An extract from The Foreign Investment Regulation Review, 8th Edition
Review procedurei 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 European Union (EU) treaty rules on the free movement of capital. Law No. 2004-1343 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.ii Categories of foreign investor
The Decree of 2019 has unified the regime applicable to non-EU investors and EU investors. It distinguishes four categories of investors:
- any natural person of foreign nationality;
- any natural person of French nationality who is not tax resident in France;
- any entity incorporated under the law of a foreign country; or
- any entity incorporated in France controlled by one of the above-mentioned investors.
Moreover, all members of a chain of corporate control are deemed investors, provided that a chain of corporate control is defined as the group constituted by an investor belonging to categories (c) or (d) and the persons or entities controlling it.
In practice, if only one entity of a chain of corporate control is incorporated abroad, the foreign investment regime shall apply. For instance, the use by a French company of an investment vehicle incorporated abroad for the purpose of a transaction carried out in France may trigger the application of the foreign investment control procedure.iii Forms of foreign investment subject to authorisation
Investors in all sensitive sectors under the Ministry's authority must seek authorisation prior to any of the following operations:
- the direct or indirect acquisition of a controlling stake 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 25 per cent of the voting rights in a company that has its registered office in France (threshold test). This condition is only applicable to foreign investors from outside the EU.
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 prior notification of a transaction is required. Since 1 January 2019, target companies have also been able to request a preliminary ruling from the Ministry. 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). 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 25 per cent of the stock or voting rights of that company.
An investor who, within the meaning of Article L233-3 of the French Commercial Code, acquires control of an entity over which it has previously, either directly or indirectly, alone or in concert, exceeded the voting rights threshold of 25 per cent will also be exempt provided that it has already been authorised. Unless the Ministry objects, a new authorisation shall take effect at the end of a 30-day period starting from the notice date.v Contents of the authorisation request
The contents of the request for authorisation are defined in regulatory provisions, most recently in those of the Order of 31 December 2019, to increase the transparency of the authorisation procedure and guarantee equal treatment to all investors. The request for authorisation must contain information about the investor, the recipient of the investment and the investment itself:
- 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 request indicates all mentions of any significant capital links or financial support granted to the investor by a non-EU foreign state or foreign public body over the previous five years and a description of the markets on which the investor operates. The application shall also include a dated and signed declaration that the investor has not been convicted of any criminal offences listed in the Monetary and Financial Code or of any equivalent offences in a foreign jurisdiction. If the investor is a legal entity, it shall also certify that, to the best of its knowledge, none of its board members has been convicted of any of such offences in the previous five years.
- 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. As are a list of its French clients and of the activities carried out to their benefit, including a precise description of the services or products provided to them; mention of the markets on which the target operates; mention of any involvement in projects or programme of EU interest or of any financial support from EU funds granted to the target.
- 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; a copy of any documents proving that the investment project is sufficiently advanced; the rationale behind the transaction in relation to the investor's overall strategy; the timeline set for the transaction and mention of any required filing (antitrust and foreign investment filings in particular).
The request shall be submitted by email to the Ministry.
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 carrying out 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). Moreover, a copy of documents proving that the investment project is sufficiently advanced has to be provided with the authorisation request.
The Ministry shall inform the investor within 30 working days of the date of receipt of the application for authorisation that either:
- the contemplated foreign investment is outside the scope of the foreign investment regime;
- the investment falls within the scope of the regime and is unconditionally authorised; or,
- the investment falls within the scope of the foreign investment regime but further examination is required.
An additional 45 working-day period runs from the date of receipt by the investor of the Ministry's decision to carry on with the examination of the case.
It is important to note that in the absence of response by the Ministry by the end of either the 30-day review period or the 45-day review period the application is deemed to have been rejected.vii Clearance test and prerogatives of the Ministry
The Ministry must verify that the investment will not harm national interests. Since the introduction of the Decree of 2019, the Ministry has been able to refuse to grant authorisation if there is a threat to the preservation of national interests in the event that the investor has links with a foreign government or foreign public body.
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 in particular:
- drug trafficking;
- criminal exploitation of a person's weakness or ignorance;
- procurement and related crimes;
- money laundering;
- acts of terrorism or financing of terrorism;
- corruption and influence peddling;
- acting in a conspiracy; or
- any damage to the fundamental interests of the nation.
In the event that such a presumption were established, the Ministry would have to refuse the investor its authorisation.
Although the Ministry is required to explain such a refusal, in practice the courts may accept that the reasons for the decision should not be disclosed for national security reasons. In practice, refusals are very rare and an approval is likely to be granted in almost every case filed with the Ministry. Nonetheless, the Ministry has a long tradition of negotiating with foreign investors before issuing an approval and this remained an informal practice until 2004.
In 2004, Law No. 2004-1343 gave the Ministry authority to subject the implementation of an investment to conditions to safeguard national interests. In particular, on the basis of the Law's provisions, which have been implemented in the Monetary and Financial Code, the Ministry may impose the following conditions on an investment:
- to preserve the continuity and security of the target's strategic activities, in particular by ensuring that the business will not be subject to the law of a foreign state (in practice, this may imply the obligation to keep the strategic activity incorporated within a French company);
- to preserve the target's knowledge and know-how (in practice, this may imply the obligation to protect sensitive information held by the company and to file patents in France);
- to adapt the target's internal organisation and governance procedures, as well as the terms and conditions for exercising vested rights in the target; and
- to set reporting duties.
Furthermore, the Ministry 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.
It is also possible that additional conditions may not suffice to remedy concerns, in which case the Ministry must refuse to grant authorisation.viii Review of the authorisation and conditions attached to it
Following the grant of the authorisation, investors may require a review of their undertakings in the event of a change, unforeseeable at the date of completion of the transaction, in the economic and regulatory conditions under which the French entity carries out its sensitive activities; in the event of an evolution in the shareholding structure of the French entity covered by the authorisation or a change among the members of its chain of corporate control; or pursuant to one of the conditions laid down in the authorisation.
For its part, the Ministry is also likely to review the investor's commitments in the event of an evolution in the shareholding structure of the French entity covered by the authorisation or a change among the members of its chain of corporate control; or pursuant to one of the conditions laid down in the authorisation.
In this situation, the Ministry can only impose new commitments in cases where the investor acquires, post-transaction, control over a company that has been subject to a previous authorised foreign investment (for example, where a non-EU investor already holding 25 per cent of the share capital and voting rights of a French company comes to acquire control over it or a foreign investor co-controlling a French company comes to acquire exclusive control over it).ix Sanctions
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.
The PACTE Law enacted in May 2019 has clarified and, at the same time, expanded the Ministry's sanction powers.
First, if 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.
Second, if an investment is 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 a return to the status quo ante, in substitution for the unfulfilled condition; or
- revoke the authorisation.
In any case, the Ministry can attach an interlocutory penalty to the above-mentioned injunction. Moreover, it can take protective measures if it considers the national interests to be 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.
Moreover, in any event, infringement of the foreign investment regulatory regime may be punished by a civil fine capped at the highest of the following amounts:
- 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, and a fine of up to five times the amount of the investment.x Right of recourse
The decisions of the Ministry are subject to full review by an administrative judge. Under this procedure, the judge is given broad powers to control the Ministry's decision to submit an investment to prior authorisation and to overrule the Ministry's authorisations or rejections. The judge may hold the government liable for damages in respect of 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.