France: FDI Key in Transactions Landscape Amid Increased Scrutiny

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Overview of regime

For many years, foreign direct investment (FDI) in certain sensitive sectors relating to French national interests has been subject to prior clearance. The French foreign investment regime currently relies on Decree No. 2019-1590[2] and the Order of 31 December 2019,[3] as modified by the Orders of 27 April 2020[4] and of 10 September 2021,[5] relating to foreign investments in France, and notifications under these regulations have to be made to the French Minister of the Economy, Finance and Recovery[6] (the Ministry of Economy).

Concept of ‘investment’ under French FDI controls

Prior approval from the Ministry of Economy is required under Articles L.151-1 and R.151-1 of the French Monetary and Financial Code for foreign investments occurring in ‘sensitive’ or ‘strategic’ sectors if they result in either:[7]

  • An acquisition of control of any legal entity governed by French law.[8]
  • An acquisition of all or part of any business division operated by a legal entity governed by French law.
  • For investors from outside the European Union (EU) and European Economic Area (EEA) only, the acquisition, directly or indirectly, solely or in concert, of more than 25 per cent of the voting rights in an entity governed by French law. This threshold has been lowered to 10 per cent until at least 31 December 2023 for investments in French companies in strategic sectors by non-EU/EEA investors where the French target’s shares are listed on a regulated market.[9]

Concept of ‘foreign investor’ under French FDI controls

The foreign investment regulations apply to any foreign investment transaction made by a non-French investor in a French legal entity active in one of the sensitive sectors or activities.[10]

It should be noted that each entity or person in a chain of control will be considered a ‘foreign investor’. A foreign investor in a chain of control either acquiring control of a French legal entity or of all or part of a business division operated by it, or crossing the relevant voting rights threshold in such French legal entity, will be subject to a filing request provided the target entity is active in a strategic sector. The focus will be on the investment decision-making power of the shareholder over the target and not solely on the status of the ultimate shareholder.

In the case of an investment fund, any person who is able to exercise legal or practical control over the fund would be considered to be within the chain of control, regardless of the legal structure.

Concept of ‘strategic sector’ under French FDI controls

Although the list of strategic sectors used to be shorter for EU/EEA investors, the Decree of 2019 removed this distinction, such that the sectors regulated by the foreign investment control mechanism are the same regardless of whether the investor is EU/EEA or non-EU/EEA. This has significantly expanded the list of strategic sectors for EU/EEA investors. In addition, the overall list of strategic sectors has been expanded (for both EU/EEA and non-EU/EEA investors) to include additional industries. [11]

The list of sensitive activities in strategic sectors covered by the foreign investment control prior approval mechanism includes the following:

  • Activities likely to jeopardise national defence interests participating in the exercise of public authority or likely to jeopardise public order and public safety, including:
    1. activities mentioned in Article L.2332–1 of the Defence Code relating to weapons, ammunition, powders and explosive substances intended for military purposes, or war materials and assimilated materials;
    2. activities relating to dual-use goods and technologies;
    3. activities carried out by entities privy to national defence secrets;
    4. activities in the sector of security of information systems carried out for a public or private operator (including as a subcontractor to these operators) that manages or uses critical facilities as mentioned in Article L.2332–1 of the Defence Code;
    5. activities carried out by companies that have entered into an agreement with the Ministry of Defence, either directly or through a subcontractor, for the design, provision of services or supply of equipment with respect to goods or services within the scope of the industry sectors listed in points 1 to 3 above and 6 below;
    6. activities relating to cryptology resources and services;
    7. activities relating to equipment or technical devices permitting the interception of correspondence or designed for the remote detection of conversations or the capture of information technology data;
    8. service activities relating to the auditing and certification of security provided by information technology products and systems;
    9. activities within the gambling industry (except for casinos);
    10. research, development and production activities aimed at dealing with the illegal use, in the context of terrorist activities, of pathogens or toxic substances and preventing the public health consequences of that use; and
    11. data processing, transmission or storage activities, the compromise or disclosure of which is such that it interferes with the exercise of the activities mentioned in points 1 to 10 above, and in the following list.
  • Activities likely to jeopardise national defence interests participating in the exercise of public authority or likely to jeopardise public order and public safety, where they concern essential infrastructure, goods or services, to ensure:
    • integrity, security and continuity of supply of energy sources;
    • integrity, security and continuity of the supply of water;
    • integrity, security and continuity of the operation of networks and transportation services;
    • integrity, security and continuity of space operations;
    • integrity, security and continuity of the operation of electronic communication networks and services;
    • performance of the objectives of the national police, the national gendarmerie and the civil protection services, and of the public security objectives of customs and of licensed private security companies;
    • integrity, security and continuity of the operation of any facility, installation or structure of vital importance within the meaning of Articles L.1332–1 and L.1332–2 of the Defence Code;
    • protection of public health;
    • the production, transformation and distribution of agricultural products as far as they contribute to national food security objectives (aiming to ensure access to safe, healthy, diversified, good-quality food in sufficient quantity, to protect and enhance agricultural land and to support the protein supply autonomy of France and the European Union); and
    • the editing, printing, distribution of political and general information through print and online press services.
  • Activities likely to jeopardise national defence interests participating in the exercise of public authority or public order and public safety, where they concern essential infrastructure, goods or services to ensure research and development activities relating to:
    • critical technologies, namely:
      • cybersecurity;
      • artificial intelligence;
      • robotics;
      • additive manufacturing;
      • semiconductors;
      • quantum technologies (technologies using the interactions of molecules, atoms and even smaller particles to create practical applications for building computers, telecommunications, satellite navigation, smartphones and medical diagnostics); and
      • energy storage, biotechnologies and technologies involved in the production of renewable energy; and
    • dual-use items and technologies listed in Annex I to Council Regulation (EC) No. 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items.

Review process – procedure and substantive assessment

Notification and review process of French FDI

The request for approval (for which there is no fee payable) from the Ministry of Economy is mandatory, suspensory and must be made prior to the closing of the transaction. The Order of 31 December 2019, as amended, formally sets out the information required in the filing application.

It is possible for a French entity to ask the Ministry of Economy to confirm whether its activities fall within the scope of the French foreign investment regulations. The Ministry of Economy can respond to such requests within two months. This is a separate request from the formal review.

In the case of a formal review, the Ministry of Economy will have 30 working days to either confirm the investment is not covered by the French foreign investment regulations, to approve the investment unconditionally or to launch an additional examination.

This Phase I formal review starts after submission of the request for approval, with any request for information suspending the review period until the complete response is provided.[12]

In the case of further investigation, or a Phase II review, the Ministry of Economy will then have an additional 45 working days (which cannot be suspended) from issuance of the initial decision to the applicant to complete the additional examination. The two-phase procedure bears some parallels with the merger control review procedure.

The Ministry of Economy has the right to amend or set new conditions (commitments) attached to an authorisation. The Ministry can, on its own initiative, amend existing conditions in the event of a change in the ownership of the target entity of the investment or in the composition of the control chain. The Ministry can also set new conditions if the investor acquires control after having obtained an authorisation under the French foreign investment regulation.

If the Ministry of Economy fails to issue a decision within the initial 30 working days or the subsequent 45 working days, as applicable, the application will be deemed to have been rejected.[13] This is a shift in approach, since, under the previous regime, if no decision had been issued by the deadline, the application was deemed to have been approved by default.

Appeals have to be lodged within 30 days of the explicit or implied rejection. These can be either (1) an administrative appeal, sent to the Ministry of Economy or (2) a contentious appeal before the Administrative Court of Paris.

