Nicolas de Witt and Adrien Ahmadi Kermanshahani explain the background and significance to new regulations governing FDI in France.
In late March, Ursula von der Leyen, the President of the European Commission, urged EU members to protect their security and economic sovereignty in response to Covid-19 so that Europe can emerge from this crisis stronger than before. France, in line with these recommendations, chose to strengthen its national foreign direct investment (FDI) screening regime, broadening the scope of transactions subject to control.
Widening of the scope of control over foreign investment in France
The ramping up of FDI screening in France is twofold: the inclusion of biotechnologies in the list of critical technologies to be subject to FDI screening and the lowering from 25 to 10% of the threshold of voting rights acquired in a listed company which triggers the screening procedure.
The reinforcement of the FDI screening scope in France will inevitably increase the timeline of M&A transactions."
This last rule will lapse at the end of the year and only concerns third countries (non-EU or non-EEA) investors. At the moment the relevant decree relating to the lowering of this threshold has still not been enacted, but the French Ministry of Economy and Finance (MINEFI) announced that it should come into force during 2H2020.
As regards biotechnologies, the order of the MINEFI, does not specify exactly what this notion refers to. Different definitions have been provided by several official institutions. For example, OECD defines biotechnology as "the application of science and technology to living organisms, their components, products and models to modify living or non-living materials in the production of knowledge, goods and services."
French High Council of Biotechnologies indicates that biotechnology "encompasses both traditional technologies - such as the use of micro-organisms in the production of food or pharmaceuticals - and technologies involving genetic engineering."
It remains certain that the absence of a clear definition will enable the French state to control almost all foreign investment transactions in French biotechs and, ultimately, to better protect French biotechnological research from foreign takeovers.
FDI screening in France
Even though in theory, foreign investments are free in France, the scope of FDI screening has been extended several times in recent years.
Three cumulative criteria have been set in the French Monetary and Financial Code to assess whether an investment is subject to the screening procedure: (i) origin of the investor; (ii) nature of the contemplated investment operation; and (iii) activity of the target. If the contemplated operation meets these three conditions, then it will require the before approval of the French Minister of Economy and Finance.
Origin of the investor
The French FDI screening scope includes, transactions which are either carried out by a foreigner, a French citizen having its tax residence abroad, an entity governed by foreign law or any entity governed by French law controlled by either one of the aforementioned persons.
It is essential to understand that the assessment of this last condition must be conducted by tracing back any chain of control between companies in order to identify the ultimate beneficiary. Notion of control here encompasses both legal and factual control over an entity, as provided by French Commercial Code in Article L.233-3 and subsidiarily in section III of Article L.430-1.
As a result, all non-French investors including EU or EEA investors are considered as foreign investors.
Nature of the contemplated investment
French screening obligations apply to the acquisition of the control of an entity governed by French law, the acquisition of the whole or part of a line of business of an entity governed by French law and the crossing by a non-EU or non-EEA investor, directly or indirectly, alone or in concert, of the 25% threshold of the voting rights of an entity governed by French law. As mentioned above, this 25% threshold should be reduced to 10% until the end of the year for investments in listed companies made by non-EU or non-EEA investors.
This means that investments made by EU or EEA investors in an entity governed by French law are also subject to the French screening procedure, except if the contemplated investment does not result in acquiring, directly or indirectly, a controlling stake of the target.
Sensitive activities of the target
The list of sensitive activities is the corner stone of the FDI screening framework in France. It has been frequently broadened by the French Government.
To date, the main "strategic sectors" concerned by the screening process are: weapons, ammunitions, military technology equipment, cryptology, aerospace, supply of vital products (water, food, energy), services and networks for transport or telecommunications, press, vital installations and national police, customs, sécurité civile or gendarmerie as well as some dual-use goods and technologies, i.e. goods and technologies that can be used for both civilian and military purposes, such as, for example, stealth technology, propulsion or sensors and lasers.
This scope also includes critical technologies such as cybersecurity, artificial intelligence, robotics, additive manufacturing, semiconductors, quantum technologies, energy storage and biotechnologies.
In summary, the scope of "strategic sectors" encompasses, with the recent addition of biotechnologies, most of the high-technologies, national supply and national defense sectors.
Timeline and sanctions
If a contemplated investment in France falls into the FDI screening framework, then the investor shall obtain the prior approval of the MINEFI. It may also occur that an investor is unable to determine whether the contemplated investment falls within the scope of the FDI screening framework. In such a case, the investor (in agreement with the target carrying on the activities that are the subject of the contemplated investment) or the target itself may request a prior ruling (rescript) from the MINEFI which shall reply within two months. In order to save time and in the event that the investment is subject to authorization, a subsidiary filling for approval of the contemplated operation can be attached to this prior ruling request.
From the date of its acknowledgement of receipt, MINEFI shall reply within thirty working days of the authorization request by the investor. Four different types of decisions may then result:
- The investment is not subject to FDI screening; or
- The investment falls under the authorization procedure and is authorized without conditions; or
- The application requires further examination in order to determine whether the protection of national interests can be guaranteed by attaching conditions to the authorization; or
- The authorization for the investment is not granted (very rarely).
Deadlines for MINEFI's final decision shall be issued within 45 working days from the date of receipt by the investor of the MINEFI's decision provided for in the three cases (ii) (iii) and (iv) above
Failure to comply with the approval procedure may have serious consequences for the investment transaction and the investor. In such a case, MINEFI may order the investor, under penalty if necessary, to file a request for authorization, to restore the previous situation at his own expense or to modify the investment. Moreover, when national interests are threatened, MINEFI may also decide to suspend the voting rights and/or limit the distribution of dividends attached to shares acquired without authorization.
Finally, in accordance with the French Financial and Monetary Code, any commitment, agreement or contractual clause that directly or indirectly carries out a foreign investment in some of the strategic sectors as described below, is null and void if it has not been authorized by the MINEFI.
Infringement of the FDI screening procedure in France may therefore have very serious consequences for the investor and the transaction he has carried out. Investors must ensure and above all be advised to consider whether the investments they are considering will first have to be approved by MINEFI.
In 2019, 213 investment transactions were subject to the FDI screening procedure, an increase of 15.7% in one year, out of a total of 1,468 foreign investment projects. More than half of these projects came from third countries investors, i.e. outside the EU or the European Economic Area.
With the covid-19 crisis and the long-lasting economic crisis that seems to be taking shape, European states, and France in particular, will have to achieve a delicate regulation: allowing companies to be financed by foreign investment while tightening control over these transactions in order to protect French state's technologies and strategic activities from acquisitions already qualified as opportunistic because of their falling valuation.
The reinforcement of the FDI screening scope in France will inevitably increase the timeline of M&A transactions. Investors must take these elements into consideration and, above all, anticipate them in order to properly run their transactions in France.
Nicolas de Witt is a partner at Taylor Wessing and Adrien Ahmadi Kermanshahani an associate
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