The New World of Foreign Direct Investment
1 . After more than a half century of increasingly liberalized world trade, there are signs of change. Do you see world trade patterns evolving in new and different directions? What does this mean for your country and your clients?
The tide of ever-increasing globalisation and economic integration is receding. The imposition of trade tariffs between the US and China, events such as Brexit, and trends such as the rampant popularity of advocates for greater protectionism in Europe, are all signs that the golden age of globalisation could be behind us.
Ceasing dangerous dependencies amid increasingly tense geopolitical contexts
The shortage of PPE equipment at the start of the COVID-19 pandemic, the race to get hold of vaccines, and the extensive and lasting disruption to the global supply chain were recent reminders that global economies are dangerously reliant on the fluid movement of goods around the world for their economic and social wellbeing.
The recent trade sanctions imposed on Russia made Europe realise that its dependence on Russia for its energy supply was problematic. Similarly, European countries fear getting caught in the middle of the increasingly tense US-China political relationship.
Within this context, France aims to become more self-reliant in certain key industries. In January 2022, for instance, the French Ministry for the Ecological Transition vowed to secure France’s supply of mineral raw materials used in the electric mobility and renewable energy sectors by supporting “initiatives that can be rapidly industrialised on the French territory”.
The French government may also seek to import from a wider variety of countries, to become less dependent on any one of them, which could represent opportunities for foreign companies to enter the French market. It could also advantage lesser-known French companies, by allowing them to secure French public procurement contracts which might previously have been won only by industry leaders.
Favouring short supply chains to avoid shortages
France will still wish to reap the benefits of open trade, but it is likely to favour shorter supply chains to avoid shortages. This means not only increasing imports from geographically close fellow EU Member States, but also encouraging domestic production of certain goods and services, by investing in French companies and French branches of foreign companies. Foreign investors could make the most of this trend by investing in France.
Not all investors, however, may be in a position to do so. Many European companies still have no other choice than to produce some of their goods outside of the EU, where labour and raw materials are cheap. By contrast, the industries for which this trend may be particularly relevant, are those that require highly skilled workers to operate.
“Globalisation among friends”
While previously the reasoning was that more trade between countries would result in co-dependencies and ultimately less geopolitical rivalry, countries are now choosing to trade with blocks they can trust.
France will increasingly want to deal with national and European companies, and with trade partners that share the fundamental values of the West, creating a tendency for “Globalisation among friends” (as Janet Yellen, the US secretary of the treasury, called it).
2 . Historically, foreign direct investment was embraced by governments as a way to strengthen domestic economies. Has your country’s government adopted an aggressive posture in regulating foreign investors?
Under the French FDI rules, a foreign investment in France requires the prior authorisation of the Ministry of Economy (MOE) if it fulfils the following three cumulative conditions:
- it is carried out by a “foreign investor”;
- it is a “regulated investment”; and
- it is carried out in a sector considered to be “sensitive”.
These terms are defined below. The scope of some of these categories was broadened in 2020, in order to prevent foreign companies from taking over French companies that were struggling during the COVID-19 pandemic.
Foreign investors are defined as:
- foreign individuals;
- French individuals who are not tax residents in France;
- foreign legal entities; and
- French legal entities “controlled” by a foreign individual or entity. The definition of “control” is very wide and can even encompass minority shareholdings that are significant, such as if they hold “decisive influence”.
A regulated investment is defined as:
- the acquisition of control;
- the partial or total acquisition of a branch of activity of a French company; and
- those resulting in a non-EU or non-EEA investor holding 10% of voting rights in a French listed company or 25% of voting rights in a non-listed French company. The threshold was set at 25% of voting rights for all French companies before 6th August 2020 but was lowered for French listed companies during the COVID-19 pandemic in order to prevent minority interests from having too much influence. The 10% threshold will remain applicable until the end of 2023.
Finally, foreign investments in any sector considered to be sensitive (such as public safety and national defence), are subject to the prior approval procedure. The French FDI regulation of May 2019 considerably broadened the list of sensitive sectors, adding, for instance, research into technologies such as cybersecurity, AI and robotics. During the COVID-19 pandemic, investments in biotechnology, and R&D into renewable energy were added to the list.
