Foreign direct investment (FDI) regulation around the world, including in France, requires, more than ever, advance planning and strategy. Playing it well will enhance deal certainty, mitigate risks and keep timing on track. Investors can also gain efficiency in the case of global transactions with assets in several countries in by putting the right due diligence process in place as early as possible in the transaction process. Finally, sellers can also facilitate divestitures by taking the initiative of clearing the activity of the target at early stage.
RECENT DEVELOPMENTS IN FRANCE AND THE EU
France: The law of May 22, 2019 concerning the growth and transformation of enterprises (Loi Pacte) and the Implementing Decree of December 31, 2019 have made far-reaching changes to investment control, in particular significantly expanding the scope of the approval requirement and changing the approval procedure. This revised FDI regime was incorporated into the French Code monétaire et financier (CMF). French MOE released in September 2022 guidelines, which they will update regularly, to clarify the interpretation of certain provisions of the French FDI regulation as well as application templates.
EU: The European Union adopted its own FDI screening mechanism (Regulation EU 2019/452) to ensure that the EU dimension of any proposed FDI in a Member State would be taken into account via mandatory notification to the EU Commission. Another objective is to enhance cooperation between Member States in screening and discussing proposed transactions.
The approval procedure changed by the Loi Pacte is already compliant with the requirements of the EU FDI screening regulation and required only minimal adjustments.
In the context of the Covid 19 pandemic, France followed the recommendations of the EU Commission and extended the sectors covered by its control system by decree in order to prevent the Corona crisis from allowing foreign investors to take control of strategic French companies that were in financial distress as a result of the pandemic.
OTHER APPLICABLE REGULATION THAT INVESTORS NEED TO CONSIDER
Investors should consider additional contractual and regulatory matters when targeting a new investment, including :
All the contractual provisions of the commercial contracts (i.e. change of control, non-compete, confidentiality and secret defense) shall continue to apply and will need to be taken care of separately in the context of a transaction, in parallel with the MOE approval procedure.
Other regulatory matters:
General regulation irrespective of a given sector, i.e. merger control:
Merger control and FDI screenings are two ex-ante control procedures. They have different goals and scopes, procedures, timetables and sanction regimes despite certain similarities. For example, unlike for merger control, economic data of the target company or of the investor, such as annual turnover or market share, are not decisive for FDI.
However, in case both apply, it is crucial to articulate both procedures (for example, information to be gathered / divestitures to be envisaged) in order to close the contemplated transaction in a timely manner.
Specific regulation in certain sectors:
Specific regulation for electronic safety and export control for weapons remain applicable to investments subject to a FDI screening. Moreover, licenses and accreditations needed for certain activities (e.g. media, press, environmental authorizations for certain industries) shall be taken care of in parallel to the FDI screening.
Labor & employment and related matters
Strict compliance with applicable labor & employment and related matters will be required, in particular, prior information and consultation of the CSE (works council) where applicable.
SCOPE OF THE FDI REGULATION
Since the entry into force of the revised French FDI regulation in 2019, ”investors“ within the meaning of the CMF are:
- natural persons with foreign citizenship;
- natural persons of French citizenship not having their principal residence in France;
- foreign (i.e. non-French) legal persons; and
- French legal persons controlled by a foreign natural or legal person.
For the assessment of “control“, the French standard definition of Article L.233-3 of the Code de commerce shall apply.
Pursuant to Article L.233-3 of the Code de commerce, the control of a company is held by whoever:
- directly or indirectly holds the majority of the voting rights;
- holds alone the majority of the voting rights by virtue of an agreement with other shareholders;
- through their voting rights, actually determines the decisions of the shareholders' meeting;
- has the right to appoint or dismiss the majority of the members of the administrative, management or supervisory bodies.
In addition, the Code de commerce presumes that a person who directly or indirectly holds more than 40% of the voting rights, when no other shareholder directly or indirectly holds a greater percentage, is considered to be a “controlling” shareholder.
A “controlling” interest is deemed to exist when two or more persons, acting in concert, actually determine the decisions of the shareholders' meeting (Article L.233-10 of the Code de commerce).
In addition to Article L.233-3 of the Code de commerce, the definition of “control” for FDI screening includes the ”decisive influence“ within the meaning of Article L.430-1 III of the Code de commerce used and interpreted under the French antitrust regulation.
