On May 14, 2014, the French government, at the initiative of the French Minister of Economy Arnaud de Montebourg and Prime Minister Manuel Valls, issued a decree (“the Decree”) substantially extending the business sectors in which the French Ministry of Economy (“MINEFI”) has a right to monitor and restrict foreign investments in France pursuant to article L.151-3 of the French Monetary and Financial Code. The Decree, which came into force on May 16, 2014, was enacted to augment the authority of the French government to intervene in transactions in the sectors concerned and, specifically, in the competition
between General Electric and Siemens to acquire Alstom’s energy business1. The additional sectors
subject to prior authorization by the MINEFI include energy, transport, water, public health and telecommunications.
The Decree is the result of a law adopted by the French National Assembly on December 9, 2004 (the “Reform Law”)2 which aimed to ensure that all foreign investments involving public order, public security, or interests of national defense were subject to official review. On December 30, 2005, the French government issued a first decree in implementation of this law listing 11 business sectors in which MINEFI has the right to monitor and restrict foreign investments in France.3 On May 7, 2012, the French government issued a second decree (the “2012 Decree”) which clarifies the definition of investments conducted through French vehicles controlled by foreign interests and removes casinos from the list of
strategic protected sectors.
Under the Decree, the administrative process for approval of foreign investments by MINEFI is in line with the previous French foreign investment decrees issued by the Government. However, investments in the additional sectors added by the Decree will be subject to prior authorization whether made by EU or non- EU investors.
Mr. Montebourg stated in an interview with Le Monde on May 14th, 2014 that the Decree is “a fundamental rearmament of [French] public authority” intended to encourage foreign investors to enter into alliances with French companies, rather than acquiring them. “Like other strategic companies, Alstom is within the scope of this decree”.
Article 30 of Law No. 2004-1343, dated December 9, 2004, concerning simplification of the law, JO No. 287, December 10,
2004, p. 20857.
Decree No 2005-1739 dated December 30, 2005 regulating foreign financial relationships, codified under Articles R153-1 et seq. of the French Monetary and Financial Code (the “CMF”) and implementing Article L. 151-3 of the CMF.
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Scope of the Decree
As was previously the case, the Decree requires that prior to making an investment in specified sectors, foreign investors notify MINEFI of the proposed investment and receive authorization. The Decree imposes more stringent requirements on non EU-based than on EU-based investors so as to pass muster under the case law of the European Court of Justice (the “ECJ”), which requires that measures restricting the free movement of capital within the European Union be narrowly-tailored to the protection of the
public order or public safety.4
Definition of foreign investors
Only “foreign investors” or French companies controlled by foreign investors are required to seek authorization from MINEFI under the Decree which distinguishes (i) EU investors, (ii) French investors controlled by foreign investors and (iii) non-EU investors.
The following are EU investors for purposes of the Decree:
any individual who is a national of one of the Member States of the European Union,5 or one of the European Economic Area member states that have signed an administrative cooperation agreement with France (Norway, Iceland and Liechtenstein);6
a legal entity that has its registered office in one of the states mentioned under (1) above; or
an individual who is a French national and a resident of one of the states mentioned under (1) above.7
A non-EU investor is an investor who does not fall under any of the categories set forth above.8
A French company controlled by foreign investors (“Foreign Controlled French Investors”) is defined as an entity that has its registered office in France, which is controlled (within meaning of Article L 233-3 of the Commercial Code)9 by:
a citizen of a country other than France;
See European Court of Justice, Case C-54/99, dated March 14, 2000; Conseil d’Etat, January 6, 1999 : Jurisdata no. 1999- 050022.
Although not mentioned by the Decree, this should be with the exception of France as the Reform Law only encompasses “foreign investments.”
Article R. 153-2 of the Regulatory part of the French Monetary and Financial Code (the “RCMF”).
Articles R. 153-2 and R. 153-4 of the RCMF.
Article R. 153-2 of the RCMF.
Under Article L. 233-3 of the French Commercial Code, a company is regarded as controlling another: (1) when it holds, directly or indirectly, a percentage of the stock conferring it the majority of the voting rights in the general meetings of the company; (2) when it holds the majority of the voting rights in this company pursuant to an agreement concluded with other shareholders and which is not contrary to the interests of the company; (3) when it actually has the power to make decisions at shareholder meetings due to its voting rights. A company is presumed to control another when it holds, directly or indirectly, a percentage of the voting rights above 40% and when no other shareholder holds, directly or indirectly, a percentage higher than its own. When applying this definition, two or more persons acting as a group shall be regarded as jointly controlling another when they actually make, under an agreement to implement a common policy, the decisions taken at the general meetings of the latter.
a company whose registered office is located outside of France; or
a French citizen residing outside of France.