Only foreign investments that fall within the scope of all three criteria (on investors, investments and sectors) are subject to prior authorisation. Nonetheless, even if the investment does not fall within the scope of those categories, the French government may still make it conditional upon the fulfilment of specific conditions, or it can reject it altogether, for instance if it considers that national interests will not be sufficiently safeguarded if the investment were made.
If the foreign investment is subject to prior authorisation, the following procedure applies:
- The investor may submit a preliminary enquiry to the MOE, to ask if the sector of proposed investment would fall within the list of “sensitive” sectors. Regardless of the MOE’s answer, the investor must still go through the entire approval procedure. Nonetheless, submitting a preliminary enquiry may help the investor plan ahead and save time.
- The investor submits an investment application to the French MOE who must decide within 30 business days whether to reject it, approve it, or carry out a more thorough review which can last up to 45 business days. The review results in either a rejection or approval, subject to conditions. A lack of answer from the MOE within those timeframes is deemed to be a silent rejection. A rejection can be appealed within 2 months, in front of the MOE itself or the administrative courts. The application itself requires submitting a vast amount of information to the MOE, such as the chain of control and ultimate beneficiary of the target company, and its main French and EU clients. Since 1st January 2022, the list of documents to be submitted has been extended and investors are now also required to disclose, for instance, the investor’s strategy within the EU.
- Post-completion filings are to be carried out within 2 months of completion.
3 . Are there specific sectors of your country’s economy or industries where foreign direct investment is barred or highly regulated?
Foreign investment into the activities listed below is highly regulated, and may require prior authorisation from the French MOE:
- activities relating to arms, ammunition, powders and explosive substances for military purposes or to war material and the like;
- activities relating to dual-use items and technologies listed in Annex IV of Council Regulation (EC) No 428/2009 of 5th May 2009;
- activities carried out by entities holding national defence secrets;
- activities carried out in the IT security sector, including as a subcontractor, for the benefit of a public or private operator managing vitally important installations;
- activities carried out by entities that have signed a contract, either directly or by subcontracting, for the benefit of the Ministry of Defence for the production of a good or service falling within a sensitive activity;
- activities relating to the study of coded messages;
- activities relating to technical equipment or devices likely to allow the interception of correspondence or designed for the remote detection of conversations or the capture of computer data;
- activities relating to the provision of services by assessment centres approved under the conditions set out in Decree No. 2002-535 of 18th April 2002 on the assessment and certification of the security offered by information technology products and systems;
- activities in the gambling sector — with the exception of casinos;
- activities to counter the illicit use of pathogens or toxic agents in terrorist activities;
- activities involving the processing, transmission or storage of data, if their jeopardy or disclosure is likely to affect the carrying out of sensitive activities;
- activities relating to infrastructure, goods or services that are essential in order to safeguard:
- energy supply;
- water supply;
- the operation of transport networks and services;
- space operations;
- the operation of electronic communications networks and services;
- missions carried out by the national police, the “gendarmerie”, civil security services, as well as the exercise of the public security missions of customs and those of companies approved as private security companies;
- the operation of establishments, installations and works of vital importance within the meaning of the Defence Code (and their information systems);
- the protection of public health;
- food safety;
- publishing, printing or the distribution of political and general information press publications;
- research and development activities relating to critical technologies (cybersecurity, artificial intelligence, robotics, additive manufacturing, semiconductors, quantum technologies, energy storage and biotechnologies and technologies involved in the production of renewable energy); and
- research and development activities involving dual-use goods and technologies.
4 . The global supply chain has been collapsing worldwide since 2020. How has this impacted businesses in your country and what steps has your country’s government taken to respond?
The global supply chain collapse led to shortages in France, especially of raw materials, electronic components and medicine. Having identified areas of vulnerability, the French government decided to diversify its supply sources to improve its autonomy.
It realised, for instance, that the Cloud computing sector is led by non-European players and therefore launched the “GAIA-X project” with Germany to try and facilitate access to the market for various other Cloud computing operators.
