Control of foreign direct investments in France (FDI) has been steadily tightened since 2014. The provisions of Articles L. 151-3 and R. 151-1 et seq. of the French Monetary and Financial Code (CMF), as supplemented by the Decree of December 31, 2019, organize this national screening mechanism based on the prior authorization of certain investments in sectors and activities considered sensitive.
In 2022, of the 131 FDI authorized, 70 were conditionally authorized, not without question as to the compatibility of these commitments with the free movement of capital and company law.
1. The filtering of FDI justifies questioning its compatibility with European requirements, as the European Commission or the Court of Justice is likely to consider it too restrictive. Moreover, it is by no means certain that all commitments imposed by the Minister of the Economy on the foreign investor in order to obtain authorization will pass the proportionality test of the Court of Justice of the European Union (CJEU).
The control of FDI in France is triggered when three cumulative conditions are met:
i. The investor is deemed a foreign investor within the meaning of Article R. 151-1 of the CMF, i.e. any individual of foreign nationality or not domiciled in France, as well as any entity governed by foreign law, or by French law if controlled by persons or entities of foreign nationality;
ii. The investment falls within the scope of Article R. 151-2 of the CMF, i.e. the investor would (i) acquire control of an entity governed by French law or an establishment registered in France, (ii) acquire all or part of a branch of activity of an entity governed by French law or (iii) for non-European investors only, exceed the threshold of 25% of the voting rights of an entity governed by French law (this threshold is reduced to 10% if the shares are admitted to trading on a regulated market); and
iii. The investment is to be made in a sensitive sector, i.e. one listed in Article R. 151-3 of the CMF, which includes defense, security of information systems, protection of public health, food safety or the continuity of energy or water supplies.
2. Do the commitments imposed on investors always comply with company law?
When authorizing an FDI, the Minister of the Economy may attach conditions (the Commitments), the compliance of which with company law raises questions. Here are a few examples to illustrate this point, which could give rise to an interesting debate before an administrative judge hearing an appeal against the Minister’s decision.
- Governance and decision-making
The compatibility of Commitments imposed by the Minister may conflict with the voting rights of foreign investor shareholders, whether controlling or not.
Traditionally, voting agreements between shareholders are disregarded when the direction of the vote is contrary to the company’s interests. In principle therefore, shareholders cannot be blamed for voting in a way that is in the company’s interest, but contrary to their voting commitments. Thus, when the investor commitments, in line with the interests of the State, are in conflict or contrary to the company’s corporate interests, the situation may become insoluble for the investor, a fortiori when they are the controlling shareholder. Company law requires a shareholder to vote in accordance with the company’s interests, while the State is contrary to these interests. Sometimes, an abuse of majority or minority voting rights can be detected, depending on the investor’s shareholding. An abuse of minority voting rights could appear, if the investor prevents the adoption of a decision necessary to the survival of the company. An abuse of majority could be qualified, if the majority investor takes decisions contrary to the company’s interests that favor him, notably solely to respect his Commitments.
In relations between shareholders (or directors), the Commitments, which are sometimes very restrictive and may even involve proposing resolutions, can be a source of conflict that is detrimental to the company’s operation. They may be exacerbated by the confidentiality of the Undertakings, making it difficult for the investor to justify the positions they take (in relation to the State’s interests) to their co-shareholders or co-directors. This situation may also clash with the logic of cooperation and transparency inherent in company law. In the event of paralysis, this disagreement caused by the commitments of certain shareholders may lead to an extreme solution: dissolution of the company, as provided for in article 1844-7, 5° of the French Civil Code.
- Right to information
Amongst the Commitments, the French State may decide to limit the investor’s right to information (restriction of access to certain legal, commercial, financial or R&D information, etc.). However, company law provides for the transmission of information to shareholders. These include annual and ongoing information, as well as management expertise. These limitations are difficult to reconcile with the right to information, which is an essential element of the political rights of associates, enabling them to exercise their voting rights in an informed manner in the interests of the company.
- De facto management
Lastly, when the State imposes commitments in the form of obligations to do or not to do, which in certain cases can even take the form of very specific management obligations (investments, employment, etc.), these obligations can lead to the foreign investor being qualified as a de facto manager when they independently carry out management acts or interfere in the management of the company. Such interference may, in particular, create an appearance for the benefit of third parties, and thus require the investor to pay company debts. Hence de facto management can lead to the investor being held personally liable. And, in the event of insolvency proceedings revealing insufficient assets, the investor’s personal liability may also be incurred for mismanagement.
In this case, it is the investor who bears the brunt of the public interest requirements dictated by the Minister of the Economy. This issue is closely monitored by investment funds, which are scrupulously careful not to be characterized as de facto managers.
*Trainee Marie Soriano also contributed to this article.
[[i] ] Fiches d’orientation, Investissements étrangers – Juillet 2023, Dalloz ; R. Dalmau, “Tentative de rachat de Carrefour : Bruno Le Maire seizes his power to control foreign investment”, Le club des juristes, 1er feb. 2021.