As a consequence, the notion of “control” is extremely wide and, in the case of transfer of a significant minority shareholding, may require in depth analysis of shareholders’ or JV agreements in order determine whether FDI screening is applicable.
The full “chain of control” is taken into consideration as the Decree of December 31, 2019 has also clarified that any person (whether natural or legal) who is directly or indirectly controlled by a foreign investor, as the case may be on a consolidated basis, is deemed to be a foreign investor within the meaning of the CMF. The MOE is applying the test on a case-by-case basis. The test can be far reaching for investment funds, including the review of the general/limited partners’ obligations and the fund’s internal regulations.
In the case of a proposed investment by one or more members of a control chain, the FDI application referred to below may be submitted by one member of the control chain on behalf of all participating investors.
According to Article R.151-2 of the CMF, the term “investment” refers to:
- the acquisition of control as defined above;
- the partial or total acquisition of a branch of activity of a French company or
- crossing the threshold of 25% of the voting shares of a French legal entity (the threshold was 33% before the 2019 reform)
As a consequence of the Corona crisis, France reduced the threshold under (c) from 25% to 10% for listed companies on July 22, 2020, with reference to the applicable German and Spanish regulations. This is intended to protect listed companies with a broad distribution of ownership from possible influence by minority interests. The reduction was originally set to expire on December 31, 2020, but has since been repeatedly extended and is now currently set to expire on December 31, 2022.
However, exceeding the threshold of voting shares under (c) is not considered an investment for the purposes of the CMF for investors from countries of the European Union or the European Economic Area that have concluded a cooperation agreement with France to prevent tax evasion or, in the case of a chain of control, if all persons in the chain of control are resident in and have citizenship from those countries (not applicable to post-Brexit UK).
These do not qualify as investments within the meaning of the French FDI regulation:
- new incorporations (e.g. greenfield investments);
- the purchase of individual assets; and
- the acquisition of the French branch of a non-French legal entity.
The 2019 French FDI regulation has unified the list of sectors considered critical for all investors, whereas prior to the reform, different lists of sectors were applied depending on the type of investor (non-EU, EU investor or French).
Furthermore, the regulation has extended the list to include the following sectors: print media, production, food safety and transformation or distribution of agricultural products, as well as research activities in the field of key technologies (including cybersecurity, artificial intelligence, robotics, semiconductor and quantum technologies). The areas of print media and food security were added as part of the implementation of the EU FDI screening regulation.
The criterion for inclusion is that an investment in the respective economic sector could potentially constitute:
- violation of national defense interests;
- participation in activities related to the State exercise of public power or the State maintenance of public order, or
- violation of public security.
The economic sectors in the CMF's list of sectors that may involve the above threats to public order and security can be summarized as follows:
- Sectors of Article R.151-3, I of the CMF, which are considered ”critical“ or ”sensitive“ by nature (especially in the fields of weapons, ammunition, explosives, cryptology or in the context of secret defense activities);
- Activities concerning infrastructure, goods or services crucial to the protection of national interests in the fields of energy, drinking water, transportation, space, electronic communications, law enforcement, operation of facilities of ”vital interest“ within the meaning of the Defense Code, public health, food safety and press (Article R151-3, II of the CMF);
- Research and development in the areas of (i) key technologies and (ii) dual-use technologies (civil and military), in one of the critical sectors (Article R151-3, III of the CMF). MOE guidelines stress in particular the importance of early stage R&D which has not yet reached the industrialization stage.
To the list of key technologies, the area of ”biotechnologies“ was added by Arrêté of April 27, 2020 and, in the context of the Corona crisis, renewable energy research and development was added by Arrêté of September 10, 2021.
According to Article R.151-7 of the CMF, approval is not required for:
- intra-group investments if all legal entities of the group are more than 50% directly or indirectly controlled by the same shareholder;
- when the investor crosses, directly or indirectly, alone or in concert, the threshold of 25% of the voting rights in the capital of an entity of which it previously acquired control with approval from the MOE; and
- when the investor acquires control, within the meaning of Article L. 233-3 of the Code de commerce, of an entity in which it had previously directly or indirectly, alone or in concert, crossed the threshold of 25% of the voting rights with approval from the MOE. In the latter case, the investor must notify the MOE of the acquisition of control prior to its execution. If the MOE does not object within 30 days in that particular case, the notified acquisition of control is deemed to be approved.