Definition of strategic business sectors
Under previous regulations, the authorization procedure applied to proposed investments in eleven business sectors.
For seven of those sectors, the definition of the sector, and the scope of MINEFI’s regulatory authority, varied in accordance with the EU or non-EU origin of the investor or if it involved a Foreign Controlled French Investor. The definitions are much more restricted when applied to EU investors or Foreign Controlled French Investors, the distinction being in most cases that investments in a defined sector by an EU investor is restricted only to the extent necessary to fight terrorism and criminal activities. The table below sets forth the differences between the definition of strategic sectors when applied to EU, non-EU investors and Foreign Controlled French Investors:
For non-EU investors10
For EU investors11 and Foreign Controlled French Investors
Businesses involved in the gambling industry, except for casinos.
No longer applicable.
Regulated businesses providing private security services.
Regulated businesses providing private security services12 when such businesses (i) provide private security services to public or private- sector entities operating critical facilities or
infrastructures, the unavailability of which could materially jeopardize France’s military or economic potential, its security or its capacity to survive as a nation,13 (ii) provide airport and harbour security services,14 or (iii) intervene in restricted sectors privy to classified information.15
Businesses involved in the research and development or manufacture of means of fighting the illegal use of pathogens or toxic substances by terrorists and preventing the adverse health-
Businesses involved in research and development or manufacture solely relating to
(i) certain pathogens or other toxic substances,16
and (ii) means of fighting chemical agents prohibited by the Convention on the Prohibition of
Article R. 153-1 of the Regulatory part of the RCMF.
Article R. 153-3 of the RCMF.
Within the meaning of Law No 83-629 of July 12, 1983 regulating private security services.
Article L. 1332-1 of the Defense Code.
Article L. 282-8 of the Civil Aviation Code and Article L. 324-5 of Seaside Harbors Code.
Article L. 1332-1 of the Defence Code.
As enumerated under paragraphs 1C351 and 1C352a.2 of Annex I of Council Regulation (EC) No 428/2009 of May 5, 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items.
For non-EU investors10
For EU investors11 and Foreign Controlled French Investors
related consequences of such use.
the Development, Production, Stockpiling and Use of Chemical Weapons and on their Destruction, signed in Paris on January 13, 1993, but only to the extent investment restrictions are necessary to fight terrorism and to prevent adverse health-related consequences thereof.
Businesses dealing with wire tapping and mail interception equipment.17
Businesses involved in the research and development, manufacture or sale of wire tapping and mail interception equipment, but only to the extent investment restrictions are necessary to fight terrorism and criminal activities.
Businesses licensed to audit and certify services relating to the security of information technology systems and products.18
Businesses licensed to provide evaluation and certification services to the French government regarding the security of its information technology systems and products, but only to the extent investment restrictions are necessary to fight terrorism and criminal activities.
Businesses providing goods or services relating to the security of the information systems of public or private sector companies managing
Businesses providing goods or services relating to the security of the information systems of public or private-sector companies managing critical infrastructures, but only to the extent investment restrictions are necessary to protect such critical infrastructures.
Businesses relating to certain dual-use items and technology.20
Businesses involved in certain dual-use items and technology to the extent they relate to companies involved in national defense.
Four of the eleven sectors covered by the Decree are considered extra-sensitive (the “Extra Sensitive Sectors”). For the Extra Sensitive Sectors, the Decree applies a uniform definition of the sector regardless of whether the investor is of EU or non-EU origin or a Foreign Controlled French Investor:
businesses involved in providing cryptology goods and services;21
See Article L. 226-3 of the Criminal Code.
See Decree No 2002-535 of April 18, 2002.
Within the meaning of Articles L. 4332-1 through L. 1332-7 of the Defense Code.
Defined as “items, including software and technology, which can be used for both civil and military purposes” under Council Regulation (EC) No 428/2009 of May 5, 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items.
businesses involving companies privy to classified information;22
businesses involved in the research, development and sale of weapons, munitions, powder, or explosive substances to be used for military ends or war, and other restricted materials;23
businesses involving companies that have entered into a design or equipment supply contract with the French Defense Ministry, whether directly or through a subcontractor, concerning goods and services involving dual-use items and technology or items listed in (1) through (3) above.
