The French foreign investment regulations (“Regulation”) has been recently modified by Decree n° 2005-1739 of 30 December 2005. At the time this article goes to press, implementing measures are still to be enacted.

 

The most significant changes are: firstly, the codification of various pieces of legislation into the Monetary and Financial Code thereby enhancing its readability; secondly, the reform of the prior authorization regime as detailed below.

 

The general principle is that foreign investments in France are free, subject to certain restrictions that are viewed as necessary in order to persevere French national interests.

 

The Regulation applies first to all non-French investors, including citizen of EU Member States although the latter are treated more favourably than citizen of third countries. French investors are also subject to the Regulation upon investing abroad or investing in France through foreign investment vehicles.

 

A prior authorization scheme exists in parallel with a filing requirement scheme.

 

Under both schemes, not only direct investments are targeted but also indirect ones, i.e., upon the acquisition of shareholding in a parent company, whether located in France or abroad, controlling a French target company.

 

Whether an investment is subject to prior authorization or filing requirement, the Regulation is likely to apply during its entire life: at the time the investment is made, during any recapitalization or shareholding change, spin-off or other form of divesture and upon re-sale of the investment. This unique feature obliges to ensure compliance with the Regulation on a regular basis.

 

When confronted with investment realized by private equity funds, French authorities take the view that the domiciliation of the management company as well as the degree of independence enjoyed from the investors to manage the fund’s portfolio are the decisive criteria to determine whether the investment is of a foreign nature. 

 

- In respect of filing requirements, three different regimes coexist, each of them providing its sets of requirements, exemptions and specific timing issues. Although in practice the filing process may be simplified thanks to the pragmatic attitude adopted by French authorities (i.e., joint filing by different investors, common filing meeting the requirement of different regimes), there must be viewed as independent one from another: e.g., the benefit of a safe harbour found under one of them will not shield from a strict compliance under the other ones. In certain cases, unofficial discussions (on a no-name basis) by counsel with French civil servants in charge will help investors to apply the Regulation to a particular case and prepare the filing process adequately.

 

- The prior authorization regime is applicable to investments realized in 11 economic sectors that are considered particularly sensitive, among which, security, defence, weapons, explosive, toxic products, dual-use technology items or casino. Certain limited exemptions apply. 

 

The authorization filing and investigation processes are similar for EU or non-EU foreign investors. Compliance is required as of the date of signature of the acquisition documentation. The filing of a complete application triggers a two-month period by the end of which the authorization must either be granted (in writing or tacitly) or denied (in writing exclusively).

 

The following three limitative criteria may be used by French authorities to determine whether a foreign investment may be deemed compliant with the preservation of French national interests:

 

-       the preservation of industrial capacities on the French territory (R&D, know-how and other IP assets, production capacity);

-       the continuity of supplies;

-       the compliance with contractual commitments contained in certain existing contracts (e.g., public procurement contracts or contracts in specific industry sectors).

 

If necessary, French authorities may condition their authorization to specific commitments from the foreign investors. These commitments may be embodied in a detailed commitment or guarantee letter issued by the foreign investor (in certain cases binding on any future owner as well). In such a case, the negotiation of these commitments with French authorities must be carefully conducted in order to ensure that there exists a reasonable balance between the legitimate concerns of the French authorities and the necessary freedom of the investors to manage its new investment.

 

A proportionality principle to the interest at stake is expressly set forth in the law. However, in certain areas closely linked with the nation’s key interests, the actual benefit of the proportionality will be delicate to obtain. The pressure of achieving the investment within contractual timelines agreed upon between the buyer and the seller and the unavoidably higher bargaining power enjoyed by the authorities as compared to that of private interests, will require thorough legal advice as well as in-depth due diligence of the target by the investor in order to build the case.

 

In extreme situations, the conditions imposed by the French authorities can go as far as imposing the spin-off of the target and the resale of sensitive assets or going concern to a French resident assuming that said assets or going concern are accessory or separable from the rest of the acquired business.   

 

Due process is embodied in the Regulation since any authorization denial must be motivated.

 

Among the sanctions or means of constraints available, as the case may be, cumulatively, to the French authorities are: injunction order to restore the situation as it was before the completion of the unauthorized investment, nullity of the transaction, compulsory resale of the target if the restoration to previous state is no longer an option, monetary sanction up to twice the size of the invested amount (i.e., the acquisition price).

 

In case of doubt about whether or not the contemplated investment is subject to a prior authorization, an advance ruling process is available; practically, this process will likely remain of limited use since it gives the Ministry of Economy a two-month period to respond which is an extremely long period in an acquisition context. Filing a formal authorization request may appear preferable. 

 

May 2006

 

 

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by Roland Montfort

Admitted in Paris, Brussels and New York

Partner of Lefèvre Pelletier & associés