In accordance with Article L.411-2 of the French Code of Relations between the Public and the Administration, the 30-day limit for a contentious appeal is extended by the exercise of an administrative appeal and only starts running again from the date of rejection.

Risks under French FDI

An investor who fails to notify is liable to a fine of the higher of:

  • twice the amount of the defaulting investment;
  • 10 per cent of the annual turnover (excluding tax) of the target company; or
  • €1 million for individuals, or €5 million for corporate entities.

The investor may also face possible criminal sanctions, including imprisonment for up to five years.

The Ministry of Economy also has the power to issue orders and injunctions if an investment has been carried out without any prior requisite authorisation. The Ministry can now ask an investor to (1) submit a request for authorisation, (2) revise the investment or (3) unwind the transaction at its own expense.

In the event of a breach of the commitments made by an investor, the Ministry of Economy can ask the infringing investor to comply (within a specified time frame) with (1) the commitments or (2) new conditions (including unwinding the investment or selling the sensitive activity). The Ministry may also withdraw the previously granted approval, in which case the investor will need to file a new approval request, unless it decides to unwind its investment.

If the protection of public order, public security or national defence is compromised or likely to be threatened, the Ministry of Economy has the power to impose interim measures to remedy the situation quickly. These measures include suspending the investor’s voting rights in the target company, preventing or limiting the distribution of dividends to the foreign investor, or appointing a temporary representative to ensure the preservation of national interests within the target company.

Remedies

Given the aim of governments to preserve domestic capacities and prevent what they consider to be predatory acquisitions, investors should consider early in the process whether there are specific assurances or commitments that they might be willing to offer in appropriate circumstances. These might, for instance, include maintaining domestic production capacity, protecting domestic research and development (R&D), ensuring the continuity of ongoing contracts, or maintaining domestic jobs.

Insights into recent enforcement practice and current trends

It is apparent that the Minister of the Economy, all while expanding the French FDI regime in a variety of ways, is also reviewing requests for prior authorisations in an increasingly detailed manner, imposing conditions on investors with increasing regularity.

The expansion trend has only increased since the covid-19 pandemic, which led to a notable and permanent changes in the French regulation:

  • The Order of 27 April 2020 relating to foreign investments in France[14] added R&D-related activities in the biotechnology sector to the list of strategic activities, which was most likely to protect French companies working on a covid-19 vaccine. This followed the 25 March 2020 guidance of the European Commission.[15]
  • Decree No. 2020-892 of 22 July 2020[16] introduced a simplified control procedure for acquisitions of at least 10 per cent by non-EU/EEA investors in the voting rights of a French company carrying out a strategic activity and whose shares are traded on a regulated market. In such a case, the investor must give prior notice of the transaction to the Ministry of Economy, which may then object within 10 business days. If no objection is raised, the transaction is authorised and the investor has up to six months to complete it. However, if an objection is raised, the investor may file a formal application for authorisation.
  • Decree No. 2020-1729 of 28 December 2020[17] extended this temporary ‘fast-track’ framework until 31 December 2021, with Decree No. 2021-1758 of 22 December 2021[18] last extending it until at least 31 December 2023. It is expected this lowered threshold will be permanent beyond 2023.

In addition to changes in the wording of the French FDI regime, the Minister of Economy had asserted itself as a highly relevant and decisive player on the European FDI stage. Even though formal vetoes remain extremely rare, the Ministry of Economy publicly tightened its position when it issued three high-profile refusals in the past year that made headlines.

First, following the interest shown by US company Teledyne in the French company Photonis, which specialises in night vision systems, the French Ministry verbally announced its opposition to the transaction, although discussions continued throughout summer 2020. The discussions then reached a point where the following conditions were imposed by the Ministry:

  • the requirement for the French sovereign investment fund Bpifrance to take a 10 per cent minority stake in Photonis, accompanied by a veto right regarding the operations and management of Photonis’ European businesses in France and the Netherlands; and
  • the establishment of an internal security committee to include representatives of the French Ministry of the Armed Forces and the Ministry of Economy, who would not only have veto rights but would also filter information to limit the transfer of strategic data to Teledyne.

