporate name, legal address, Kbis extract (certificate of registration) or registry number (SIREN number), details of the business activity and main customers, and the most recent fiscal year turnover and results are required; and
- regarding the investment, the details required are the shareholding structure before and after the contemplated operation, the purchase option on the remaining capital, if any, and the total amount of the operation, with the financial terms and conditions.40
The request shall be submitted by email and one original has to be filed with the Ministry.41
The contents of the request for authorisation are defined in the Order of 7 March 2003 to increase the transparency of the authorisation procedure and guarantee equal treatment to all investors. In practice, if the information provided in the request is not sufficiently precise for the Ministry to carry out an assessment of the transaction, investors are likely to receive requests for additional information. Every supplementary request for information suspends the review period, meaning that, in practice, the authorisation procedure could extend well beyond the statutory time frame.
vi Filing date and review period
The foreign investment regulations do not foresee a specific filing deadline, although the authorisation request must be sent once the investor is firmly committed to proceeding with the proposed transaction (in practice, as soon as a put option is signed) and in any case prior to the closing of the proposed transaction (failure to respect the authorisation regime may result in heavy sanctions; see Section IV.vii). The Ministry has two months to conduct a review of the transaction from the date it receives a complete notification. If it fails to respond within this time frame, the authorisation will be deemed granted (in practice, this never happens).
The French government has implemented an informal 'fast-track' procedure for determining whether an investment falls within the ambit of the prior authorisation procedure. In this regard, the Ministry has committed to respond within three to four weeks to any complete notification. This specific time frame applies without prejudice to the period of review of two months in case it appears that the investment is subject to prior authorisation.
vii Clearance test
The Ministry must verify that the investment will not harm national interests.42 If necessary, it may impose conditions on the investment relating, in particular, (1) to the continuity of the business, (2) its industrial, research and development capacities or related know-how, (3) the safety of its supply chain and (4) the performance of procurement contracts or contracts concerning public safety, national defence or research, or the production or trading of weapons, ammunition, or explosive powders or substances, by companies that have their registered office in France.43 It is possible that additional conditions may not suffice to remedy concerns, in which case the Ministry must refuse to grant authorisation.44
In addition, the Ministry's review must determine whether there is a 'serious presumption' that the investor is likely to commit any of the following crimes:
- drug trafficking;45
- criminal exploitation of a person's weakness or ignorance;46
- procurement and related crimes;47
- money laundering;48
- acts of terrorism or financing of terrorism;49
- corruption and influence peddling;50
- acting in a conspiracy;51 or
- any damage to the fundamental interests of the nation.52
In the event that such a presumption is established, the Ministry would have to deny the investor its authorisation.53
viii Prerogatives of the Ministry
The Ministry has a long tradition of negotiating with foreign investors, but this was an informal practice until 2004. Law No. 2004-134356 gave the Ministry authority to subject the implementation of an investment to conditions to safeguard national interests.
These conditions are specified in Decree No. 2005-1739 of 30 December 2005: typically, investors will commit to continuing the business's operations in the future. They might also undertake to protect its industrial, research and developmental capabilities, related know-how or the safety of its supply chain. Additional conditions may be imposed on companies that have their registered office in France to guarantee the continued performance of procurement contracts or contracts concerning public safety, national defence, research, or the production or trading of weapons, ammunition, or explosive powders or substances. Conditions related to the protection of sensitive information have become more usual during the past year.