In contrast to the specificity of the Decree, the Exon-Florio Amendment and its implementing regulations do not precisely define the business activities that fall within the scope of the President’s restrictive authority. This determination is left to the discretion of CFIUS member agencies, and the Exon-Florio Amendment merely lists factors to be considered in reaching a case-by-case decision.24 Historically, most
CFIUS filings have involved the defense industry. However, in recent years, an increasing number of CFIUS reviews concern critical infrastructures such as information technology and the telecommunications industry.25
The Decree has extended this list of relevant strategic sectors to include:
“other activities relating to materials, goods or services, including those relating to the security or the proper operation of facilities and equipment, which are essential to guarantee the country’s interests in relation to public order, public security or national defense, as listed below:
integrity, security and continuity of supply of electricity, gas, hydrocarbons or other energy sources;
integrity, security and continuity of supply of water in accordance with the provisions enacted in the interest of public health;
integrity, security and continuity of operation of transport services and networks;
integrity, security and continuity of operation of electronic communications, services and networks;
integrity, security and continuity of operation of an establishment, a facility or infrastructure which is vitally important within the meaning of the French Defence Code; and
Paragraphs III and IV of Article 30 and paragraph I of Article 31 of Law No 2004-575 of June 21, 2004 for confidence in the digital economy, JORF of June 22, 2004.
Within the meaning of Decree No 98-608 of July 17, 1998 relating to the protection of classified information.
Within the meaning of Titles III and IV of Book III of the second part of the Defense Code.
In particular, they must consider: (1) domestic production needed for projected national defense requirements; (2) the capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials, and other supplies and services; (3) the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the United States to meet national security requirements; (4) the potential effects of the proposed or pending transaction on sales of military goods, equipment, or technology to any country identified under applicable law as (a) supporting terrorism or (b) a country of concern for missile proliferation or the proliferation of chemical and biological weapons; (5) the potential effects of the proposed or pending transaction on U.S. international technological leadership in areas affecting national security.
Jeanne Archibald, Conference on Foreign Investments and National Security held on October 10, 2005 in Paris.
Fried Frank Client Memorandum
-the protection of public health.”
Definition of foreign investments
As was previously the case, the definition of “foreign investment,” varies in accordance with the EU or non-EU origin of the investor or if it involves a Foreign Controlled French Investor.
Non-EU investors are required to seek prior authorization from MINEFI for any of the following:26
the direct or indirect acquisition of a controlling stake in a company having its registered office in France (the “stock transfer test”);
the acquisition of all or part of a line of business of a company having its registered office in France (the “asset transfer test”); or
the acquisition of more than 33.33% of the stock or voting rights of a company having its registered office in France (the “threshold test”).
Once again, the Decree takes a much more circumscribed approach with respect to EU investors and Foreign Controlled French Investors.
The threshold test does not apply to EU investors or Foreign Controlled French Investors.27 Nonetheless, as the stock transfer test applies to direct or indirect changes of control, the indirect acquisition of a controlling stake by a foreign investor could arguably trigger the stock transfer test even if the direct stock acquisition is made by a Foreign Controlled French Investor.
The stock transfer test applies to EU investors only with respect to the four Extra Sensitive Sectors.28 For the remaining seven strategic sectors, EU investors are required to seek authorization from MINEFI only if they trigger the asset transfer test.29 Similarly, Foreign Controlled French Investors are required to seek authorization from MINEFI only if they trigger the asset transfer test.
For purposes of the asset transfer and threshold tests, the 2012 Decree removed “explicit” references to “direct or indirect” change of controls. Instead, the preamble to the 2012 Decree states that the 2012 Decree created a new category of Foreign Controlled French Investors subject to the Decree (as discussed above).
The grant of loans or guarantees, the purchase of licenses or patents, and the execution of commercial or technical assistance agreements in connection with the acquisition of a French company by a foreign investor are no longer considered to be foreign investments subject to MINEFI authorization. This is a significant departure from prior rules as such transactions used to be considered foreign investments
subject to MINEFI authorization.30
Article R. 151-3 of the RCMF.
Article R. 153-3 of the RCMF.
Article R. 1543-4 of the RCMF.
Article R. 153-5 of the RCMF.
See Article 1-4, III of the Decree N°2003-196 of March 4, 2003.
Fried Frank Client Memorandum
Even if prior authorization is no longer required for a particular foreign investment, an administrative notification may still need to be filed with the MINEFI at the time the investment is made.31
Prior authorization requests must be sent in three original copies to MINEFI at the following address: Direction générale du Trésor, 139, rue de Bercy, 75572 Paris Cedex 12.