However, the discussions ultimately came to an end with a formal prohibition of the transaction issued by the French state at the end of 2020 – an unprecedented event.

The second prohibition was issued in January 2021. The Ministry of Economy vetoed Canadian retailer Couche-Tard’s acquisition of French supermarket chain Carrefour – even before the submission of any formal filing – in the name of French food sovereignty, illustrating the topicality of control by foreign investors.

The latest prohibition occurred in October 2023, when the Ministry of Economy formally vetoed the acquisition of Canadian Velan, including its two French subsidiaries (Segault and Velan Lyon), by the US company Flowserve. Early in the process, the French Minister of Defence had publicly indicated to Parliament that they intended to oppose Flowserve’s takeover, which supplies valve solutions for French nuclear power plants and nuclear submarines. The Ministry of Economy eventually took the decision to prohibit the two takeovers, considering that a clearance subject to conditions would not have been not sufficient to reduce all the risks associated with the acquisition.

For the business world, these vetoes set a high water mark in the rising tide of protectionism and are a signal of stronger protection of French companies from non-European investors, implicating even close economic partners of France such as the United States and Canada.

These cases reflect the French government’s increased sensitivity to national interests and more aggressive approach to enforcement. Foreign investors need to be prepared for tighter scrutiny and the potential imposition of conditions (and, in certain cases, prohibition decisions).

This tighter scrutiny and overall increase in scope of the French FDI regime are also reflected in the latest released figures.[19] Indeed, the Ministry disclosed that 325 requests were submitted to it in 2022 with 131 transactions being approved, 53 per cent of which were subject to commitments. Twenty-four per cent of the reviewed transactions were linked to the defence sector, 52 per cent were related to essential infrastructure, goods or services, and the remaining 24 per cent were a mix of both sectors. The 10 per cent increased share of defence activities transactions in the last year likely reflects a shift following the war in Ukraine. Investors mostly remained non-EU/EEA based, especially from the UK, US and Canada. EEA-based investors primarily were based in Germany, Luxembourg and Italy.

Practical insights and strategic guidance for investors

Just a few years ago, FDI screening had limited implications for merger and acquisition (M&A) transactions as its impact was generally limited to investments in the defence sector or in critical infrastructure. However, French foreign investment control has now become a major issue in M&A transactions, introducing a new dynamic of negotiation with investors. As with merger control, the risk of a foreign investment control review is no longer an exception to the rule and must be taken into account in terms of both the certainty of a transaction and the timing of its completion. In this respect, the due diligence stage is now a key part of the resolution of foreign investment issues, as even low or minority shareholdings can trigger the application of FDI rules, as can contractual arrangements, other rights and acquisitions of assets.

When planning an M&A transaction, French FDI filings need to be considered alongside competition-based merger control rules. In addition, parties should bear in mind that the French government has a large degree of discretion under the French FDI regime. Under the French system, FDI filing precedents are not publicly available and a previous clearance decision issued by the French ministry stating that a particular target’s activities fall outside the scope of the French FDI regulation cannot be used as a precedent to avoid subsequent filings in the same sector. The result is a degree of uncertainty that needs to be factored into the overall transaction risk.

As with other regulatory approval requirements, when a transaction falls under the French FDI regime, there will be implications for the deal timetable. Reviews can take a number of months. The Bureau Multicom 4 within the Ministry of Economy’s Treasury Department is formally in charge of the review. When reviewing a foreign investment, the Ministry conducts inter-ministerial consultations with other ministries, government agencies or regulators competent depending on the relevant sectors concerned by the foreign investment under review, such as the Ministry of Defence, the Ministry of Transportation or the Ministry of Health. This inter-ministerial consultation allows the ministries concerned to raise questions about the investor, the target or the transaction dynamics and can undoubtedly affect the overall timetable. In practice, the Ministry takes the view that, for as long as any questions remain unanswered, the clock is not ticking.

