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25 January 2023
While the measure had been presented, in July 2020, as temporary and justified by a need for reinforced protection for listed companies weakened by the waves of Covid, the Prime Minister[1] has, for the third time, issued a decree, in the last days of the calendar year, extending by one more year (i.e., until December 31, 2023) the measure lowering from 25% to 10% the threshold applicable to the acquisitions of voting rights which would trigger the administration's control over foreign investments in French companies engaged in sensitive activities and which shares are listed on a regulated stock exchange[2].
The scrutiny over foreign investments in France is also embedded in the context of the increasing importance of the new European screening system[3], which affects the assessment of transactions - cross-border transactions requiring an in-depth analysis, country by country, of the filing to be made in order to ensure the most efficient process. These developments aims at making the control of foreign investments more durable and stable, and encourage national control authorities to better formalize their procedures.
This is the case in France, where the legitimacy of a prior control system is now fully accepted by the control authorities[4].
In this spirit, following the reform of December 31, 2019 (effective April 1, 2020) which substantially modified the control of foreign investments in France ("IEF"), the French Treasury ("DGT") has published a series of documents aiming at clarifying and standardizing the French FDI practice: Frequently Asked Questions, standard files, annual reports and, very recently, the Guidelines.
Expected since the entry into force of the 2019 reform, the DGT published the Guidelines after a detailed public consultation involving, inter alia, practitioners, which was held from March to April 2022. The aim of such Guidelines for the DGT is to make available to the public a certain number of clarifications and recommendations that will enshrine certain market practices and provide, where the Ministry deems it appropriate, a better visibility on the procedure - while enabling the administration to retain a great deal of latitude in the assessment of the transactions.
When asked about the legal force of these Guidelines, the DGT indicated that they are enforceable against the administration, subject to overriding considerations of general interest. This maintains a significant degree of uncertainty in the authorization process: compliance with all the conditions set out in the Guidelines does not offer the foreign investor with any guarantee that their application will be successful.
However, the effort of transparency and cooperation with practitioners that these Guidelines reflect is to be commended. At a presentation meeting attended by Gide on October 18, the DGT indicated its willingness to continue using the same cooperation method, stating that the Guidelines would be updated annually and supplemented with answers to questions that practitioners would continue to face.
The DGT also confirmed that no legislative changes are to be expected in the coming months[5] : it instead intends to continue clarifying and stabilizing the existing system. In particular, it is studying the feasibility to introduce, for certain targeted activities, more specific criteria based on turnover, on the degree of maturity of projects or on other objective elements.
The upcoming release of the 2022 Annual Report should provide more information on the practical effects of this regulation on FDI in France.
The Guidelines focus on the issues most regularly encountered by practitioners, as expressed during the public consultation. They relate more specifically to the eligibility criteria of the control; the clarifications relating to the procedure itself are important but essentially technical.
Transactions subject to the control of the Minister of Economy are those that meet the following three cumulative criteria: an "investment" by a "foreign investor" in a French entity operating a "sensitive activity". The Guidelines provide interesting clarifications on these three criteria.
Defined by article R. 151-1 of the French Monetary and Financial Code (CMF), an investor is qualified as "foreign" if they are (i) an individual of foreign nationality, or (ii) an individual of French nationality but not resident in France, or (iii) an entity governed by foreign laws.
A French entity would also be qualified as a foreign investor if it is controlled, directly or indirectly, by a "foreign investor" (as defined in paragraphs (i) to (iii) above). In this respect, the Guidelines confirm that any element of foreignness within the investor's chain of control will cause the entire chain of control to fall within the scope of "foreign investor". Thus, a French investor whose chain of control is French except for one foreign entity (or individual) will constitute a foreign investor in its entirety, even if the entity or person ultimately controlling the investor is French.
Particular attention must therefore be paid to the investor's shareholding structure, and it is essential to acquire a global view of its chain of control, up to its ultimate controller (regardless of whether it is an individual or a legal entity).
The Guidelines are more innovative when dealing with the notion of investor as an "entity". Based on the European position , the DGT opts for an extensive meaning, including both entities with legal personality and those without[6]: companies, branches, SPACs, associations, trusts, investment vehicles, foundations, States, local authorities, etc. The DGT adds in this respect that "investment vehicles, regardless of their form or place of incorporation, are foreign investors themselves (...), independently of their management company".
A cautious approach should therefore be preferred in the presence of a foreign investment fund: the fact that its management company is French does not exclude this fund from the scope of the IEF control, whether or not it has legal personality.
Moreover, while the identity of the fund's Limited Partners ("LPs") is not, at this stage, required for the filing, the DGT indicates that it does not rule out the possibility that the fund's organization regulations and the identity of some of its LPs may, in exceptional cases, be requested.
Four categories of transactions fall within the scope of control of the IEFs: (i) the acquisition of control of a French entity, (ii) the acquisition of a line of business of a French entity, (iii) the crossing, alone or in concert, directly or indirectly, of 25% of the voting rights in a French entity, and (iv) the crossing, alone or in concert, directly or indirectly, of 10% of the voting rights in a French entity listed on a regulated stock exchange[7].
