Regulated sectors under French law have recently undergone substantial changes, particularly concerning foreign investments. These adjustments constitute an overall reinforcement of control over foreign investments along with a clarification of the applicable regime. For the first purpose, the so-called “PACTE” Law of May 22, 2019 (i.e., the French law on the Action Plan for Business Growth and Transformation) strengthened and broadened the prior authorization procedure and extended the enforcement powers of the French Ministry of Economy and Finance (the “Ministry”). In the same vein, a Decree published on November 29, 2018, introduced a written preliminary request to the Ministry for both the French target company and the initial investor to ease the prior authorization procedure. Finally, a recent Decree and a Ministerial Order, both published on December 31, 2019, and which will enter into effect by April 1, 2020 (the “New Decree” and the “New Ministerial Order”), have substantially clarified the French foreign investment control regime.
Scope of the French Regulation re. Foreign Investment Control
According to article R. 151-1 of the French Monetary and Financial Code (effective as of April 1, 2020), foreign investments occurring in “sensitive” or “strategic” sectors in France may be subject to prior authorization by the Ministry.
In order to determine which transactions are subject to prior approval, three alternative criteria have been laid out. Prior authorization will be required in case of (i) the acquisition of control, as defined in article L. 233-3 of the French Commercial Code, of any French law entity; (ii) the acquisition, in part or in full, of any business division operated by a French law entity; or (iii) for foreign investors coming from outside the European Union (“EU”) or the European Economic Area (“EEA”) only, the acquisition, directly or indirectly, solely or in concert, of more than 25% of voting rights of French law entity (contrary to the previous 33.33% threshold of share capital and voting rights of such French law entity).
The New Decree also provides for additional sectors of activities subject to prior authorization. Activities occurring in the R&D sector, in the press sector, and in agriculture are henceforth considered as sensitive. In the R&D sector, the New Decree focuses only on critical activities which encompass, according to the New Ministerial Order, cybersecurity, artificial intelligence, robotics, additive manufacturing, semiconductors, quantum technologies, and energy storage.
Along those lines, the New Decree also erases the previous distinction between sectors of activities depending on the location of the foreign investors (i.e., the distinction between foreign investors outside and/or inside the EU/EEA).
Preliminary Request and Prior Authorization
The New Ministerial Order sets out new requirements regarding the written preliminary request procedure and the written prior authorization procedure and regarding the scope of information and documentation to be provided to the Ministry for each of those procedures.
In order to better anticipate the analysis of any contemplated investment by the relevant French authorities, the target company or the investor (with the prior approval of the target company) can solely file a written preliminary request with the Ministry to determine whether such contemplated investment is subject to prior approval. The Ministry must reply within two months. However, it should be noted that the New Decree and the New Ministerial Order do not give us at this stage any specific details regarding the timing and the degree of firmness of the agreement between the transferor and the foreign investor for filing such written preliminary request. Further clarification should be obtained from the Ministry in this respect.
In order to obtain prior authorization, foreign investors must send a written request to the Ministry, which in turn must reply within 30 days to communicate whether the proposed investment is (i) fully approved, (ii) approved with conditions, or (iii) rejected (article R. 151-6 of the French Monetary and Financial Code (effective as of April 1, 2020)). Regarding conditional approval, the Ministry may condition its authorization for various reasons, which have been stated in the New Decree under article R. 151-8 of the French Monetary and Financial Code (effective as of April 1, 2020). In the absence of an answer from the Ministry, the foreign investment is deemed to be rejected.
Finally, the New Decree provides three cases of exemptions from prior authorization for foreign investors: (i) when the investment is made between entities belonging to the same group; (ii) when the foreign investor crosses, directly or indirectly, solely or in concert, the threshold of 25% of the voting rights in the capital of an entity already controlled by such foreign investor; or (iii) when the foreign investor acquires control of an entity over which it has previously directly or indirectly, solely or in concert, exceeded the threshold of 25% of the voting rights, provided that such change of control has been notified in advance to the Ministry.
Recent legislative developments have also extended the Ministry’s enforcement powers. Henceforth, the Ministry can impose three cumulative sanctions, which are set out below in increasing order of severity:
- First, even though any transaction that closes without the Ministry’s authorization is null and void, the Ministry can proceed to impose administrative sanctions upon the foreign investor, including injunctions to (i) submit another request for authorization, (ii) restore the previous situation at its own expense, or (iii) change its investment strategy. The Ministry can also now attach to injunctions a financial penalty, which shall not exceed €50,000 per day.
- Second, the Ministry can take provisional measures such as suspending the exercise of the voting rights illegally held by a foreign investor or restricting the distribution of the dividends attached to the shares of a French company held illegally by a foreign investor. It should be noted that these discretionary measures, which should be imposed only in case of emergency, exceptional circumstances, or imminent threat to the public order, are subject to full remedy actions.
- Finally, under the PACTE Law, the Ministry can impose financial penalties in the event of (i) the conclusion of a foreign investment without prior authorization, (ii) the procurement of prior authorization by fraud, (iii) non-compliance with any conditions provided under the Ministry’s authorization, or (iv) partial or complete non-execution of injunctions (article L. 151-3-2 of the French Monetary and Financial Code).
These financial penalties shall be proportional to the seriousness of the infringement committed and shall not exceed the greater of the following amounts: (i) twice the amount of the irregular investment, (ii) 10% of the annual pre-tax turnover of the company carrying out the strategic activities, or (iii) €5 million for legal entities and €1 million for natural individuals.