Finally, the EU’s foreign investment screening mechanism, which was put in place in late 2020, must be taken into account. National authorities communicate between themselves when a filing occurs[20] and the European Commission or other Member States may submit comments and questions to the parties. Indeed, following the second year of Regulation (EU) 2019/452 (the FDI Screening Regulation)[21] being in force, the European Commission released an annual report,[22] which highlighted that, in 2021, a total of 414 notifications were submitted by 13 Member States, with France ranking among the five most active members within the European network. These additional steps could therefore affect the estimated review timeline and should not be ignored.

Reform proposals

The scope of the French FDI screening mechanism has been extended via the 10 September 2021 Order regarding foreign investments in France,[23] officially published on 22 September 2021. The aim of the Order is to adapt the French system of control of foreign investments to the current developments and challenges in the renewable energy sector by amending the Order of 31 December 2019. As a result, R&D activities relating to ‘technologies involved in the production of renewable energy’ now also fall within the scope of control.

The Order also provides for changes to the content of an authorisation or a prior review of application filings and, in particular, adds to the list of documents to be provided when submitting an authorisation application. These changes are in line with the information requested under the European cooperation mechanism set up under the FDI Screening Regulation, and take into account documents that, in practice, were routinely requested by the Ministry of Economy after an initial filing.

These changes came into force on 1 January 2022.

With respect to recent developments, following a public consultation process conducted in the spring of 2022, the services of the Ministry of the Economy published on 8 September 2022 the first ever guidelines of the French FDI regulation.[24] This document provides a detailed description of the applicability conditions of the national regime and offers some in-depth insights on the review procedure. Noticeable changes include explicit reference to the rules of competition laws when assessing control between legal entities, restatement of the absence of any de minimis exemptions and representations on some specific carveouts for cases, such as hostile takeovers. While the French government and the Ministry’s services retain a large degree of discretion in assessing FDI filings, the guidelines provide a much-welcomed starker legal certainty for foreign investors in France.

We expect to see increased French FDI regulation going forward given the current political context in Europe with respect to Ukraine heavily impacting the defence and energy sectors, as well as supply chains, across the globe. Indeed, the French Minister of the Economy has so far already announced the following measures, which are likely to come into force in 2024:

  • permanently lowering the 10 per cent voting rights threshold for non-EU/EEA investors;
  • expanding the list of strategic sectors to include the extraction and processing of critical raw materials;
  • expanding the review to investments in French branches of foreign companies; and
  • launching an online platform to streamline interaction between the Ministry, parties and external counsel.

As always, FDI remains inherently vulnerable to economic and political shocks.


Notes

1 Katrin Schallenberg and David Tayar are partners at Clifford Chance.

2 Décret No. 2019-1590 du 31 décembre 2019 relatif aux investissements étrangers en France, available at https://www.legifrance.gouv.fr/loda/id/JORFTEXT000039727443/.

3 Arrêté du 31 décembre 2019 relatif aux investissements étrangers en France, available at https://www.legifrance.gouv.fr/loda/id/JORFTEXT000039727569/.

4 Arrêté du 27 avril 2020 relatif aux investissements étrangers en France, available at https://www.legifrance.gouv.fr/loda/id/JORFTEXT000041835304/.

5 Arrêté du 10 septembre 2021 relatif aux investissements étrangers en France, available at https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000044082732.

7 It is anticipated the French FDI regime will be amended to not only cover investments in legal entities governed by French law, but also investments in French branches of foreign companies. See https://www.economie.gouv.fr/video-priorites-economiques-de-la-rentree, at 23 minutes.