The exceptions do not apply, in particular, if the purpose of the investment is to relocate one of the critical industries abroad.
APPLICABLE FDI PROCEDURES
Pursuant to Article R.151-4 of the CMF, the investor and, more recently, the target company may submit a preliminary inquiry to the MOE to determine whether the target company's activity (or business line) is considered partially or wholly ”critical“ within the meaning of the CMF. This comes in addition to an established practice of reaching out unofficially to the MOE, to establish a preliminary contact, a practice which has just been confirmed in the September 2022’s guidelines.
The MOE will respond to such a request within two months.
It remains to be seen to what extent this option will be used in practice since, in the event of a positive response from the MOE (i.e. the company is active in one of the critical areas), the entire approval process must still be completed. MOE has expressly rejected the use of two parallel requests: a preliminary inquiry and a subsidiary formal request for approval. It is worth noting, however, that in 2021, according to the MOE, 41 preliminary requests were made, and of these, 76% of the requests for investment control were classified as non-critical.
The MOE has issued publicly available questionnaires and other investor friendly documents to prepare the FDI preliminary inquiry (questionnaires for the investor and for the target). These questionnaires are much lighter compared to the approval questionnaire (see below).
Investors may initiate the preliminary inquiry quite early on in the transaction process even at the bid stage (before entering into exclusive discussions with the seller). Indeed, the questionnaire is not strict about the stage of the transaction (there is no requirement, for example, of having a binding LOI signed). However, prior to doing so, investors will need to obtain the consent of the target (which shall receive a copy of the MOE response) and the early stage will need to be documented as part of the application file.
Moreover, the cooperation of the target/seller seems indispensable to obtaining all the information required to complete the form on the target’s activities. This is particularly true for certain subcontracting activities whose rank in the value chain does not permit easy identification of the ultimate sector of the products/services supplied. Indeed, it is unlikely that the standard sell-side due diligence report / information memorandum issued by investment banks will be sufficient. One could reasonably anticipate that, over time, these reports and memoranda – when the target is active in a sector deemed sensitive – will integrate a full section on FDI (as we are seeing already in respect of ESG considerations).
Since the introduction of the Loi Pacte, which has made the procedure more transparent, the procedure is divided into two phases, similar to the merger control procedure.
The approval process begins with the submission of the request to the Direction General du Trésor (MOE department specialized in FDI screening) and is then divided into the following two phases (Article R.151-6 of the CMF):
(a) Phase 1: the MOE must decide, within 30 business days from the receipt of the application:
- to reject the application, considering the investment is not within the scope of the FDI regulation;
- to accept the application and grant the clearance without conditions; or
- to order a more extensive review.
The MOE may request additional information on the investment, the target enterprise and/or the investor, it being specified that the 30 business days period is suspended until the information requested is provided to the MOE.
(b) Phase 2: if a more extensive review is ordered, the MOE has 45 business days to deny approval or, if necessary, to grant approval subject to conditions (see below).
Where the MOE requests for additional information, the 45 business days is not suspended.
Prior to the entry into force of the Loi Pacte, the procedure went through only one phase with a time limit of two months.
MOE’s final decisions (i.e. an investment denial) are appealable within 2 months before the MOE itself and/or the administrative courts.
Simplified fast-track procedure
With regard to the case of exceeding the 10% threshold for listed companies, which was newly regulated in the context of the Corona pandemic, a simplified fast-track procedure was introduced, in which the MOE must decide within ten days whether to approve the transaction or to subject it to further review.
The 2019 reform clarified that the MOE's silence or lack of response within the above deadlines is considered a rejection at any stage of the procedure or a preliminary inquiry, the only exception to this being the fast-track procedure for exceeding the 10% threshold for listed companies. This is a clear shift in approach towards a more structured regime as the previous regime allowed for approval by default in the absence of a decision within the then applicable timeframe. An appeal may be lodged within thirty days of an express or implied rejection by the MOE.
Information to be provided to the MOE
The CMF contains the list of documents and information to be submitted. In particular, the investor must disclose its capital links or financial support from a third country or a public entity outside the European Union during the last five years.
