FRANCE: An Introduction to Corporate/M&A: High-end Capability

The Challenge of Controlling Foreign Direct and Indirect Investment

After two years of record-breaking activity, the French M&A market has since shown some signs of economic slowdown, in particular related to the war in Ukraine, the energy crisis, inflation and the rise in interest rates. As a result of financing becoming more expensive and difficult to obtain, as well as purchasers requesting more protections (extensive due diligence, more guarantees, price revision mechanisms, etc) from sellers not willing to adjust their price expectations, transactions are taking much longer to be completed.

In this complicated environment, one of the main challenges for international transactions in France definitely remains the control of foreign investments. Even though control of foreign investments constitutes a derogation from the freedom of investments, in recent years the number of screened files has increased, in particular due to the extension of the list of activities deemed sensitive, with transactions involving European investors and/or indirect changes of control, and more complicated processes, triggering many risks for investors.

A derogation from the freedom of investment 

The control of foreign investments in France aims at ensuring the protection of public order, public security and national defence interests, by requiring, for some transactions set to be completed by foreign investors (ie, non-French persons or those with a non-French entity in their chain of control), in business activities deemed as sensitive, the prior approval of the Finance Minister (Ministre de l'Économie, des Finances et de la Souveraineté industrielle et numérique), represented by the Treasury Department of the Finance Ministry. Being a derogation from the freedom of investment, it is strictly regulated by law and regulations.

In practice, the process requires a maximum duration of 75 business days, starting with the filing by the investor of a request deemed complete by the Ministry. At the end of a first phase of up to 30 business days, the Ministry communicates to the investor one of the three following options: (i) the investment does not fall within the scope of foreign investment screening in France; (ii) the investment falls within this scope and is authorised without conditions; or (iii) the investment falls within this scope and further investigation is needed to determine if conditions are required to safeguard national interests.

At the end of the second phase (up to 45 business days), the Ministry communicates to the investor one of the three following results: (i) authorisation of the transaction without conditions; (ii) authorisation of the transaction subject to conditions; or (iii) no authorisation – this can be explicit or implied, in the event of absence of response within the prescribed regulatory deadline.

Increase of the number of screened files 

Between 2017 and 2021, the number of files screened by the Ministry has doubled. In 2021, 328 transactions projects were examined by the administration, a figure 31.2% higher than in 2020. Among them, 124 were considered as sensitive to public security, public order and national defence interests, and in 54% of cases, the authorisation was subject to conditions.

Figures for 2022 will only be available in March but are expected to follow this trend.

Extension of the list of activities deemed sensitive

This increase of the number of screened files relates to the extension of the scope of the relevant regulation, and in particular the list of concerned sensitive activities which is rather broadly interpreted and has been considerably expanded in the recent years.

Indeed, initially focused on defence and securities issues only, this list has been successively extended, including to: 

(i) energy (gas, electricity, hydrocarbons), water, transport, electronic communications and public health (decree dated 14 May 2014);

(ii) aerospace, data-hosting and R&D in some critical technologies (notably cybersecurity, artificial intelligence, semiconductor, dual-use goods and technologies) (decree dated 29 November 2018);

(iii) print media and online political and general information services, food safety, energy storage and quantum technologies (PACTE law dated 22 May 2019 and its implementation decree dated 1 April 2020, in line with the EU Regulation of 19 March 2019 establishing a framework for screening foreign investment into the Union);

(iv) R&D in biotechnologies (order dated 27 April 2020); and

(v) technologies involved in the production of renewable energy (order dated 10 September 2021).

Indirect change of control and European investors

The French regulations on control of foreign investment apply to indirect change of control as well and could also be applicable to “foreign to foreign” transfers. Additionally, most related French restrictions apply also to investors based in the European Union.

Indeed, the concerned transactions are those where a foreign investor acquires:

(i) direct or indirect control (as defined in Article L. 233-3 of the French Commercial Code) of a French legal entity;

(ii) all or part of a business from a French legal entity; or

(iii) (only for investors outside the European Union or the European Economic Area) alone or in concert with others, more than 25% of voting rights of a French legal entity.

However, regarding the third criterion and due to the energy crisis, a threshold of 10% is currently applicable until 31 December 2023 for French companies whose shares are listed on a regulated market.

More challenging processes 

Lastly, processes for the control of investments have become more challenging and longer, in particular in the case of authorisation subject to conditions.

The conditions generally include maintaining sufficient resources to preserve sensitive activities, having French governance, as well as maintaining headquarters and production tools in France. However, they tend to be less standardised, effective for longer periods and, in some cases, relatively tough and dissuasive for the investors in view of their contemplated project and business. This gives rise to forceful negotiations between the Ministry and the investors and their counsel, in some cases with the involvement of non-legal advisors. In addition, the maximum prescribed regulatory duration for both phases is often necessary for the completion of the process.

Still many risks despite some efforts from the administration

In the case of completion of an investment within the scope of the regulation and without obtaining the approval of the Ministry, the latter is entitled to order the investor to restore the previous situation at its own expense. More generally, non-compliance with the related regulation may trigger significant financial sanctions.

Thus, the control of foreign investments constitutes a major risk for international investors. This risk is increased in view of remaining uncertainties on the scope of some sensitive activities, the control regime’s rather unpredictable results in some cases and the challenged confidentiality, despite some noticeable efforts from the administration (very available and responsive services, publication of notably complete guidelines in September 2022, planned implementation of an online platform for the filing of requests).

Therefore, this process has to be followed thoroughly and to be taken into account from the beginning of the contemplated transaction, notably in the conditions precedent and the planned timing, and the assistance of lawyers with much experience of negotiation with the Ministry in this specific field remains highly recommended.