FDI regulation tightens in France

August 2022  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2022 Issue

In recent years, a heightened level of scrutiny has been applied to foreign investments in the name of national security globally, and France has been no exception to this trend. From recent amendments to the French foreign investment screening regime, notably ministerial decrees and orders issued in 2020 and 2021, to clear geopolitical and environmental changes, the trend toward tighter scrutiny is clear.

Foreign direct investment (FDI) in France has been subject to regulation for several decades, with the first such law being enacted 55 years ago. However, over the past decade, FDI screening has taken on a narrative of its own. Globally, governments have grown to adopt the view that certain foreign investments ought to be subject to governmental approval.

France is no exception to this trend. While in principle open to foreign investment, the French government has, in recent years, applied and strengthened the French Foreign Investment Regime (FFIR). The FFIR is overseen by the French Ministry of the Economy, Finance and Recovery (MOE) and is governed by the French Monetary and Financial Code, which has been amended several times of late to increase the scope of the regime.

In addition to the FFIR, the European Union (EU) adopted its own FDI screening mechanism by way of Regulation (EU) 2019/452. The FDI Screening Regulation ensures that the EU aspect of any proposed FDI in a member state is considered, requiring notification to the European Commission. It also enhances cooperation between member states when screening and discussing proposed transactions.

Following the first year of the FDI Screening Regulation being in force, the EC released an annual report which highlighted that, between 11 October 2020 and 30 June 2021, a total of 265 notifications were submitted by 11 member states, with France ranking among the five most active members with 108 transactions notified to the European network by 11 October 2021.

Given the extent of the cooperation between French authorities and the EC, the French MOE adopted a new order on 10 September 2021, providing that, from 1 January 2022, the notification Form B requested under the European cooperation mechanism, established under the FDI Screening Regulation, will systematically need to be submitted for non-EU investors, alongside the list of documents to be provided when submitting a French request for prior approval.

Though national security is ultimately left in the hands of member states, which are free to make their own assessment of FDI transactions, the relevant member state must take the non-binding comments and opinions of other member states and the EC into account when reaching a conclusion.

Unsurprisingly, the coronavirus (COVID-19) pandemic has been a game changer, leading to the further expansion of the existing French regulation. The Order of 27 April 2020 relating to foreign investments in France added research and development (R&D)-related activities in the biotechnology sector to the list of strategic activities under the FFIR, implemented to protect French companies working on a COVID-19 vaccine. This followed the 25 March 2020 guidance of the EC, which had identified an increased risk that non-EU acquirers would attempt to obtain control over suppliers of essential products, including products in the healthcare sector.

While activities essential for the protection of public health were already regulated under the French FDI screening rules before the pandemic, the extension of the regime to cover R&D-related activities in the biotechnology sector is a permanent change and permits tighter control of foreign acquisitions in this field, where players are most often start-ups with innovative R&D activities. As a result, between 2020 and 2021, requests for prior authorisation on foreign investment in biotechnology have almost doubled.

In addition, Decree No. 2020-892 of 22 July 2020 introduced a simplified control procedure for acquisitions by non-EU/EEA investors of at least 10 percent of the voting rights of a French listed company carrying out a strategic activity. Where this threshold is met, the investor must give prior notice of the transaction to the MOE, which has a period of 10 business days within which to object to the transaction. If no objection is raised, the transaction is authorised, and the investor has up to six months to complete it. However, if an objection is raised, the investor must file a formal request.

Decree No. 2020-1729 of 28 December 2020 extended this temporary ‘fast-track’ framework initially until 31 December 2021. Unsurprisingly, this temporary lower threshold of 10 percent was, in November 2021, extended again for a further year until 31 December 2022, justified by the ongoing economic effects of the pandemic, which continued to threaten weakened, publicly listed French companies.

In addition, a new order of the French MOE was adopted on 10 September 2021, extending the list of critical technologies included in the definition of ‘strategic sectors’ to comprise technologies relating to the production of renewable energy. Thus, R&D activities relating to these new technologies now fall within the scope of French foreign investment control. This amendment is designed to strengthen the protection of activities that are essential to guarantee the French energy mix will become more sustainable – a major political challenge.