As of January 1, 2022, a decree has expanded the list to include the information required to implement the EU FDI screening regulation, specifically an English-language form that must disclose, among other things, the target company's activity in the EU and the investor's strategy in the EU.
Notwithstanding the above, only one filing has to be made with the French MOE. Indeed, since January 1, 2022, the so-called notification Form B requested under the EU FDI screening regulation will need to be submitted alongside the list of documents to be provided within the French clearance application as soon as any entity or person belonging to the chain of control of the investor is located outside of the EU. EU screening shall also be applicable where a target is established in one EU country but is selling goods and / or providing services in several Member States whose security and / or public order might be affected by the contemplated FDI.
In order to comply with those obligations, the MOE has issued publicly available questionnaires and other investor-friendly documents to prepare the FDI application, namely: the application file to request the approval from the MOE; and the questionnaire for the EU common FDI screening. The French questionnaire is in French and the EU questionnaire is in English.
The information now requested on both questionnaires goes far beyond past practice even if past practice resulted in additional information being unofficially requested during meetings with the MOE.
Information to be provided to the MOE now includes among other things:
An indication of whether a past transaction of the investor or the target have been subject to an MOE clearance in the past. If a past transaction on the target was subject to a prior MOE clearance, it will be a good indicator that the target is potentially subject to the FDI regulation. However, since the regulation has been expanded over the years (in particular, with several new sensitive sectors added), investors cannot consider that the absence of such MOE clearance at the time of an earlier transaction on the same target gives any comfort about the fact that MOE clearance would not apply to the current one;
- An indication of whether a past transaction of the investor or the target have been subject to an MOE clearance in the past. If a past transaction on the target was subject to a prior MOE clearance, it will be a good indicator that the target is potentially subject to the FDI regulation. However, since the regulation has been expanded over the years (in particular, with several new sensitive sectors added), investors cannot consider that the absence of such MOE clearance at the time of an earlier transaction on the same target gives any comfort about the fact that MOE clearance would not apply to the current one;
- A presentation of the direct investor, the chain of control and ultimate beneficiary, including the name of the natural persons and, if legal entities, the names of the corporate officers;
- The global strategy of the investor (long term/short term investment, investment trends), its strategy in France and in the EU and the strategy for the target (contemplated synergies, business plan);
- An affidavit to be issued by the investor certifying that it has not be sentenced during the past 5 years, in France or abroad, for criminal or tax offences such as drugs and human trafficking, embezzlement, corruption etc;
- A list of the intellectual property (IP) assets owned by the target;
- A list of main French and EU clients of the target; A list of the competitors and market share of the target;
- A determination of the value of the French assets. This creates a possible difficulty in the case of a global acquisition when a price per asset is not easily identified (this is not a new issue, this was already the case before Loi Pacte);
- A copy of the LOI or other agreement showing that the discussions on the contemplated investment are in an advanced stage;
- A list of other conditions precedent (i.e. merger control);
- The contemplated closing date and supporting documentation for the calendar of the transaction;
- If available, whether the investor appears financially able to ensure the continuity and proper operation of the target after the acquisition; and
- If less than 100% of the share capital is to transfer, an explanation of how the ownership provides control and the modalities of a joint exercise of control.
Investors are required, within 2 months following the completion of the transaction, to make a post-completion filing with the MOE.
Confidentiality and public disclosure
As indicated above, since the information to be provided to the MOE is extremely wide, the level of confidentiality (i.e. applicable regulation to listed companies) shall be specified when filing the authorization request with the MOE.
MOE can resort to international cooperation to verify the accuracy of the information provided and that business confidentiality cannot be invoked against it.
Loi Pacte requires the French government to publish statistical data on investment control on an annual basis and to report annually to Parliament. The EU Commission also publishes regularly on the topic.
In contrast to merger control, however, the individual decisions of the MOE on investment control are not published and thus cannot serve as precedents.
APPROVAL WITH CONDITIONS
Loi Pacte has now enshrined in law the existing practice of imposing conditions on the approval of an investment. This is to ensure that the project, in particular when it is exported, does not violate the protected national interests in the field of national security, law and order or defense (Article L.151-3 of the CMF).