Review and Authorization
In line with the previous regulations, once MINEFI has received notification of a proposed foreign investment, it will conduct a review of the reported transaction, which must be completed within two months.32 If MINEFI fails to respond within this time frame, the authorization will be deemed granted.33
In practice, the review process provides MINEFI with the opportunity to impose conditions on or changes to the terms of the proposed investment to safeguard national interests. While MINEFI has negotiated with parties informally in the past,34 the Reform Law formally empowers MINEFI to impose conditions to
ensure that foreign investments will not jeopardize national interests.35 The Reform Law thus gave
MINEFI additional leverage to obtain concessions from investors.
The Decree specifies the conditions that MINEFI has the authority to impose: (i) a duty to continue the business’s operations in the future or (ii) an undertaking to protect its industrial, research and developmental capabilities, related know-how or the safety of its supply chain.36 Additional conditions may be imposed on companies which have their registered office in France to ensure that they continue
to perform under procurement contracts, whether as contractor or subcontractor, or contracts concerning public safety, national defense or research, or the production or trading of weapons, ammunitions, or explosive powder or substances. In the event the strategic business for which authorization is required is only an ancillary business of the target, MINEFI may condition its consent to the transaction on the sale of the ancillary business to a company independent from the foreign investor. The Decree specifies that the conditions imposed by MINEFI must be proportional to the protection of the national interest being
It seems safe to assume that given the breadth of its ability to impose conditions, MINEFI should be able to obtain commitments similar to those CFIUS has obtained from investors in U.S. companies. Under the Exon-Florio Amendment, parties can enter into binding contractual agreements with relevant U.S. governmental agencies, such as the Department of Commerce, the Federal Bureau of Investigation, the Department of Defense or the Department of Homeland Security. Commitments can include adding American citizens to the company’s Board of Directors, guaranteeing that the Board of Directors be
See Article R 152-5 of the RCMF.
Article R. 153-8 of the French Regulation.
See for example the 2004 acquisition of the “Saft” batteries business of Alcatel, for which, the French government imposed stringent conditions to its approval of the sale, including a requirement that the Saft headquarters remain in France, along with all research centers and production facilities serving French military purchasers.
Article L. 151-3, II of the CMF.
Article R. 153-9 of the RCMF.
Fried Frank Client Memorandum
exclusively comprised of Americans, granting full access to U.S. law enforcement agencies, or undertaking to continue research and development in the United States.38
MINEFI authorization is not required (or “deemed granted”) when the investment involves companies belonging to the same corporate group, meaning that more than 50% of their stock or voting rights are held, directly or indirectly, by a common shareholder.39 However, this safe harbor does not apply when the reported transaction is intended to transfer abroad all or part of one of the strategic businesses involved.40
Similarly, an investor who has already been authorized to acquire a controlling stake in a strategic sector company is exempt from seeking a new authorization from MINEFI if it increases its ownership interest, directly or indirectly, beyond 33.33% of the stock or voting rights of such company.41
Grounds for Rejection
MINEFI is required to refuse to authorize the proposed transaction if it finds that there is a strong probability that the investor is likely to commit one of the following crimes:42 (i) drug trafficking;43
(ii) criminal exploitation of a person’s weakness or ignorance;44 (iii) procuring and related crimes;45
(iv) money laundering;46 (v) acts of terrorism or financing terrorism;47 (vi) corruption and influence peddling;48 and (vii) acting in a conspiracy.49
In addition, MINEFI must refuse to authorize the reported transaction if the implementation of any conditions MINEFI is authorized to impose would not suffice to safeguard national interests and (i) the continuity of the business, its industrial, research and development capacities or related know-how could not be protected in the future; (ii) the safety of its supply chain could be jeopardized; or (iii) the performance by companies that have their registered office in France under procurement contracts, whether as contractor or subcontractor, or contracts concerning public safety, national defense or research, or the production or trading of weapons, ammunitions, or explosive powder or substances,
could be compromised.50
Fact Sheet - Committee on Foreign Investments in the United States, Organization of International Investments.
Article R. 153-6, I of the RCMF.
Article R. 153-6, II of the RCMF.
Article R. 153-10 of the RCMF.
Within the meaning of Article L. 222-34 to 222-39 of the French Criminal Code.
Within the meaning of Article L. 223-15-2 of the French Criminal Code.
Within the meaning of Article L. 225-5, 225-6 and 225-10 of the French Criminal Code.
Within the meaning of Article L. 324-1 of the French Criminal Code.
Within the meaning of Article L. 421-1 to 421-2-2 of the French Criminal Code.
