At the end of September, the French Directorate-General of the Treasury released updated guidelines on FDI in France.
The new regulations aim to provide clarity to an intricate system. The Ministry of Economy (MOE) intends to encourage foreign investment in the market while safeguarding national defence, public security and public order.
“The objective of the French guidelines is to provide more transparency to investors and to facilitate the interpretation of the concept of French FDI laws and regulations,” said Orion Berg, partner at White and Case. “This would allow investors to better assess the need to submit FDI filings in specific cases.”
Since as early as 2005, France has adopted guidelines to control FDI.
“France implemented the first of its kind FDI rules,” said Romaric Lazerges, head of Allen & Overy’s global public law group. “Now, we see a trend with an increasing number of countries having this kind of FDI control. But in France, it’s not so recent. We have had this kind of control for over a decade, especially in sectors such as defence.”
Scope of foreign investment
The guidelines interpret ‘foreign investment’ broadly. Transactions such as acquisition of shares, mergers, contributions and transfers will be within the scope of the guidelines.
The FDI threshold applies to an acquisition of more than 25% of shareholder voting rights, directly or indirectly, if the investor is based in the EU/EEA. The acquisition can represent one investor or several foreign investors acting jointly.
The current threshold for listed companies, which is set to lapse on December 31 2022, has been reduced to 10% due to Covid-19.
Scope of foreign investor
The concept of a ‘foreign investor’ is any entity under foreign law, regardless of legal personality, within or outside of the EU, as long as it is organised and carries out business within the market.
This means that trusts, investment vehicles or special purpose acquisition companies (SPACs) will fall within the scope of ‘foreign investor’.
If only one agent in the investor’s chain of control is a foreign entity, the investor will qualify as ‘foreign’.
“The concept of ‘foreign investor’ is quite wide because you basically address the whole chain of control,” said Vincent Brenot, partner at August Debouzy. “You can perfectly have a French company purchasing another French company but if one of the shareholders is based abroad, you will have a foreign investment.”
Sensitive sectors
Foreign investment in sectors deemed to be “sensitive” are submitted to the MOE for screening and subsequent approval.
The guidelines provide general information on what French authorities are deemed to be ‘sensitive activities’ subject to review, found in Article R.151-3 of the French Monetary and Financial Code.
A sector may be considered ‘sensitive’ regardless of the turnover it generates in the market.
The list of sectors that must be screened by the MOE have been expanded. For example, it now includes R&D activities in the biotechnology sector and technologies in renewable energy production.
“The guidelines provide some general guidance regarding the test applied to determine whether certain activities should be considered as “sensitive” for FDI purposes,” said White and Case’s Berg. “In particular, it provides some indications about how French authorities would assess the “essential” character of certain activities related for example to infrastructure, goods or services essential for energy supply.”
The guidelines do not clarify the kind of transactions that fall within the scope of the regulation or how the MOE will arrive at a decision. But the Treasury encourages parties to file in any case of doubt.
See also: IFLR Foreign Direct Investment Special Focus 2022 launched
Timeline of the process
The filing process begins with a submission of request to the Directorate General of the Treasury. A decision must be made by the government within 75 days.
The review period is split into two phases:
● The first phase consists of 30 working days. The government will assess whether the activity of the company is within the scope of the regulation. At the end of this period, the minister will issue a decision either deciding that it is not within the scope of the FDI regulation or that under the regulation the transaction will be authorised without conditions.
● A second phase of investigation will begin when further investigation is required. This phase has a set time limit of 45 working days.
However, there are ways to reduce these phases.
“For instance, if as a French potential target, you anticipate that there will be a transaction in your company then you can go to the French Administration and ask for a pre-assessment, before the foreign investor is identified,” said Allen & Overy’s Lazerges. “A pre-assessment will reduce the duration of phases when it comes to implementing the transaction.”
How should firms prepare for the regulation?
To avoid time constraints or complications, firms are advised to organise and plan ahead of the transaction process.
“From a M&A perspective, I have not seen the interest of foreign investors lowering because of the regulation,” said Julien Aucomte, partner at August Debouzy. “The only thing is that investors have to analyse and get ready as soon as possible for the process and to have discussions with the French administration as soon as possible to make sure that there are no red flags - which is a rare situation.”
It is likely that more M&A transactions will be subject to screening due to the expansion of sensitive sectors under the FDI regulation.
“It is key for investors to conduct overall FDI risk assessment early in the deal process and to consider a clear multijurisdictional strategy to address coordination and substantive issues in large cross-border transactions,” said White and Case’s Berg.
See also: Primer: EU Foreign Subsidies Regulation
Impact on investors
The guidelines do not offer criteria regarding the identity of a foreign investor but it is a factor that may impact a transaction.
“There are official objective criteria like which sector or which part of the shareholding an investor is acquiring and nothing about subjective criteria such as the identity of a potential purchaser,” said Allen & Overy’s Lazerges. “But it’s true to say that the identity or nationality of the investor can have some impact on the way the government makes its assessment.”
According to Luc Lamblin, a public lawyer at Allen & Overy, the French government is quite cautious with countries in certain sectors. For example, the Cloud Act is considered a threat by the French government so when US investments are considered in data hosting activities they are cautious. The American International Traffic in Arms regulation is also considered a threat in the defence sector which will be taken into consideration.
However, sources emphasise that it is rare to face refusal based on the FDI regulation.
“There are very very few refusals from the French government,” said Allen & Overy’s Lazerges. “I think that foreign investors know that. Veto is not impossible but rare. Of course there is an issue of timing with the transaction, but it’s usually quite minor. It can take up to three or four months, rarely more than that. In some other countries, timing is sometimes more an issue.”
Comparison with other jurisdictions
Compared with other jurisdictions, French FDI regulations remain flexible and attractive to market participants.
“We tend to see that some foreign investors are scared of the French regulation because the French administration has a reputation of being difficult to manage,” said August Debouzy’s Brenot. “But once they understand, they can have your transaction cleared within a couple of months and the conditions imposed are generally not as heavy as the American ones for instance. The French regulation is not that stringent.”
In comparison to the US regime, sources believe French FDI regulations allow for a quick and smooth process.
“I would say that the main difference between the French regime and the US regime is that the French regime is quite speedy,” said Allen and Overey’s Lamblin.
The other important difference is that the US regime may involve commitments or conditions that are really cumbersome to investors. Also, the French government would not apply proxy boards which exist in the US. Another difference is that France has put emphasis on sovereignty whereas the American regime covers the protection of its citizens.
See also: Foreign investors eyeing private M&A in the US: part one
What’s next?
Currently, the filing process is done by email. However there has been recent development to create an electronic platform to submit findings.
“This would make the process more automatic in the coming years and would ease the relationship with administration,” said August Debouzy’s Brenot. “Doing everything by email is a bit heavy.”
Another trend is increased cooperation with the EU Commission and other EU Member States.
“When you file for a request of authorization in France, at the same time, you will find what we call a Part B, which is in English, and goes directly to the EU Commission and other Member States where the business’ activities are,” added Brenot.
This allows the EU Commission and other Member States to issue opinions about the transaction. The Ministry is not obliged to take them into account but it increases cooperation.
There is also ongoing work within the Foreign Investment Bureau to elaborate on the thresholds of certain sensitive sectors to make the transaction process more efficient.
“For example, in the energy sector, you would not have to make a finding if you were below a certain threshold,” said August Debouzy’s Brenot. “The Bureau is thinking about how to ease the process.”
