In response to an evolving geopolitical context, from the invasion of Ukraine to Covid-19, FDI screening regimes have proliferated in Europe over the past months, and regulators are getting tougher on certain investments. France had already refused to authorise an investment in a target active in the military sector in 2020. This new decision comes just a few months after France strengthened its FDI regime.

Overview of the decision

On Friday 6 October 2023 the French Ministry of Economy announced that the government would issue a formal decision whereby it is rejecting the authorisation request submitted by a U.S. investor to acquire two French companies, which are currently owned by a Canadian company and design and manufacture valves for the nuclear, petrochemicals and aeronautical sectors.

Despite their small size, both companies have less than 100 employees, these companies are of strategic importance to the French government. Not only are they operating in a “sensitive sector”, but also the French companies sell their products to French strategic entities, such as France’s flagship submarine and aircraft carrier manufacturer, and several French nuclear power plants.

"The proposed commitments were not sufficient to reduce all the risks associated with the acquisition” (French Ministry of Economy)

This decision follows months of negotiations between the U.S. investor and the French government around potential conditions of an authorization. The French Defence Ministry had already stated in May they were not in favour of authorising the takeover. The French Ministry of Economy have justified its decision by pointing to inadequate guarantees provided by the U.S. investor in relation to the concerns raised by the government. Among these concerns were export restrictions that the U.S. government could have imposed in the future pursuant to the International Traffic in Arms Regulations (“ITAR”).

French FDI regime

France’s FDI regime targets acquisition by a non-French investor of French entities, including subsidiaries and branches located in France, whose activities fall within the scope of "core strategic activities”. The regime was among the first regime to be introduced in Europe, and has since been strengthened several times over the past years to extend its scope.

The legal basis of this regime are articles L. 151-3 et seq. and R. 151-1 et seq. of the Monetary and Financial Code. The French FDI regime complies with Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, but goes further than the EU Regulation. The Treasury Department of the Ministry of Economy (Direction générale du trésor “DGT”) published a guidance in September 2022 and FAQs in December 2022 (available in English and in French), which explain the main steps of France’s FDI screening process and clarifies certain definitions.

Investors shall file a notification to the DGT. Failure to notify the DGT may result in a penalty and is a criminal offence. Closing the investment without FDI clearance is prohibited.

In 2022, 131 transactions were authorised by the Ministry, of which 70 (53%) were subject to conditions to protect national interests.

Impact of France’s decision on the takeover

The U.S. investor announced they would not proceed with the takeover given the decision of the French government.

Practical takeaways for foreign investors

• More than ever, investors should adopt an FDI screening strategy and assess where the target’s activities are exposed to political discussions. This strategy should include among others:

  • Including an FDI review in the target due-diligence.

  • Approaching and negotiating potential conditions with the DGT and other impacted State’s departments early on in the process.

  • Including FDI clauses in transaction documents.

• Investors should pay particular attention to the sensitive nature of the activities of the target’s subsidiaries for local governments. Even a small subsidiary may be viewed as critical by a government and leads to conditions.