Within the meaning of Article L. 433-1 of the French Criminal Code.
Within the meaning of Article L. 450-1 and L. 321-6 of the French Criminal Code.
Article R. 153-10, 2° of the RCMF.
Fried Frank Client Memorandum
In any event, if MINEFI decides to reject a transaction, it must explain the grounds for its refusal.51
Right of Recourse
Pursuant to the Reform Law, MINEFI decisions are subject to “full review” (recours de plein contentieux) by administrative law courts.52 Under this procedure, French administrative law judges are given broad powers to substitute their determinations for those of MINEFI and to overrule MINEFI authorizations or rejections, order new conditions imposed, or hold the government liable for damages to the investor.53
Additionally, an investor can challenge a MINEFI decision under European Community law in French courts if it can demonstrate that the French regulatory framework restricts the free movement of capital and is not narrowly tailored to the protection of the public interest at issue.54 A legal challenge on this basis was made successfully by the Church of Scientology of Paris under the prior French regulatory
regime. The ECJ has found that France violated European Community law by prohibiting a London-based investment fund from making an investment in the Church of Scientology of Paris, on the grounds that the previous French foreign investment regulations “defined the investments concerned only in general terms, as investments of a sort calling into question public order and public safety, so that interested parties
could not recognize specific circumstances in which prior authorization is necessary.”55 The Reform Law
was intended to respond to the ECJ’s concerns by eliminating public health from the list of protected sectors, and mandating the issuance of the Decree to limit the list of protected sectors. It is thus unclear whether such recourse would be successful in the future.
Finally, the European Commission, which oversees competition policy and guarantees the free movement of goods and capital in the European Union, may itself decide to bring an action against the French government before the ECJ. In fact, shortly after the French government unveiled its plans to issue the Decree, the European Commission expressed serious concerns as to whether the draft Decree was in
line with applicable EU competition laws and indicated it would follow the matter closely.56 Following
undisclosed negotiations between the European Commission and the French Government, the European Commission’s concerns may have been alleviated, and the European Commission has not reiterated its opposition since publication of the Decree. By removing casinos from the list of strategic business sectors, the 2012 Decree may have addressed one of the European Commission’s concerns.
Under the Reform Law, MINEFI may impose a wide range of sanctions for failure to respect the authorization regime.57 An investment made without MINEFI approval or in contravention of the
Article R. 153-10 of the RCMF.
Article L. 151-3, III of the CMF.
By contrast, the Exon-Florio Amendment specifically exempts the U.S. President’s decisions from judicial review. However, Exon-Florio’s implementing regulations allow companies to file a request for withdrawal at any time prior to a final decision. After CFIUS approves an application’s withdrawal, any subsequent re-filing is considered a new, voluntary notice. An investor who faces strong opposition from CFIUS can thus file for review again later by making new propositions to CFIUS.
European Court of Justice, Case C-54/99, dated March 14, 2000; Conseil d’Etat, January 6, 1999 : Jurisdata no. 1999-050022.
Press conference of EU Commission Spokesman Gregor Kreuzhuber on August 30, 2005.
These injunctive remedies are codified as Article L 151-3 of the French Monetary and Financial Code.
Fried Frank Client Memorandum
conditions imposed by MINEFI may be enjoined; additional conditions, such as maintenance of local production, may be imposed on the investment; or the parties may be required to return to the status quo ante at their own expense.58 If ordered, rescission must be accomplished within no more than 12 months.59
Failure to comply with an injunction may be punished by a civil fine of up to twice the amount of the non- complying investment. In contrast to the prior foreign investment rules, the Reform Law specifies that fines must be proportional to the gravity of the offense.60
Additionally, any agreement, understanding or contractual provision purporting to effectuate a foreign investment in one of the sectors identified by the Decree, without due authorization from MINEFI is null and void and will therefore be unenforceable.61
Finally, criminal sanctions may be imposed on the investor, including imprisonment for up to five years, seizure of the investment, and a fine of up to twice the amount of the investment.62 This fine can be multiplied by five in the case of legal entities held liable for the offense.63
In drafting the Decree, the French government had to perform a careful balancing act to maintain control over a wide range of industries in strategic sectors while making restrictions on foreign investment sufficiently narrow to pass muster under ECJ case law. Whether the right balance has been struck will be determined by future legal challenges. Nevertheless, the net effect of the Decree for foreign investors is a broadening of the type of transactions requiring prior governmental authorization, but with a clearer framework for negotiations to obtain clearance. The possible review of whether the decree complies with EU regulations will not suspend its entry into force.