The possible conditions, according to the CMF (Article R. 151-8), are aimed at ensuring the continuity and security of critical activities (especially regarding possible subjection to foreign law), ensuring the maintenance of specific knowledge and know-how, adapting the internal organization of the target company (including the exercise of the acquired rights), or determining the form in which the investor must inform the authority in charge of supervising the investment.
In particular, the MOE may require that part of the acquired shares or a branch of the target company be sold to a third party approved by the MOE. If, in the course of an approval procedure or in the course of the preliminary analysis of the transaction, the possibility of a condition to this effect on the part of the MOE becomes apparent, the search for a suitable purchaser should be started at an early stage in the interests of the transaction.
Conditions imposed by the MOE, if any, should (in principle) meet a proportionality test (which is not defied and left at the discretion of the MOE).
In practice, the conditions are generally imposed by unilateral commitments of the investor to the French State.
MOE also regularly requires that the investor report to it annually on the development of its investment and the target company.
Conditions may be revised during the life of the investment by either the MOE or the investor upon change of circumstances. Until an agreement is reached on the new conditions, the existing ones shall survive.
Finally, it is extremely rare for the MOE to formally refuse approval as investors usually withdraw from their project if the required conditions become too extensive.
SANCTIONS AND EXECUTION CONTROL
Loi Pacte has significantly expanded the list of sanctions which can be imposed by the MOE, and investors now expose themselves to significant penalties, including fines, should they fail to comply with their obligations.
- If an investment requiring approval is carried out without it, the MOE has the option to:
- order the investor not to proceed with the transaction, to change it, or to restore it to its previous state, and to order that an application for approval of the transaction be filed;
- impose a penalty of up to EUR 50,000 per day;
- order profound protective measures, such as the suspension of the investor's acquired voting rights, the prohibition on paying dividends or distributions based on the investor's acquired shares, or the temporary suspension of the disposal of assets;
- In the event of non-compliance with the requirements or commitments of an approved investment, the MOE may: revoke the approval, order the investor to comply with its obligations, if necessary by imposing a penalty, or, impose other conditions, including the restoration of the previous situation or the removal of assets from the critical sectors.
In both cases, the MOE may also impose fines of up to the highest of: (i) twice the amount of the investment in the transaction, (ii) 10% of the target's annual worldwide turnover before tax, or (iii) EUR 5 million for legal entities and EUR 1 million for natural persons.
In addition, Article L.151-4 of the CMF provides that any agreement to proceed with a transaction where the target is within the scope of the FDI approval procedure is void where the prior approval from the MOE has not been obtained.
THE EUROPEAN COOPERATION SYSTEM
In the first twelve months after the entry into force of the EU FDI screening regulation, 265 transactions were notified to the Member States and the EU Commission within the framework of the European cooperation system. 108 of these were notified by France. The exchange of information has also allowed the MOE to refine its risk analysis, especially when the target company was active in several countries of the European Union.
The driver for the EU FDI screening is whether an investment is likely to affect “security” and “public order” and article 4 of Regulation EU 2019/452 provides factors and examples of activities which are likely to affect “security” and “public order”.
The EU FDI screening by the EU Commission complements the Member States’ screening mechanisms and is initiated upon notification by the Member States. Where an investment falls within a Member State FDI screening mechanism, such Member State is obliged to notify the EU Commission and the other Member States of any FDI in their territory.
The Member State concerned – here France – may only make its final FDI screening decision after receipt and due consideration of the EU Commission and Member States’ comments or opinions, all within the timeline provided for above.
The cooperation system can be explained with the following examples:
The target group is established in France and is subject to the French FDI screening
France’s FDI screening shall apply and the transaction shall be notified by France to the EU cooperation system. Other Member States and the EU Commission can provide comments or opinions on the contemplated investment.
The target group is established in France and in Germany and is subject to the French and German FDI screening:
Both the French and German FDI screening regimes shall apply and the transaction shall be notified by both France and Germany to the EU cooperation system. Other Member States and the EU Commission can provide comments or opinions on the contemplated investment.
The final decisions on whether or not a foreign investment undergoing screening is authorized is ultimately left in the hands of Member States, who are free to make their own assessment notwithstanding comments from other Members States or the opinion of the EU Commission (neither of which are binding). The comments received will likely be taken into account and, as the case may be, evident in the commitments undertaken by the investor to secure an approval of its investment by the relevant Member State authority (the MOE for France).