On September 9, 2022, the French Ministry of Economy (the “Minefi”) issued its first guidelines on the regulation of foreign investment control in France (“FDI Regulation”) (the “Guidelines”).
The Guidelines were eagerly awaited as certain provisions of the FDI Regulation leave room for discretion and there is no published decision-making practice on which the relevant stakeholders may rely. While the Guidelines do not constitute an element of hard law, they provide useful insight into the official interpretation of certain elements of the FDI Regulation. By contrast, clarifications regarding the identification of “sensitive activities” remain underwhelming.
The purpose of this memorandum is to highlight the key points raised by the Guidelines as well as certain important questions that remain unanswered:
1. Concerning the concept of “foreign investor”
The French FDI Regulation defines foreign investors as (i) persons of foreign nationality, (ii) French nationals residing abroad (residence being defined according to the principles used under tax law), (iii) legal entities incorporated under the laws of a foreign state, or (iv) legal entities incorporated in France but controlled directly or indirectly by one or more individuals or legal entities identified in (i), (ii) or (iii).
The Guidelines clarify that persons holding dual French citizenship are not considered foreign investors.
The Guidelines also confirm that it is sufficient that only one entity in the investor’s chain of control be a foreign entity (e.g. transactions carried out through an investment vehicle such as an investment fund incorporated under foreign law) for the transaction to fall in the scope of the FDI Regulation, even if the ultimate controlling shareholder is French. This means for example that an investment transaction led by a fund structured under the law of Luxembourg falls within the scope of the FDI Regulation even if the fund is managed by a French management company.
Given the multiple types of governance structures for investment funds, the Guidelines specify that the question of who controls an investment fund will be analyzed on a case-by-case basis, taking account the rights of the limited partners and the way the fund is managed. Depending on whether the limited partners are pure passive investors or have certain power in the decision making process, the French FDI authorities may require information on (i) the general partner and (ii) any controlling limited partner. This approach appears more intrusive than the ruling of the French administrative supreme court (the Conseil d’Etat) in 2020 pursuant to which there is normally no requirement to include information regarding the limited partners/investors participating in the fund in the FDI filing.
2. Concerning the investment transaction-types falling within the scope of the FDI Regulation
Investment transactions falling within the scope of the FDI Regulation include (i) the acquisition of control over a French law entity by a foreign investor, (ii) the acquisition of all or part of a “branch of activity” of a French law entity by a foreign investor, or (iii) the direct or indirect crossing (individually or jointly) of 25% of the voting rights in a French law entity by a Non-EU/EEA investor.
The Guidelines provide certain details regarding notably:
- The acquisition of joint control, which is assessed under the meaning of Article L. 233-3-III of the French Commercial Code and therefore presupposes the existence of a concerted action between several investors who have entered into an agreement with a view of implementing a common strategy in relation to the controlled company and that enables the concerted parties to de facto determine together the company’s decisions. The Guidelines also specify that the change from joint to sole control or vice versa does not require a new FDI authorization.
- The concept of indirect threshold crossing, under which only shareholdings held by companies controlled (either directly or indirectly) by a foreign investor are taken into account. This means that: (i) a foreign investor is considered to have indirectly crossed the 25% threshold of any subsidiaries controlled by a French target company in which the 25% threshold is directly crossed; and (ii) entities that are not controlled by said the French target company are not within the scope of the French FDI Regulation. In addition, the crossing of the 25% threshold in a French target company by a French investment vehicle instituted by several foreign investors, none of whom exercise any controlling rights (alone or acting in concert), does not fall within the scope of the FDI Regulation. The Guidelines also confirm that the crossing of the 25% threshold in a French listed company by a foreign investor already authorized to acquire 10% of the voting rights (in the context of the temporary regime applicable as from August 7, 2020 to non-EU/EEA investments in French listed companies) does not require a new FDI authorization.
- The concept of “branch of activity”, which is defined under EU and national case law as a collection of assets and liabilities forming an entity capable of functioning independently by its own means. The Guidelines consider that the acquisition of a branch (e., a non-incorporated establishment), a portfolio of sensitive contracts, intellectual property rights, license, any equipment, vehicles, furniture and machines or even a single element of this whole may constitute the acquisition of all or part of a branch of activity for the purpose of the French FDI Regulation as long the concerned branch of activity is able to operate independently. The Guidelines also clarify that the FDI Regulation only covers the acquisition of all or part of a branch of activity owned by a French legal entity. Consequently, a branch (“succursale”) of a foreign company does not fall within the scope of the FDI Regulation in France.