As a consequence of the six sectors added by the Decree of 2014 and the Decree of 2018, the Minister may now also subject the implementation of an investment to conditions aimed at guaranteeing the integrity, security and continuity of the operations of an installation, facility or structure of vital importance,57 the transportation and electronic communications networks and services, or the protection of public health.58
Furthermore, the Decree of 2014 authorises the Minister to demand the divestment of part of the target's activities falling within a strategic sector to an independent third company. This was already provided for by the Decree of 2012, but only if the strategic business concerned was an ancillary activity of the target. Today, the Minister may order the divestment of any activity falling within the scope of the strategic sectors. However, the conditions imposed must be proportional to the protection of the national interest being safeguarded.59
In the course of its assessment, the Ministry may seek the assistance of foreign regulatory authorities to verify the information submitted by foreign investors, in particular regarding the provenance of funds.60
Failure to respect the authorisation regime comes at a potentially heavy price. At the very least, any agreement, understanding or contractual provision purporting to effectuate a foreign investment in one of the sectors identified by the regulatory provisions, without due authorisation, will be considered null and void.61
When required to do so, the investor will have up to 12 months to accomplish the rescission.62
The law PACTE enacted in May 2019 has clarified and, at the same time, expanded the Ministry's sanction powers.
Firstly, in case the investment is carried out without any authorisation, the Ministry can either:
- order the investor to file an application;
- order the investor to return to the status quo ante at its own expense; or
- order the investor to modify the investment.63
Secondly, in the event of an investment in contravention of the agreed conditions, the Ministry can either:
- order the investor to comply with the unfulfilled condition;
- order the investor to apply remedy actions, including the return to the status quo ante, in substitution to the unfulfilled condition; or
- revoke the authorisation.64
In any case, the Ministry can attach an interlocutory penalty to the above-mentioned injunction. Moreover, it can take protective measures if it considers that the national interests are at risk: it has the authority, inter alia, to suspend the voting rights, the distribution of dividends or the free disposal of the assets related to the sensitive activities, and to appoint, within the company, an agent entitled to obstruct any decision likely to affect the protection of national interests.65
Moreover, in any event, infringement of the foreign investments regulation regime may be punished by a civil fine capped to the highest of the following amounts:66
- twice the amount of the non-complying investment;
- 10 per cent of the annual turnover (excluding tax) of the company carrying out the sensitive activities; and
- €5 million for legal entities and €1 million for natural persons.
However, a fine must be proportional to the gravity of the offence.
Investors also face possible criminal sanctions, including imprisonment for up to five years. Legal entities face the imposition of various prohibitions (carrying out certain activities, participating in public tendering procedure, receiving government subsidies, etc.), either definitively or for a limited period of time and a fine of up to 10 times the amount of the investment.67
x Right of recourse
The decisions of the Ministry are subject to full review by the administrative judge.68 Under this procedure, the judge is given broad powers to control the Ministry's decision to submit an investment to prior authorisation,69 to overrule the Ministry's authorisations or rejections. The judge may hold the government liable for damages to the investor; although, in practice, it is extremely difficult to establish the state's liability.
Moreover, an EU investor may challenge the Ministry's decision under EU law in the French courts if it can demonstrate that the French regulatory framework creates an unjustified restriction of the free movement of capital, or that it lacks proportionality with regard to the public policy objectives at issue.
xi Declaration of the completed investment
The completion of an authorised investment gives rise to a notification in accordance with the conditions laid down by a forthcoming order of the Ministry.70
V FOREIGN INVESTOR PROTECTION
France has signed and ratified bilateral investment treaties with 104 countries, as well as the multilateral International Centre for Settlement of Investment Disputes Convention on the settlement of investment disputes between states and nationals of other states. These treaties offer foreign investors broad guarantees in terms of protection of their investment, resolution of disputes (such as access to arbitration, and the recognition and enforcement of awards) and compensation.
There are no significant enforcement issues to report. The latest World Bank Doing Business report, which ranks France 38th out of 190 countries in terms of protecting minority investors,71 would seem to confirm this analysis.
Strong guarantees exist at the domestic level: for instance, the right to property is constitutionally protected in France.72 Investors may seek protection of their right before any judge and, at the highest level, before the Constitutional Council.
VI OTHER STRATEGIC CONSIDERATIONS
It is recommended that foreign investors establish informal contacts with the Ministry prior to filing an official request. The monitoring and control of foreign investments in sensitive business sectors is a highly political process, and it would be impossible to overcome opposition from the government. Additionally, if the Ministry were to deny authorisation on grounds of national interest, it is hard to imagine that administrative courts or eventually the Council of State would overrule this decision.
