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FI Monitor Issue 5, 2022

Key takeaways from the French Guidelines on FDI

On September 8, 2022, the French Treasury published its long-awaited guidelines on the application of the French foreign direct investment regime (Guidelines).

These Guidelines form part of the French Treasury’s ambitions to make foreign direct investment (FDI) regulation more transparent and accessible and to provide helpful clarification on the relevant legislation based on past decisional practice.

Sensitive activities covered by the regime

Given the sensitive nature of the assessment conducted by the Treasury, the Guidelines provide only general guidance on the determination of the sensitive activities subject to review under the regime. As expected, the Guidelines do not provide much detailed clarification on the scope of activities covered by the regime.

Some activities are inherently sensitive, such as the activities in the defense and security sectors (e.g. arms, munitions, explosive substances for military purposes, dual-use goods and technologies, cryptology services) and the investments in related critical technologies as well as research and development activities.

The assessment is more difficult for investments which may fall in the category of infrastructure, or goods or services that are “essential” to ensure the integrity, security or continuity of supply of energy, water, transportation, space operations, electronic communication networks and services, the protection of public health, and food security.

For this category, a “sensitivity test” is used by the French Treasury, which assesses a number of factors on a case-by-case basis. These factors include the customers of the French target, the nature of the target or its products, the specificity and the applications of the products, services and know-how of the French target, their substitutability and the danger posed by its activities.

The case-by-case approach presented in the Guidelines provides enormous discretion to the French Treasury in interpreting what activities are sensitive. Indeed, such interpretation may be subject to change over time depending on various factors. This justifies the “open” definition adopted by the Treasury and explains why “sensitive” activities are assessed as of the date of the transaction.

Because certain activities may be deemed sensitive and in scope for the authorities one day and not another, this approach does not provide much legal certainty to companies. In particular, what constitutes a subject of national interest worth protecting evolves over time, especially given current geopolitical developments. A way to mitigate uncertainty is the possibility for the target to engage in a pre-transaction consultation procedure with the Treasury.

The Guidelines also point out that there is no materiality threshold for the application of the French FDI regime. Therefore, an activity can be considered “sensitive” as a result of one isolated contract, regardless of the turnover generated by the French target in the market.

Types of investments covered by the regime

The interpretation of what constitutes foreign investments is very broad in the Guidelines. It covers all types of transactions in sensitive sectors, including mergers, acquisitions of shares in a French entity, or asset acquisitions if they include a “branch of activity” of a French company.

The regime may apply even if the transaction perimeter does not include a local legal entity. In this regard, the Guidelines confirm the very broad and flexible approach adopted by the Treasury concerning the notion of acquisition of part of a branch of activity, which may cover:

  • a significant number of IP rights necessary for the operation of a “branch of activity;”
  • an assignment of a patent or the granting of an exclusive or non-exclusive license of a patent;
  • a portfolio of sensitive contracts; and/or
  • equipment, vehicles, furniture and machinery used in the operation of the “branch of activity” where they are sufficiently consistent to make a “part of a branch of activity.”

The Guidelines specify that only one of these elements can be sufficient to trigger control, for instance when it is essential for the performance of the sensitive activity.

Clarification of the legislation

Turning to French FDI legislation, the Guidelines aim to provide clarification. We note, in particular, the following:

  • An expansive concept of foreign investor, which may cover natural persons and any type of entity such as public or semi-public companies, branches, associations, trusts, investment vehicles, and special purpose acquisition companies.
  • The French rules apply when the chain of ownership involves a foreign entity, even where the ultimate controlling entity is French.
  • In a post-Brexit environment, the Guidelines confirm that only Iceland, Liechtenstein, and Norway are treated as equivalent to European investors (and are therefore exempt from filing when crossing a 25 percent threshold). This does not apply to UK investors, which are treated as non-European for purposes of the regime.
  • The change of the quality of control (e.g. moving from joint control to sole control) does not in itself require approval, unless the transaction meets other criteria.
  • Minority acquisitions could constitute an acquisition of control if special voting rights are granted to the investor (e.g. double voting rights) or when the investor has specific prerogatives, veto rights or the power to appoint the majority of the members of the governing bodies of the French target.
  • Greenfield investments in newly formed companies do not fall within the scope of the rules. Investments involving French branches (succursales) of non-French companies are also not in the scope of the regime.
  • A filing is only required when the relevant voting rights threshold is crossed for the first time, not for additional shareholding acquisitions.
  • Conditions are imposed in more than half of the cases in France. The Guidelines provide further clarification on the monitoring of the conditions by the competent authorities and the circumstances under which the conditions may be revised. Conditions may be revised by the Minister or the investor (subject to approval from the Treasury) provided that the investment continues to be in line with the protection of French national interests.
  • In terms of sanctions, if an investment is made without prior authorization, it will be void and the investor may face financial and criminal sanctions. The Guidelines specify that the foreign investor can rectify the nullity of the transaction by submitting an ex post request for approval. If granted, the civil nullity of the transaction will be purged, save that the investor may still be subject to a risk of a financial penalty.

To view previous versions of our foreign investment monitor, please visit our archive here.

Our team

Please get in touch with us or your usual Freshfields contact if you would like to discuss these or any other regulatory issues in more detail.