Partially in response to the COVID-19 pandemic, a large number of European governments have either introduced new foreign investment control regimes or strengthened existing regimes over the course of the past year to protect strategic industries. At the forefront of these reforms, France is now pathing the way in enforcing those laws more stringently than ever before.

On Friday 18 December 2020 the French Ministry of Armed Forces announced that the government would issue a formal veto to block a foreign investment by a U.S. investor in a French company active in the design and manufacture of light intensified tubes in the aeronautics and defence sectors. This follows from an initial decision on 31 March 2020 by the French government to reject the application and months of negotiations around potential conditions to authorization between the U.S. investor and the French government. 

This decision comes as the scope of the pre-existing foreign investment control regime was significantly expanded on 1 April 2020 to include, amongst others, print and online publishing and quantum technology. In addition the threshold for minority investments by non-European Union/European Economic Area (EU/EEA) investors was lowered from crossing 33 percent ownership in share capital or voting rights to 25 percent of voting rights. In the absence of a response from the French Ministry of Economy and Finance within 30 days of the application for authorization, the application is deemed rejected.

On 27 April 2020the scope was further extended to biotechnology-related research and development activities and the jurisdictional threshold for investments by non-EU investors in French companies listed on a regulated market was temporarily lowered from crossing 25 percent or more ownership in voting rights to 10 percent or more of voting rights. Whilst the lower threshold was due to expire on 31 December 2020, it was extended last month and will now expire on 31 December 2021. 

In addition to expanding the scope of application of the foreign investment screening rules, the Ministry is showing a clear intention to strengthen enforcement. In addition to the investment that the French Minister of Armed Forces opposed last month, the French Minister of Economy and Finance, Bruno Le Maire, announced earlier this month that he was prepared to use investment screening powers to block the proposed takeover by Canadian Alimentation Couche-Tard Inc. of French retail giant Carrefour SA. The following day the parties issued a joint statement stating that they had ceased negotiations on the proposed takeover.

And these trends are not observed only in France as elsewhere in Europe, we notice a significant push by governments, willing to use their powers to intervene and ultimately block certain transactions that would be viewed as damaging to their essential interests. In Germany for instance, the Ministry of Economics decided on Wednesday, 2 December 2020 to block the acquisition of communications technology company IMST GmbH by a subsidiary of the Chinese state-owned defence group China Aerospace and Industry Group Co. Ltd.

Practical takeaways for foreign investors looking to invest in France and elsewhere in Europe

• Bearing in mind that the jurisdictional scope of the French regime is broad and its application to a transaction may not be immediately obvious, the early stages of deal planning and diligence of a transaction involving French target(s) need to include identifying whether the transaction will be subject to foreign direct investment (FDI) screening notification in France. Non-EU and non-EEA investors looking to invest, directly or indirectly, in a French company listed on a regulated market should bear in mind that the lower jurisdictional threshold has been extended until 31 December 2021.
• Investors should pay close attention to FDI screening decisions by the French Minister of Economy and Finance to assess which sectors and types of investors are targeted in practice by that regime.
• European investors should also consider European FDI screening regimes as they are not exempt from FDI screening reviews in certain jurisdictions. In France, a direct or indirect acquisition of a controlling stake by a non-French EU investor in a French entity can be subject to mandatory notification.
• As the French FDI regime gives rise to mandatory notification obligations, any transaction caught by the French FDI screening regime will need to include an appropriate closing condition and associated provisions (such as cooperation and best effort provisions relating to obtaining FDI authorization).
• In particularly sensitive sectors, buyers and sellers should consider approaching early on in the process the French Ministry of Economy and Finance and other ministries and administrations potentially impacted by the transaction on its feasibility, and negotiating the terms and conditions of a potential authorization prior to formally filing the application. 
• Where a transaction is subject to notification in more than one EU member state, parties should take care to ensure consistency across all filings as the relevant authorities may exchange information and opinions under the new EU FDI screening regulation.

Authored by Aline Doussin and Iris Karaman.