Certain targets may use regulatory consent for a change of control as an effective means of defence against unsolicited offers, and especially when the offeror is a foreign company. In light of this, it is helpful to secure political approval at an early stage.
VII CURRENT DEVELOPMENTS
The Ministry has recently launched a public consultation73 on the amendment of the Order of 7 March 2003. The main objective is to speed up the examination of the requests for opinion or authorisation applications.
Currently, the list of requested documents is broadly defined, and additional information is often requested by the administration. The draft aims at clarifying the obligations imposed on stakeholders, which is expected to shorten the time frame of the examination period.
The debated draft also allows the transmission of requested documents by electronic means to modernise the procedure.
To our knowledge, the adoption of a new Decree reshaping the regime of foreign investment is currently contemplated.
1 Didier Théophile is a partner and Olivia Chriqui-Guiot and Guillaume Griffart are associates at Darrois Villey Maillot Brochier.
2 Article L151-1 of the Monetary and Financial Code.
3 Article L151-2 of the Monetary and Financial Code.
4 Law No. 66-1008 entrusts the government with the power to police foreign investments.
5 Law No. 2019-486 of 22 May 2019 (Law PACTE).
6 Decree No. 67-78 of 27 January 1967, Decree No. 89-938 of 29 December 1989, Decree No. 2003-196 of 7 March 2003, Decree No. 2005-1739 of 30 December 2005, Decree No. 2012-691 of 7 May 2012, Decree No. 2014-479 of 14 May 2014, Decree No. 2016-1663 of 5 December 2016 and Decree No. 2017-932 of 10 May 2017.
7 Decree No. 2018-1057 of 29 November 2018.
8 Order of 14 February 1996.
9 Order of 7 March 2003.
10 OECD, latest foreign direct investment (29 April 2019), available at http://www.oecd.org/investment/FDI-in-Figures-April-2019.pdf.
11 According to the report for the year 2019 prepared by Ernst & Young on investment attractiveness in France, available at https://www.ey.com/Publication/vwLUAssets/ey-barometre-de-l-attractivite-de-la-france-2019/$File/ey-barometre-de-l-attractivite-de-la-france-2019.pdf (Ernst & Young, 'La France résiste aux chocs, Baromètre EY de l'attractivité, France, 2019').
12 Certain investments that exceed the €15 million threshold must be notified to the French central bank for statistical purposes (Article R152-3 of the Monetary and Financial Code). Decree No. 2017-932 of 10 May 2017, which aims to simplify investments for foreign companies, abolished the administrative declaration to the Directorate General of the Treasury.
13 Article L151-3 of the Monetary and Financial Code.
14 Articles R153-2 et seq. of the Monetary and Financial Code.
15 Article R153-5 of the Monetary and Financial Code.
16 Article R153-4 of the Monetary and Financial Code.
17 Facilities, installations and structures that are of vital importance are identified by administrative authorities and are those that, should they become unavailable, would diminish the security of the nation, its potential to wage a war and its capability to survive. They include, inter alia, nuclear installations and certain facilities classified for environmental protection.
18 A uniform definition of 'sector' is applied to all foreign investors in these sectors.
19 European Court of Justice, Association Église de scientologie de Paris and Scientology International Reserves Trust v. The Prime Minister, Case C-54/99, 14 March 2000.
20 Adopted on 9 December 2004.
21 The list of sensitive business sectors remains limited, although it has recently been expanded, which was not the case before 2004.
22 Article R153-4 of the Monetary and Financial Code.
23 The definition extends to nationals of the European Economic Area (EEA) Member States that have signed an administrative cooperation agreement with France (i.e., Norway, Iceland, Liechtenstein).
