Foreign investment screening in France: first guidelines issued by the Treasury

05 December 2022
Frédéric Saffroy and Alice Bastien

The French Treasury’s Directorate General (“DGT“) has published its first guidelines to assist investors and their advisors to comply with the French foreign investment screening process.

These guidelines set out the scope of this control, including its key concepts, the conduct of the procedure and the follow-up of authorizations issued by the Minister in charge of the Economy.

1 – Clarification on the concept of “foreign investor”

A “foreign investor” is an individual of foreign nationality, an individual (even of French nationality) not resident in France for tax purposes, or a legal person (entity) governed by foreign law, regardless of its legal form or location (including investment funds and investment vehicles).

The DGT has clarified that all persons and entities in the same chain of control (as defined by Article L. 233-3 of the French Commercial Code) are investors under the regulations. Control therefore applies as soon as one member of the chain of control is foreign, even if the ultimate investor controlling the entire chain is a French entity or person.

Investment funds may be foreign investors, regardless of their management company. The guidelines indicate that the analysis of the chain of control of investment funds is carried out on a case-by-case basis and must take into account the specificity of each structure and the way the fund is managed. Furthermore, the transfer of an interest in an entity of an investment fund to another fund controlled by the same management company is not exempted from authorization, provided that this management company does not hold more than 50% of the capital or voting rights of these two funds.

2 – Clarification on the different forms of investment

Investment transactions are diverse, and the regulations do not list them. Only transactions carried out by a foreign investor on a French target entity operating in sensitive activities require a prior authorization.

Therefore, investment transactions in French branches of foreign companies are not subject to screening, because these branches are not considered French targets.

The DGT also confirms that “greenfield” investments – corresponding to the creation of an entity in France by a foreign investor to develop an activity in that country – are not subject to foreign investment screening.

Finally, the DGT recalls that a transaction which consists in the direct or indirect acquisition of a portfolio of sensitive contracts, a significant number of intellectual property rights (including software or know-how) or materials, vehicles, furniture, or equipment necessary to operate a sensitive business (asset deal), may be analyzed as the acquisition of part of a business, and thenbe subject to screening (see §3 below).

3 – “Sensitive” activities

The Guidelines remind the three types of activities that are “sensitive”:

  • Activities listed in Article R. 151-3, I of the French Monetary and Financial Code (“Code monétaire et financier”, “CMF”) are eligible by nature (so-called “objective” eligibility).
  • Activities that are likely to harm national defense interests, public order, or the exercise of public authority (Article R. 151-3, II CMF) are subject to a “sensitivity test” to assess their essential nature. Among the key criteria are the target’s customers, the nature, specificity and applications of the products or services provided, or the associated know-how, the substitutability of the activities or their dangerousness.
  • Research and development (“R&D”) activities are eligible when they are intended to be implemented in one of the activities listed in the abovementioned paragraphs (Article R. 151-3, III CMF).

The sensitivity of the activity is therefore determined on a case-by-case basis (see reminder below). The targets carrying out subcontracting or supply activities for the benefit of an operator of vital importance (also known by the French acronym “OIV“) are strongly presumed to be sensitive. However, as the list of OIVs is protected by national Defense secrecy, the DGT will not be able to confirm or deny the presence of an OIV among the customers/partners of a French target.

4 – Exceptions to the authorization requirement: intra-group operations

Foreign investors are exempted from the authorization requirement when the investment is made between entities that all belong to the same group, as defined in Article L. 233-1 of the French Commercial Code.

However, a simple control relationship of a shareholder over different entities is not sufficient, as it does not imply the ownership of more than 50% of the capital or voting rights. Similarly, if 50% of the capital or voting rights of entities are held by several shareholders acting jointly, the investment is not exempt from authorization.

Reminder of the principles applicable to foreign investments

Regardless of the amount of the transaction, any investment – whether direct or indirect – made through the acquisition of shares (takeover of a company, or for non-EEA investors, acquisition of more than 25% – or, until December 31, 2022[1], 10% of the voting rights of the target company) or acquisition of goodwill or assets (all or part of a branch of activity of a company) of a French company performing critical activities is subject to a prior authorization by the Minister of the Economy, under penalty of nullity and heavy financial fines.

Since October 11, 2020[2], foreign investments must also be notified to the European Commission and to other Member States. This screening mechanism reinforces the protection of activities and essential assets of the Union and coordinates the responses brought to the investors. In 2021, just over 1,500 cases were notified. Nearly 73% of the cases analyzed were authorized. 23% were conditionally authorized, 3% were abandoned and only 1% were refused[3].

For European and non-European investors, the controlled sectors include (i) activities likely to affect national defence, public order, or public safety (war materials and similar, dual-use goods, national defence secrets, information systems security, encryption, sensitive data storage, etc.) or (ii) the same activities when they concern essential infrastructures, goods or services (energy, water, transport, space operations, communications, integrity, security and continuity of a vital operator, public health, agricultural products, press) and (iii) R&D activities in the above-mentioned sectors and related to the critical technologies defined in the order of December 31, 2019 (including cybersecurity, robotics, 3D printing, energy storage and renewable energies), as well as to dual-use goods and technologies.

[1] French Decree No 2021-1758 of 22 December 2021

[2] Date of the entry into force of UE Regulation 2019/452 of 19 March 2019

[3] See report of the Commission of 1 September 2022

For any additional information, please contact the Compliance and Regulatory team.

Frédéric Saffroy, Partner, and Alice Bastien, Associate.