8 Control is defined under French law as either (1) holding directly or indirectly a majority of the voting rights in the general meetings of the company, possibly through an agreement concluded with other members or shareholders, (2) determining the decisions in the general meetings, even without a majority (e.g., through a blocking minority), or (3) having the power to appoint or dismiss the majority of the members of the administrative, management or supervisory bodies of the company. Joint control is possible where two or more persons act in concert. Control is furthermore presumed where one holds more than 40 per cent of the voting rights, and no other member or shareholder holds a fraction greater than its own. See French Commercial Code, Article L.233–3.

9 It is expected this lowered threshold will become permanent beyond 2023. See https://www.vie-publique.fr/discours/287750-bruno-le-maire-05012023-politique-economique.

10 Article R.151–1 of the French Monetary and Financial Code defines a foreign investor as either (1) an individual of foreign nationality, (2) an individual holding French nationality, but who is not domiciled in France within the meaning of Article 4B of the French General Tax Code, (3) any entity governed by foreign law, or (4) an entity governed by French law that is controlled by one or more of the persons or entities referred to in points (1), (2) and (3).

11 It is anticipated the list of strategic sectors will be further expanded to include the extraction and processing of critical raw materials. See https://www.economie.gouv.fr/video-priorites-economiques-de-la-rentree, at 23 minutes.

12 French Monetary and Financial Code, Article R.151-6; Guidelines relating to foreign investment control in France, para. 2.2.3. ii.

13 French Monetary and Financial Code, Article R.151-9.

14 Arrêté du 27 avril 2020 relatif aux investissements étrangers en France, available at https://www.legifrance.gouv.fr/loda/id/JORFTEXT000041835304/.

15 Communication from the Commission Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (the FDI Screening Regulation) 2020/C 99 I/01, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.CI.2020.099.01.0001.01.ENG&toc=OJ%3AC%3A2020%3A099I%3AFULL.

16 Décret No. 2020-892 du 22 juillet 2020 relatif à l’abaissement temporaire du seuil de contrôle des investissements étrangers dans les sociétés françaises dont les actions sont admises aux négociations sur un marché réglementé, available at https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000042138111.

17 Décret No. 2020-1729 du 28 décembre 2020 modifiant le décret no. 2020-892 du 22 juillet 2020 relatif à l’abaissement temporaire du seuil de contrôle des investissements étrangers dans les sociétés françaises dont les actions sont admises aux négociations sur un marché réglementé, available at https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000042754696.

18 Décret n° 2021-1758 du 22 décembre 2021 prorogeant l’abaissement temporaire du seuil de contrôle des investissements étrangers dans les sociétés françaises dont les actions sont admises aux négociations sur un marché réglementé, available at https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000044553697.

19 Foreign Direct Investment Screening in France – Annual Report 2022, available at https://www.tresor.economie.gouv.fr/Articles/2023/04/12/publication-du-rapport-annuel-sur-le-controle-ief-en-2022.

20 A template notification form is publicly accessible and has the aim of streamlining the assessment by the European Commission and Member States under the cooperation mechanism of whether a foreign direct investment undergoing screening is likely to affect security or public order in at least one other Member State – see https://circabc.europa.eu/ui/group/be8b568f-73f3-409c-b4a4-30acfcec5283/library/aac8130b-3b40-4bd1-99b5-147447189f23/details.

21 Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, available at https://eur-lex.europa.eu/eli/reg/2019/452/oj.

22 Report from the Commission to the European Parliament and the Council Second Annual Report on the Screening of Foreign Direct Investments into the Union, available at https://ec.europa.eu/transparency/documents-register/detail?ref=COM(2022)433&lang=en.

23 Arrêté du 10 septembre 2021 relatif aux investissements étrangers en France, available at https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000044082732.

24 Minister of the Economy, Guidelines on Foreign Investments in France, available at: https://www.tresor.economie.gouv.fr/Articles/314615b9-70b9-417f-bb94-5dd1437e7418/files/a81a841b-dc55-4685-af34-213bb0bd88cc [PDF].

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