The legal regulation of foreign investment in France following the “Pacte” Act
Financial relations between France and abroad are “free”, under the French Monetary and Financial Code (CMF). A foreign economic agent wishing to invest in France doesn’t have to carry out any specific prior formalities.
However, by way of exception, the French Government limits the intervention of foreign investment in France in certain sensitive sectors of the economy, for which control remains and which must be authorized in advance.
Foreign investments in France subject to prior authorization
In order to determine whether the investment transaction falls within the scope of the authorization procedure, two conditions must be met.
1) The forms of investment covered
The CMF states three forms of investment are subject to the prior authorisation procedure when made from a member state of the European Union or a third country):
- the acquisition of control of a company whose registered office is located in France
- the acquisition of all or part of a branch of activity of a company whose registered office is established in France
- and, if the investor is a resident of a third country, the crossing of a threshold for holding capital or voting rights in a company whose registered office is located in France is 25% of ownership.
2) Sensitive activities subject to prior approval
In order to be compatible with the European principle of free movement of capital, the control of foreign investment is only accepted if it is allowed only in a limited range of activities involving public policy, security or national defence. There is restrictive list of sectors of activity for which foreign investment is subject to authorization, such as gambling activities (with the exception of casinos) and research and development relating to pathogens.
The list of these activities is regularly renewed by a “Conseil d'état” decree), to include so-called "innovative" strategic activities ; and in particular, with the recent decree of December 31, 2019 applicable from the July 1st, 2020, quantum technologies and energy storage will be included in the scope of control.
In case of doubt, the foreign investor and the target company, may question the Administration as to whether their transaction falls within the scope of the prior authorization procedure.
The system of prior authorisation
The system of prior authorization has been profoundly modified by the “PACTE” Act, regarding the powers of the Minister [II], the authorization procedure [I] itself having been only slightly modified. The implementing provisions of the “Pacte” Act entered into force immediately, while the measures applicable to authorization requests will enter into force on April 1st, 2020.
1) The prior authorisation procedure
Following this request, the Minister must take a decision within thirty days of receipt of the request, failing which the authorization is deemed to have been granted. The French government wants to speed up the procedure, halving the response time from two months to thirty days, thus ensuring France's attractiveness.
The IEF may be authorised or refused, but it may also be authorised subject to conditions that ensure the preservation of France's interests. Refusal must be justified and may only be decided within the framework of an exhaustive list of reasons provided for example, the decree of December 31, 2019 requires investors to inform the Minister of any relationship with a foreign State as such relationships are grounds for refusal. The French government thus intends to protect itself and its economy from hostile acquisitions from foreign states. Any decision of the Minister may be appealed to the administrative judge.
(2) The powers of the Minister of the Economy
The “PACTE” Act considerably expanded the powers available to the Minister of the Economy in order to prevent and punish violation. In particular, it gives him the power to take a number of protective measures (, such as suspending voting rights, prohibiting the distribution of dividends, suspending the disposal of assets, appointing an ad hoc agent or withdrawing an authorisation subject to conditions, if he considers that the protection of national interests is or may be compromised, in the context of an IEF without prior authorisation.
The Minister is granted an extended right of disclosure of any document and information necessary for his mission, after receiving comments from investors within 15 days, except in cases of urgency, exceptional circumstances or imminent infringement (L.151-3-1 CMF).
In addition, the Minister’s power of injunction is reinforced in the context of an IEF without prior authorization. Three injunctions are instituted: injunction to the investor to file an authorization request, to restore the internal situation at his own expense, or even to modify the investment. Any decision of the Minister (injunction or protective measure) can be pronounced under penalty, which the decree of December 31, 2019, limited to € 50,000 per day.
Finally, the “Pacte” law confers on the Minister the power to punish four breaches pecuniary 1) non-compliance with an injunction, 2) carrying out an operation without authorization, 3) obtaining authorization by fraud, and 4) a breach of conditions.
The maximum amount of sanctions has also been considerably increased under the PACTE law: the highest amount between double the amount of the irregular investment, 10% of the amount of the annual turnover of the target company, 1 million euros for natural persons and 5 million for legal entities.
III] The reporting obligation
Previously, certain investments were subject to prior declaration to the Treasury. Henceforth, foreign economic agents may now only be subject to a declaration to the Banque de France for purely statistical purposes (1), but failure to do so may lead to heavy penalties (2).
1) The procedure for reporting to the Banque de France
Transactions involving amounts in excess of 15 million euros that enable a foreign economic agent to acquire at least 10% of the capital or voting rights of a French company, or to exceed the 10% threshold, must be reported to the Banque de France. The declaration must be drawn up by letter and include information making it possible to identify the foreign investor and the target of the IEF.
2) Penalty for failure to declare
The declaration must be sent to the Banque de France within 20 working days following the settlement date of the investment concerned (. Failure to comply with this declaration may be punished by imprisonment for 5 years, a fine equal to twice the amount of the offense, knowing that the judge may order a ban on the pursuit of a commercial activity or public service.
IV] The influence of European law on the regulation of IEF
On March 19, 2019, a European framework regulation was adopted to increase cooperation between Member States and the European Commission on the regulation of foreign direct investment, establishing a common investment screening framework. This new regulation, applicable from October 11, 2020, will only apply to investments from residents of third countries. The regulation is intended to influence the French legal system in two points[3]:
- a reasoned opinion procedure is put in place on the initiative of a State or the Commission, and imposes an obligation to inform the Commission of any individual control procedure. This opinion mechanism will be set within a time limit of 35 days, which will require France to adapt its response time to the authorization request.
- lastly, and above all, the regulation allows the European Commission to request member States to control or even prohibit foreign investments which jeopardize "European projects or programs of common interest". Such activity is not yet targeted by the CMF, thus inducing a forthcoming reform of the hexagonal system.
V] The transparency obligations under the prior authorisation framework
IEFs can therefore be subject to a prior authorization regime which the answer is at the discretion of the Minister of the Economy. This discretion is not synonymous with an arbitrary total. The Pacte law has indeed strengthened transparency obligations as regards the control of these IEFs.
The CMF provides for the drafting of an annual report towards the public, in an anonymous and purely statistical framework, and towards Parliament, which will have real powers of investigations and the right of hearing of the competent ministers.
These reports will constitute interesting opportunities for appreciating the strategy that the government will adopt in terms of controlling IEF - liberalism or protectionism - and will no doubt be eagerly awaited by economic players.
For expert advice on the legal regulation of foreign investment in France, please contact our legal specialists at Delcade on +33(0)1 75 43 18 56 or email: [email protected]