Although greenfield transactions are not covered by the IEF regulations, the categories of transactions referred to above cover a wide range of transactions (acquisition of securities, contributions, mergers, for valuable consideration or free of charge, without materiality or turnover thresholds). The Guidelines provide valuable clarifications for each of them.
(a) With regard to the concept of control[8], the Guidelines establish the use of the concepts of de facto or de jure control, joint or sole-control, which are familiar to practitioners.
(b) With regard to the crossing of thresholds, the Guidelines clarify the method for calculating indirect shareholdings in the target company: the voting rights held by an investorin the target company must be added to those held by the entities that the investor controls directly or indirectly[9].
Other methods of calculation are expressely excluded
The Guidelines also confirm, with regard to the crossing of thresholds, that the notion of concerted action must be interpreted in the light of article L. 233-10 of the French Commercial Code, namely as an agreement to acquire, transfer or exercise voting rights, to implement a common policy with respect to the company or to obtain control over it.
(c) With respect to the concept of "line of business", the contribution of the Guidelines remains limited. Referring to national and European case law, the DGT defines a line of business as the combination of tangible and intangible elements allowing an autonomous operation[10] or as a combination of goods and persons capable of performing an activity[11]. However, the DGT tends to have a broad understanding of the concept of line of business, which must be determined on a case-by-case basis. Thus, the DGT has considered that the transfer of a portfolio of sensitive contracts, or the transfer of important patents, may qualify as a transfer of a line of business.
(d) The Guidelines provide two interesting clarifications with respect to the application of the derogatory 10% threshold: first, the notion of regulated stock exchanges covers not only the French regulated markets but also all regulated markets in the European Union and in the States within the European Economic Area. Thus, a transaction on a French entity listed on one of these markets could fall within the scope of the control. Secondly, an investor duly authorized to cross the 10% threshold will not be required to file a new application if it plans to cross the 25% threshold: such an exemption could be interesting for transactions in listed entities, as the timeframe of the IEF procedure is often not compatible with the timeframe of the financial markets.
(e) Lastly, a noteworthy clarification is made regarding the timing of transactions: only the factual and legal elements existing at the date of completion of a proposed transaction are taken into consideration by the DGT. Thus, potential voting rights attached to future instruments (warrants, convertible or redeemable bonds, etc.) are not taken into account in the determination of the above-mentioned thresholds or even control.
A foreign investment is only subject to the prior authorization of the Minister if it is made in a French entity operating, on the date of the investment, a so-called "sensitive activity" in France. The list is provided under article R. 151-3 CMF and the terminology used leaves the way open - no doubt intentionally - to a very broad interpretation by the administration.
From a practical point of view, the determination of the "sensitive" nature of an activity is - in the vast majority of cases - the cornerstone of the assessment. However, given the very general terms used to designate the activities listed, one will often find themselves in a grey area.
Practitioners therefore expected the DGT to provide objective criteria for determining the "sensitive" nature of certain activities, in order to stabilize certain interpretative jurisprudences, in particular for activities covering very different realities, such as energy, transport, public health, biotechnology or data storage. This expectation has been disappointed: the silence of the Guidelines on this point reflects the DGT's desire to retain the greatest possible margin of interpretation.
Some of the technical clarifications provided by the Guidelines are useful, particularly with regard to exemptions, the suspension of the review periods or the content of the filings.
More generally, the DGT no longer emphasizes its ability to meet short deadlines. At the end of the first 30 working days (Phase 1), the filings may more often continue into Phase 2, during which the administration has an additional 45 working days to carry out an in-depth examination.
[1] Decree no. 2022-1622 of December 23, 2022 relating to the temporary lowering of the threshold for controlling foreign investments in French companies whose shares are admitted to trading on a regulated market
[2] However, it should be noted that this measure could become permanent, as Bruno Le Maire announced during his Vœux aux acteurs économiques on January 5, 2023.
[3] Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for screening foreign direct investment in the Union
[4] While Decree No. 2014-479 of May 14, 2014 on foreign investments subject to prior authorization may have been perceived as a form of anachronism
[5] With the exception of the reform that could make the 10% threshold for listed companies permanent, or even extend it to non-listed companies.
[6] "Any organized group of persons and elements enabling the exercise of an economic activity that pursues an economic objective" (section 1.1.2 of the GL)
[7] See note 1 - applicable until December 31, 2023.
[8] For the purposes of determining an "investment". The concept of control used to determine the chain of control of a foreign investor is different.
[9] For example, if an investor A owns 60% of B, which will own 25% of the voting power of the target, given that A controls B, then A is considered to own 25% of the voting power of the target. The factoring of the shareholdings (A holds 60% x 25% = 15% of the target) are not relevant to the control of the IEFs.
[10] Court of Cassation, Commercial Chamber, February 6, 1990, No. 88-16-827
[11] ECJ, October 13, 1992, case C-50/91, Commerz-Credit-Bank.
