Purporting to protect France’s strategic interests that the French government made use of its power to control foreign investments by blocking, on 18 December 2020, the takeover of the French company Photonis – specialized in optronic defence technologies – by the American conglomerate Teledyne. The French procedure, in principle confidential, was made public in the context of a proceedure before the US Securities and Exchange Commission (SEC).

This blocking is the final act of a backstage procedure: At the end of July 2020, five months after Teledyne’s first authorization request to the French Ministry of the Economy and Finance, the following conditions had been imposed by the Ministry, (i) the taking of a 10%minority stake  in Photonis by the French sovereign investment fund Bpifrance, accompanied by a veto right regarding the operations and management of Photonis’ European businesses in France and the Netherlands and (ii) the establishment of an internal security committee including representatives of the French Ministry of the Armed Forces and the French Ministry of the Economy and Finance, who would also have veto rights and would filter information in order to limit the transfer of strategic data to Teledyne.

In return for a substantial purchase price reduction, Teledyne had accepted the imposed conditions, but the French government finally put an end to the acquisition – the first such case to be made public.

The blocking of the above-mentioned takeover of Photonis illustrates the move towards a strengthening of the protection of French companies from non-European investors, even when they are close economic partners of France such as the United States or Canada.

Most recently and in the same logic, on 13 January 2021, the French Minister of Economy, Bruno Le Maire, publicly declared his hostility to the take-over the French supermarket chain Carrefour by the Canadian Couche-Tard, arguing that the transaction would put at risk availability of essential foodstuff in French supermarkets and that the Ministry of Economy had the power to prohibit the transaction, precisely due to the recent broadening of the scope of French foreign investment control, which now also includes food security (see below).

This political declaration came as a surprise to involved actors and market specialist. For now, it seems to have put an abrupt end to the takeover discussions at a very early stage.

As a matter of principle, foreign investments in France may be conducted freely. However, a prior authorization requirement limits investments in so-called sensitive sectors, namely, on the one hand, activities likely to affect public order, public security or national defence interests (which are all very vast concepts) and, on the other hand, research, production or sales of weapons, munitions, as well as explosive powders and substances.

The French Monetary and Financial Code (Code monétaire et financier) lists eleven activities falling within the scope of authorization requirement. In addition, activities relating to infrastructure, goods or services that are essential to the preservation of national interests in ten economic sectors and research and development activities relating to either critical technologies or dual-use items and technologies, both civil and military, can be controlled.

The prior authorization requirement is subject to the Ministry of the Economy and Finance assessing three distinct criteria: the nationality of the investor, the nature of the investment  (e.g. acquisition of shares or of a business) and the activities concerned by the investment. It should in particular be noted that any change of control over a French target, including indirect and outside of France, falls within the scope of the control requirement. Regarding the investor itself, the procedure now also requires the investor, in the interest of protecting sovereignty, to disclose its relations to foreign States or public bodies. If the Ministry of Economy and Finance considers that the implementation of conditions to the investment is not sufficient to ensure the preservation of national interests, it may refuse to grant the authorization. In case of an unauthorized investment subject to a prior authorization requirement very significant fines can additionally be imposed upon the investor.

French foreign investment control has recently been further strengthened, within the context of European Regulation 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the European Union, entered into force on 11 October 2020.

The conditions of the prior authorization requirement were indeed modified, at first by the French Law n°2019-486 of 22 May 2019, generally referred to as the “Loi Pacte”, and as of 1 April 2020 by the provisions of Decree n°2019-1590 and the implementing Ministerial Order of December 31, 2019, which broadened the scope of application and modified the procedure, now structured as an initial review period lasting up to 30 working days and, if necessary, an in-depth review period lasting up to 45 working days, similar to phases 1 and 2 of merger control procedures. Finally, the Ministry’s lack of reply within this time limits for each phase of the procedure, is deemed to be a rejection (and no longer a tacit approval) of the prior authorization request.

This tightening of the control was achieved not only by lowering the holding threshold triggering the control of extra-European investments in France from 33.33% to 25%, but also by including new sectors in the scope of application, such as – without being exhaustive – print media, space operations, food safety, energy storage and quantum technologies, and then in April 2020 biotechnologies, added to the list of controlled sectors in the context of the sanitary crisis. Also in April 2020, in the context of the sanitary crisis, the threshold for acquisition of shareholdings subject to the regularisations was temporarily lowered to 10% for listed companies. This measure, which was due to expire on December 31, 2020, has now been extended until December 31, 2021.

Finally, the coercive powers of the Ministry of Economy and Finance have been strengthened. The Ministry now has the power of injunction against the foreign investor, which can be accompanied by a penalty of up to € 50,000 per day of non-compliance.

French M&A transactional practice already takes into account foreign investment authorization processes for several years now. With the entry into force of the new rules, an increasingly wide range of sectors – and therefore M&A transactions – are (or may be) subject to the regulations. Moreover, the opposition to the Photonis takeover and most recently the political opposition to the Carrefour take-over are a reminder that the prohibition of a transaction is not purely theoretical.

It is therefore all the more important to anticipate and consider the time periods of the authorization procedure in the timeline of a transaction. Thus, as part of divestment process, the seller may request the Ministry of the Economy and Finance to review the target’s activity at the outset of the transaction, possibly allowing the parties to complete the transaction without delay related to an additional condition precedent, if the target’s business does not fall within the scope of the control.

In the most sensitive cases, it is essential for the seller to minimize transaction realization risks linked to possible conditions imposed by the Minister of the Economy and Finance, in particular by means of so-called “hell or high water” clauses (obligating the purchaser to accept all conditions). On the other hand, it is in the buyer’s interest to retain the flexibility to renegotiate the purchase price in case conditions profoundly modify the economic rationale of its investment.

Finally, it can be expected that recent developments will favour (at similar proposed purchase prices) European and particularly French candidates in open bid processes for targets with a sensitive activity, as sellers are likely to want to avoid realization risks.