Most importantly, the same order also added to the list of information and documentation to be filed alongside a request for prior authorisation. In addition to the Form B, the French FDI application will also need to contain additional information on the target’s activities, such as a list of French and EU competitors, specifying the market share held in France by each French competitor, and a list of the intellectual property (IP) rights held by the target together with details of their nature and duration. The French FDI application will further need to list the procedures for accessing and managing data relating to French customers, if any, indicating data is now also a major part of the MOE’s analysis.

These changes came into force on 1 January 2022, a few months after publication of the order, to give the affected parties and their external counsel a minimum period to adapt to the new measures.

Though formal vetoes remain rare, some recent transactions have been blocked by the MOE in a display of its new powers. In particular, the MOE blocked the acquisition of French supermarket chain Carrefour by Canadian convenience store chain Couche-Tard, in January 2021 without even launching a formal review. Bruno Le Maire, France’s current MOE, declared Carrefour to be “a key link in the chain that ensures the food security of the French people” and opposed the transaction on the ground of French food sovereignty. It is unlikely to be a coincidence that the outright prohibition came during the peak of the COVID-19 pandemic, in which several western economies faced supply chain problems in key sectors, such as food and healthcare.

In another notable example, in late 2020, the MOE had launched a formal review of the proposed acquisition of Photonis, a manufacturer of electro-optic solutions with military applications, by US defence manufacturer Teledyne. While discussions were ongoing on potential commitments throughout summer 2020, in December 2020 the transaction ended up being prohibited by the French authorities on the grounds of French sovereignty in the defence sector – an unprecedented event. As Photonis is a strategic supplier of night-vision devices to the French armed forces, the intervention is slightly less surprising than that of the Carrefour prohibition, but nevertheless stands out among a relative scarcity of official vetoes by the French MOE of foreign investment transactions.

For the business world, these vetoes are a signal of stronger protection of French companies from non-European investors, impacting even close economic partners of France such as the US and Canada. These cases reflect the French government’s increased sensitivity to national interests and more aggressive approach to enforcement. Foreign investors, even EU-based, need to be prepared for tighter scrutiny and the potential imposition of conditions, and, in certain cases, prohibition decisions.

Even if it appears that only a small proportion of transactions have been blocked, the MOE is increasingly clearing transactions subject to commitments. The regime has been expanded in almost every way possible, such as expanding the criteria for investments falling within the scope of the regime, broadening the ‘strategic sectors’, expanding the legal entities to which the regime applies (covering both the target and the investor’s chain of control), and widening the MOE’s powers.

The FFIR suffers from a relative lack of transparency, in part due to the sensitivity of the activities it deals with. To mitigate this lack of transparency, the MOE has already taken steps, including publishing its first annual report in March 2022, presenting the main trends that emerged in the last year.

Indeed, the MOE announced that 328 requests were submitted to it in 2021, a 31 percent increase from 2020, with 124 transactions being approved, 54 percent of which were subject to commitments. Fourteen percent of the reviewed transactions were linked to the defence sector, 57 percent were related to essential infrastructure, goods or services, and the remaining 29 percent were a mix of both sectors, a notable increase from the 18 percent in 2020. The larger share of non-defence activities logically follows the widening in recent years of the sectors subject to the regime. Investors mostly remained non-EU/EEA based, especially from the UK, US and Canada. EEA-based investors primarily were based in Germany, Luxembourg and Ireland.

2022 is expected to bring further transparency to the FFIR with the publishing of guidelines by the French MOE over the summer, following a public consultation which occurred in the spring. These will provide some deeper insights on the MOE’s priorities and expectations with respect to FDI filings. While the French government will retain its large degree of discretion, the guidelines should hopefully provide some clarity on the regime and decrease the legal uncertainty for foreign investors in France.

We expect to see increased French FDI regulation going forward. With the Russian invasion of Ukraine heavily impacting the defence and energy sectors, as well as supply chains, across the globe, we cannot rule out further developments, particularly given FDI is inherently vulnerable to economic and other types of shocks.

 

Emily Xueref-Poviac is a counsel and Hendrik Coppoolse is a legal consultant at Clifford Chance. Ms Xueref-Poviac can be contacted on +33 (0) 1 44 05 53 43 or by email: emily.xuerefpoviac@cliffordchance.com. Mr Coppoolse can be contacted on +33 (0) 1 44 05 24 89 or by email: hendrik.coppoolse@cliffordchance.com.

© Financier Worldwide

BY

Emily Xueref-Poviac and Hendrik Coppoolse

Clifford Chance

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