The Government also aimed to increase the production of strategic goods on French territory, through its “France Revival” plan, which provides support to French companies. It hoped to reduce France’s industrial and technological dependency on non-European countries in the following sectors: health products, agri-food, critical inputs for industry, electronics and telecommunications. A paracetamol manufacturing facility will, for example, be repatriated to France by 2024, which will reduce Europe’s dependency on the international market by one third.
Increasing stock for certain key products was also seen as essential, and, since 30th March 2021, the French government requires operators of medicine and medical devices that are intended for the French market to hold a certain amount of stock.
5 . In M&A transactions as well as joint ventures in your country, what are the most critical issues foreign investors must evaluate prior to contemplating a transaction?
Prior to contemplating a transaction, foreign investors should:
- Check if the contemplated transaction could require prior authorisation from the French MOE. A preliminary enquiry with the MOE can be launched very early on in the investment process, even before a letter of intent is signed. While it will not shorten the investment application procedure itself, knowing in advance whether prior authorisation will be necessary should allow investors to save time by compiling information early.
- Verify whether there will be a requirement to inform and consult the employees, any trade union or other internal employment organisation within the French target company, in connection with the contemplated transaction.
- Comply with EU or French antitrust regulations: if the thresholds specified in the relevant law are met, the French (or European, depending on the transaction) Competition Authority must be notified prior to the transaction, to avoid incurring fines.
6 . What is the best strategy for acquiring interests in real estate or other tangible property in your country? Is this more difficult for foreign investors?
In France, the services of a Notary are required to register any purchase, lease or mortgage over real estate. If the target company owns significant real estate, it would be advisable to instruct a Notary to investigate and/or certify the title to the property.
Clients acquiring real estate are often advised to do this through a corporate structure rather than directly, which can give both protection from liability and flexibility in any subsequent sale process. There can also be tax and registration duty advantages.
Depending on the nationality of the foreign investor, opening a bank account and completing a KYC check may take time and potentially slow down the investment process. Documents evidencing the origin of funds should be compiled early.
Non-French speaking foreign investors would be well advised to use advisors who are bilingual to assist them in the investment process, as French civil servants are unlikely to speak another language than French.
7 . What laws or regulations exist in your country to protect data exchange and privacy, and is the protection of intellectual property challenging for foreign investors?
In France, the main legislation governing data protection is Regulation (EU) 2016/679 that came into force on 25th May 2018 (the GDPR), and the French Data Protection Act.
The following laws also deal with data protection in France:
- Directive 2022/58/EC (as amended by directive 2009/136/EC), the “ePrivacy Directive”, implemented under French law in 2004;
- Directive 2016/680 on the processing of personal data by competent authorities for the purpose of the prevention, investigation, detection or prosecution of criminal offences or the execution of criminal penalties, implemented under French law in 2018;
- Articles L.34-1 et seq. of the post and electronic communications Code; and
- Articles 226-16 et seq. of the French criminal Code on criminal sanction and fines for infringement of an individual’s data protection rights.
Trademarks and patents can be registered with the French National Institute of Industrial Property. All procedures relating to industrial property rights are dealt with online, making processing more efficient and allowing applicants to track the progress of their applications in real time.
The French data protection authority (CNIL) and the authority responsible for competition and consumer law (DGCCRF) ensure that the various stakeholders comply with data protection regulations, and can impose sanctions for non-compliance.
The robustness of these laws and the sanctions applicable in case of infringement, provide foreign investors with the certainty that their IP rights are well protected.
8 . Describe the most common legal structures used by foreign investors when doing business in your country.
There are many different types of companies in France (both civil and commercial) and the choice of legal structure determines the structure and terms of the transaction. The most common types of companies used by foreign investors are the following:
- The société par actions simplifiée (SAS) which is the most standard form of entity for private companies. It is possible for it to have only one shareholder, and the minimum share capital required is just EUR 1. An SAS can operate in a variety of ways, and its by-laws can be tailored to meet specific business needs. For instance, the management structure can vary from having just one director, to having a more traditional governing body, such as a board of directors. Importantly, no share certificates are issued in an SAS or in an SA. Instead, shareholders and shareholdings are registered in the shareholder accounts and share transfer books, which are usually kept by the company itself. Transfers of shares are implemented by way of signature of a transfer form and recorded in the share transfer books.