24 Or in one of the above-mentioned EEA Member States.
25 Or in one of the above-mentioned EEA Member States.
26 Decree No. 2012-691 of 7 May 2012.
27 Within the meaning of Article L233-3 of the Commercial Code, which defines 'control' as: 'holding, directly or indirectly, a percentage of the stock conferring the majority of the voting rights in the general meetings of the company; holding the majority of the voting rights in a company pursuant to an agreement concluded with other shareholders, and which is not contrary to the interests of the company; and the power to make decisions at shareholders' meetings because of the held voting rights. A company is presumed to control another when it holds, directly or indirectly, a percentage of the voting rights above 40 per cent and when no other shareholder holds, directly or indirectly, a percentage higher than its own.'
28 Article R153-5-2 of the Monetary and Financial Code.
29 Article R153-1 of the Monetary and Financial Code.
30 Within the meaning of Article L233-3 of the Commercial Code; see footnote 33.
31 Article R153-3 of the Monetary and Financial Code.
32 Article R153-4 of the Monetary and Financial Code.
33 Article R153-5 of the Monetary and Financial Code.
34 Article R153-5-1 of the Monetary and Financial Code.
35 Article R153-7 of the Monetary and Financial Code.
36 Article 6 of the Decree No. 2018-1057 of 28 November 2018.
37 Article R153-6, I of the Monetary and Financial Code.
38 Article R153-6, II of the Monetary and Financial Code.
39 The information is listed in Article 4 of the Order of 2003.
40 The request shall indicate whether settlement has been by way of a transfer of funds from abroad to France or by other means.
42 Within the meaning of Article L151-3 of the Monetary and Financial Code (i.e., public policy, public security and national defence).
43 Article R153-9 of the Monetary and Financial Code. The conditions listed in the Monetary Code are not exhaustive.
44 Article R153-10 of the Monetary and Financial Code.
45 Within the meaning of Articles 222-34 to 222-39 of the Criminal Code.
46 Within the meaning of Article 223-15-2 of the Criminal Code.
47 Within the meaning of Articles 225-5, 225-6 and 225-10 of the Criminal Code.
48 Within the meaning of Article 324-1 of the Criminal Code.
49 Within the meaning of Articles 421-1 to 421-2-2 of the Criminal Code.
50 Within the meaning of Article 433-1 of the Criminal Code.
51 Within the meaning of Article 450-1 of the Criminal Code.
52 Within the meaning of Book IV, Title I of the Criminal Code.
53 Article R153-10 of the Monetary and Financial Code.
55 See, for instance, Decision No. 262626 of the French Council of State (the highest administrative court), dated 3 November 2004. The Council found that the Ministry's decision to submit a non-governmental organisation to an authorisation regime concerning grounds of national security did not need to be justified.
56 Adopted on 9 December 2004.
57 Within the meaning of Articles L1332-1 and L1332-2 of the Defence Code.
58 Article R153-9 of the Monetary and Financial Code.
60 Article R153-12 of the Monetary and Financial Code.
61 Article L151-4 of the Monetary and Financial Code.
62 Article R153-11 of the Monetary and Financial Code.
63 Article L151-3, I of the Monetary and Financial Code.
64 Article L151-3-1, II of the Monetary and Financial Code.
65 Article L151-1-3 of the Monetary and Financial Code.
66 Article L151-3-2 of the Monetary and Financial Code.
67 Article 459 of the Customs Code.
68 Article L151-1-3, IV of the Monetary and Financial Code.
69 See Decision No. 160550 of the French Council of State, dated 15 April 1996, affirming the power of administrative courts to control the Ministry's decision to submit a foreign investment entity to the authorisation regime.
70 Article R153-13 of the Monetary and Financial Code.
71 The World Bank, Doing Business 2019, available at https://www.worldbank.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_web-version.pdf. Since 2015, the 'protecting investors' indicator has been changed to 'protecting minority investors' to better reflect its scope. This new indicator measures shareholders' rights in corporate governance beyond related-party transactions.
72 It was recognised as a constitutional right by the Constitutional Council on 16 January 1982 (Decision No. 81-132 DC).