- The exemption for intra-group transactions: FDI authorization is not required when the investment is made between sister companies, e. companies in which the same shareholder holds, directly or indirectly (ab initio), at least 50% of the share capital or voting rights. The Guidelines consider that this exemption does not automatically apply to operations involving the transfer of sensitive French target companies from an investment fund vehicle to another, even if both vehicles are managed by the same management company. The authorities will assess on a case-by-case basis whether this transfer can benefit from the intra-group exemption taking account how the fund is structured and managed and its specificities.
- The acquisition of financial products (such as convertible bonds or warrants): FDI authorization is not required when the foreign investor acquires financial products (such as convertible bonds or warrants) which may result in the crossing of the 25% threshold (or until December 31, 2022, the 10% threshold in a listed company) or in the acquisition of control over the target at a later date which remains uncertain. The FDI filing will only be required when the change of control or threshold crossing becomes “certain”. The implication is that investors will not be able to obtain an FDI authorization upon acquisition of these financial instruments unless they can establish that the conversion is “certain” in the short term.
3. No clarification concerning the notion of “sensitive” activity
The Guidelines do not provide detailed guidance on how to interpret particular categories of sensitive activities listed in the FDI Regulation. Only one page out of the 49 pages of the Guidelines is dedicated to this question on which stakeholders lack clarity, especially insofar as there is no published decision-making practice on which they may rely.
While certain activities are considered sensitive per se, others rely on a “test of sensitivity”. Article R. 151-3, II of the Monetary and Financial Code considers that companies whose operations are considered “essential” to certain national objectives (such as preserving key supplies, communication networks, public health, agriculture, etc.) fall within the scope of the FDI Regulation. The vagueness of these terms allows the Minefi to conduct its analysis on a case-by-case basis and with a significant margin of appreciation.
Determining whether the target’s activities fall within the FDI Regulation can be in practice a highly uncertain exercise and the Minefi recommends to notify transactions or submit a prior review request in case of doubt. As a result, a large number of FDI notifications give rise to an out-of-scope decision. Based on the Minefi’s 2021 Activity Report, out of 328 filings 124 resulted in an authorization decision. In addition, 76% of the requests for opinion submitted to the Minefi to confirm whether a transaction falls within the scope of the FDI review result in an ineligibility decision.
The Guidelines provide limited clarifications or confirmations on certain aspects:
- The French authorities will take a broad approach concerning R&D activities in the fields of critical technologies or dual-use items: the FDI Regulation targets early R&D activities (not just mature ones) on the basis of potential future applications (not only those considered or commercialized by the target company) for clients active in the sensitive sectors listed under the FDI Regulation.
- The Guidelines include a reminder that the turnover of the French target company or the amount of the investment do not necessarily reflect the essential character of the activities. In particular, target companies with low turnover may nevertheless fall in the scope of the FDI Regulation, for instance when the target company provides very specific services/equipment to clients whose activities are critical for national security..
- The Guidelines confirma that the list of operators of vital importance (opérateurs d’importance vitale), a criterion that triggers a filing obligation, is confidential. As a result, a potential investor may not receive confirmation from the target company that it is acquiring an operator of vital importance and may in practice be compelled to notify a transaction out of precaution.
These Guidelines show that FDI control in France now aims at a certain legal stability following the implementation of the PACTE Law and the entry into force of the EU FDI Regulation. This allows the French authorities in charge of FDI control to provide a certain degree of guidance on the way they interpret the FDI Regulation and they intend to apply it.
This contributes to reinforce legal certainty for potential investors, even though certain aspects of the FDI Regulation still remain particularly unclear. Clarifications in the next version of the Guidelines will be much welcome.
 See Section 1.1.1 of the Guidelines.
 See Section 1.1.3 of the Guidelines.
 See Section 1.1.4 of the Guidelines.
 See Section 22.214.171.124 of the Guidelines.
 See Section 126.96.36.199 of the Guidelines.
 See Section 188.8.131.52 of the Guidelines.
 See Section 1.2.5 of the Guidelines.
 See Section 1.2, page 11 of the Guidelines.
 See Section 1.4.1 of the Guidelines.
 See Section 1.2.2 of the Guidelines.
 See Section 1.3 of the Guidelines.