Emmanuel Macron may have used wine, cheese and other traditional French produce to lure more than 140 global executives to a pre-Davos “Choose France” summit in January, but it is the myriad of pro-investment legal and business measures that the French president has pushed for in his first half year in office that are encouraging more and more businesses to open up shop in France.
Initiatives and legislation to cut red tape, reduce taxes and loosen labor laws have caught investors’ attention, highlighting a shift in French business culture that has brought a new energy to innovation-dependent sectors such as life sciences and software.
At the same time, new legal and market practices aimed at providing strong, attractive legal terms and incentives for investments in France have made potential investors question their traditional uncertainties over investments, such as French legal constraints around investing in earlier-stage companies, concerns around management and employee retention and termination, and uncertainty as to how best to achieve efficient liquidity.
As a result, business innovation in France is booming, and the rapid creation and growth of new companies offers tremendous opportunities to investors globally.
It is Macron’s determination to liberalize the rules for investing in France that underpins his efforts to court global tech and life sciences leaders like Alphabet (Google), Siemens and even Chinese e-commerce leader Alibaba.
Macron has already helped to foster a large number of private initiatives such as Station F, a mega-campus for startups in Paris, which is being funded by French billionaire Xavier Niel. Indeed, the president reportedly told all invitees to the Versailles summit that they would be invited only if they promised new investment projects in France. Among the many executives who attended was Sheryl Sandberg, Facebook’s Chief Operating Officer, who pledged to add 60 researchers to the company’s artificial intelligence lab in France, complementing a startup incubator opened earlier in Paris, the company’s first in France.
But even prior to Macron’s reform efforts and his use of the “bully pulpit” to push to encourage new business in France, French business and investment structures have evolved greatly over the past decade in the direction of U.S. investment practices. And while France does not yet have U.S.-style standardized legal documentation such as the National Venture Capital Association’s investment forms, its market practices and customs have evolved to a point where investment processes in France are at times even simpler than those used in the United States.
Instead of multiple investment documents such as stockholders agreements, investor rights agreements and co-sale agreements, a single shareholders agreement is generally employed in French investment transactions, covering all of the voting rights, covenants among investors, access to information and management rights. In addition, following amendments to French contractual law made in 2016, the general enforceability and interpretation of such agreements has been significantly strengthened. And whereas under French law, breaches of shareholders agreements traditionally needed to be resolved through complex court action and damages, the new regime permits more equitable forms of relief through the enforcement of obligations.
Additionally, since 2004 the French Commercial Code has enabled companies to issue preferred shares with rights (particularly financial rights) whose structures can be highly flexible. The rights attached to preferred shares have been extended even further and standardized in the past decade.
It is common practice today, for example, to provide for standardized anti-dilution protection—weighted-average or full ratchet—through the conversion ratio of the preferred shares, as is customary in the United States. Previously, such protections needed to be implemented through the issuance to investors of specialized and complex warrants that investors had to exercise—and pay—in order to implement their protections.
France’s tax and social environments have also undergone significant shifts that have benefited innovative young companies, especially startups. Earlier-stage companies, especially those with significant research and development (R&D) costs that were established within the previous eight years, are eligible under certain conditions to a specific French tax regime called “Jeune Entreprise Innovante.” Under this program, companies benefit from tax breaks and incentives, as well as contributions to French social programs on behalf of their R&D employees and personnel. Many of these companies are also entitled, under special criteria, to a tax refund for up to 30% of their R&D expenses (“Crédit d’Impôt Recherche”).
And while changes to France’s tax regime have helped foster and stimulate earlier-stage and innovative R&D activity, other factors, too, help explain why the country has seen so much disruptive innovation by startups in recent years. In parallel to French legal and tax reforms, the general public’s mindset has also evolved in favor of spinning off the R&D units of academic and other public institutions into private companies. Popular opinion has swung, too, in favor of allowing government money to be used in the form of subsidies, grants, loans and all stages of equity investments to stimulate innovation at private companies.
Even the traditional restrictions around hiring and firing personnel contained within French employment law have finally begun to weaken, in part through Macron’s recent prodding.
He and others in France realize that young companies and their investors need to take risks. After all, many young companies may not succeed in the long term, once the immediate business need has focused and matured. It is no accident that reform of French employment law was a key Macron campaign promise and one of the first he has striven to implement.
No doubt, in the future, France’s wines and cheeses will continue to draw tourists to the country. But it is not hard to foresee a day when investors will flock to the country with equal enthusiasm, drawn by France’s many “unicorns”.