- The société anonyme (SA). This is the appropriate form for a public (i.e., listed) company, and requires a minimum of two shareholders and a share capital of at least EUR 37,000. An SA can only be managed either by a CEO and a board of directors, or by an executive committee and a supervisory board. The operating and management rules of an SA are strictly defined in the French commercial Code.
- The société à responsabilité limitée (SARL) (private limited liability company). Traditionally, this type of company was used mainly by entrepreneurs. Its shares are known as interest shares (parts sociales). The identity of the shareholders is available to the public as their names appear in the by-laws, which must be filed at the Commercial Registry. A change of shareholder therefore usually entails amending the by-laws. Transfers of shares to third parties are restricted and require the prior approval of the shareholders (clause d’agrément). When an individual purchases shares in an SARL, the consent of their spouse may be required, depending on their matrimonial regime.
9 . What are the most attractive opportunities for foreign investors in your country at this time?
According to the 2021 EY Attractiveness Survey for France, the logistics domain is proving attractive, as it is driven by the boom in the e-commerce and health sectors, especially since the COVID-19 crisis.
Investing in France in sectors linked to the ecological transition could also be attractive to foreign investors. The French government intends to roll out tax breaks and other incentives to encourage companies and individuals to transition to greener energy and will ultimately adopt legislation that will make such transitions compulsory.
Projects relating to manufacturing could also present attractive investment opportunities for foreign investors, for many reasons. The French labour force is highly skilled and productive, tax relief is available to companies that invest in research and development (called Crédit d'Impôt Recherche), and the government provides young and innovative firms with certain exemptions from social security contributions. The country’s infrastructure is well developed, allowing for the smooth shipping of raw materials and goods produced, and movement of people, both domestically and internationally. France being the second largest consumer market in Europe, domestic demand for manufactured goods would be high.
Healthcare is currently another attractive industry to invest in. International investment in this sector has grown, and France is the European country that received the most investment in healthcare in 2020. Moreover, in 2021, the number of foreign investment projects in the French pharmaceutical industry was up by 123% compared to 2019, illustrating the boom in the industry. Importantly, the French government will invest close to EUR 7 billion as part of its “Health Innovation 2030” strategy, to foster innovative investment in healthcare, and also plans on making the process of reviewing and authorising clinical trials and granting market access, more competitive and predictable. It will also support industrial investment in the sector, with the aim of making France a leader in health-tech. According to 2019 OECD statistics, France is ranked first among OECD countries in terms of access to healthcare, making it an attractive market for foreign pharmaceutical companies.
Finally, the French Ministry for Ecological Transition aims to increase domestic production of materials used in the electric mobility and renewable energy sectors in particular, to increase France’s independence. To do so, it will invest extensively to help companies produce such products on the French territory, so investment in those sectors could be promising.
10 . Do specific laws or mechanisms exist in your country to protect foreign direct investors?
France has signed bilateral investment agreements with 115 countries, which provides foreign investors from those countries with an additional level of protection, on top of their commercial contracts, in relation to government policies that could impact their activities. In practice those agreements protect foreign investors against unfair or inequitable treatment, such as, for example, arbitrary expropriation by the host country.
Foreign investment in France is also protected thanks to France’s strict anti-corruption laws. The severe penalties inflicted in case of breach of the provisions act as strong deterrents. For instance, the law “Sapin II” introduced on 9th November 2016 relating to transparency, modernisation of the economy and the fight against bribery, created the “French Anti-Corruption Agency”. It helps prevent and detect acts of corruption, extortion, misappropriation of public funds, and other related misconduct, with significant financial sanctions in case of breach.
Foreign investors in France also benefit from the country’s robust legal framework to protect and enforce their IP rights. For instance, copyrighted works in France are protected during the author’s life and for 70 years after their death, whereas the length of the protection offered under the Agreement on Trade-Related Aspects of IP Rights (ADPIC) is just 50 years after the death of the author. Similarly, a registered trademark is protected for 10 years under French law, as opposed to only 7 years under ADPIC.