France: A Practical Perspective on How to Deal with the FDI Regime in a M&A Transaction in France

The foreign direct investment (FDI) regime in France, initially focused on core strategic sectors (defence, weapon production), has significantly evolved over the last 10 years. It is now a key component of how M&A transactions are conducted in France, from their preparation to their negotiation.

1. Preparing the Transaction: Conducting the FDI Analysis

The latest modification of the regime, adopted as recently as January 2024, represents the last stage in a progressive evolution leading to a control organized around three core steps: (i) determining if the contemplated transaction is subject to the regime, (ii) assessing if the entity completing the transaction is considered a foreign investor, and (iii) verifying if the target operates in one of the sectors listed by the legislation. While the first two components are relatively easy to analyze, the last one depends on several factors and cannot necessarily be assessed unilaterally by the parties to the transaction.

Indeed, the sectors concerned by the regime fall into three categories. The first category covers sectors that are sensitive by nature, such as defense and national security. The second category generally includes public health, integrity of essential infrastructure (water, transportation, energy), and food safety. The third category relates to R&D activities applied to specific technologies. When the transaction concerns the first type of activity, the analysis is binary: if the activity falls within the scope of these sectors, it is subject to control. For the second and third types, the analysis is more challenging because the activities are not considered sensitive by nature, and it is uncertain how the FDI authority (French Minister of Economy) will assess them. As a precaution, investors generally decide to submit an authorization request when transactions involve these sectors.

Additionally, a sector not considered sensitive at a given time may become so; the FDI authority will take into account the political and economic context, which may impact the sensitivity test. For instance, the war in Ukraine affected transactions in the energy sector, just as the Covid crisis did in the health sector. Therefore, it is important not to rely on a previous decision rendered on a given sector when assessing the need to submit a request for a new transaction, even if it is in the same sector.

We also recommend all advisors to ensure that the analysis is conducted in all jurisdictions where the target group is active.

1. Completing the Transaction: Taking the Constraint into Account

Given the increasing number of transactions falling within the regime’s scope, considering FDI requirements in deal preparation and negotiation is crucial. The need for authorization impacts deal certainty, which ranks immediately after price in the list of sellers’ concerns.

Once a request is submitted, the process consists of two phases, with the second phase conditional upon the response at the end of the first. During the first 30-business-day period, the FDI authority will review the request and decide whether the transaction (i) does not fall within the regime’s scope, (ii) falls within the scope and is authorized without conditions, or (iii) falls within the scope and requires further examination to determine if authorization depends on accepting conditions. If the response is the third type, the FDI authority has 45 business days to conduct this additional examination and, if necessary, formulate conditions. These conditions may be negotiated by the investor.

A first recommendation, when acting on the sell-side, is to submit a request for a prior review (demande d’examen préalable), an option offered by the French regime. It is generally not advisable to go through this on the buy-side when the deal clock is already ticking; however, preparing for a sale is a long process, and obtaining confirmation from the FDI authority that the sector in which the target group operates is not considered sensitive and therefore does not require authorization can save time, put all bidders on an equal foot regardless of their nationality and therefore ensure that they focus on price negotiations.

Once the deal has really kicked off, the potential purchaser will need to provide comfort to the seller regarding their ability to manage deadlines by aligning them with other regulatory deadlines (notably merger control) to avoid wasting time, and by collecting the required information early in the process to submit the authorization request as soon as possible.

Legal advisors have long been accustomed to negotiating merger control-related conditions in a share purchase agreement. The approach to the FDI-related condition precedent will be similar: sellers will request an equivalent to a “hell or high water” approach, expecting bidders to accept any and all conditions requested by the FDI authority. Bidders, depending on their appetite for the transaction and its competitive nature, will try to negotiate what they consider acceptable commitments.

Since precedent decisions are not publicly available, legal advisors will rely on their experience with transactions requiring authorization under the FDI regime to navigate these constraints. Fortunately, the French FDI authority has made significant efforts in recent years to increase transparency in their processes and guidelines and is keen on consolidating a stable regime to maintain France’s attractiveness for foreign investors.

In 2023, 255 decisions have been issued by the FDI authority in France with respect to requests for authorizations[1]. 135 transactions have been authorized[2], among which 60 were cleared subject to conditions.

If you need more information or further guidance in this area, please contact Carole Bodin.

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[1] Source : Foreign Investment Screening in France – Annual Report 2023 (83865cf0-0ecd-4684-badf-3e39fa6bb833 (economie.gouv.fr))

[2] This does not necessarily mean that all other decisions were refusals – they may be confirmations that the transaction did not fall in the regime’s scope. The authority does not communicate on the number of refusals.