by Roland Montfort

Member of the Paris, Brussels and New York Bars

 

Foreign – Investments – Regulations – Administrative filings – Statistical filings – Treasury – Bank of France

 

 

I.  Introduction:

 

A Decree (No. 2003-196) and Ministerial Order of March 7, 2003, published in the Official French Legal Journal (journal officiel) on March 9, 2003 (together, “New Regulation”), both immediately effective, have significantly modified the filing requirement regulations applicable to foreign investments in France (as well as to French investments abroad).  These texts have together had the effect of repealing Decree No. 89-938 of December 29, 1989 and the Ministerial Order of February 14, 1996, whose drafting was clearly unsatisfactory.  The new texts which are an integral part of French regulatory law and public order and which apply equally to persons established in other Member States of the European Union, come within the scope of a long French regulatory tradition (regulation of exchanges, etc.) noted for a progressive relaxation. We shall not address in this article the “prior authorization regime,” which is applicable on a rather exceptional basis, broadly speaking, to investments realized in certain particularly sensitive sectors (e.g., activities tied to national defense) that has been the object of minor modifications (e.g., elimination from the list of the marketing in France of certain foreign securities, lengthening of the waiting period for a response from the Minister of the Economy).

 

It is important to note initially that the New Regulation may be applied equally to investments carried out in France by French entities (e.g., the local investment vehicle of a foreign investor) or by French residents (e.g., where the investment is realized in France through a special purpose vehicle established outside of France).

 

II.  Summary of the New Regulation:

 

The key principles of the New Regulation are as follows:

 

1.  Although the texts are especially imprecise in their terminology, the term “foreigner” relates, in fact, to the notion of residence (the criteria being the “principle center of interests”) and not that of nationality that continues to produce no consequence in the matter; in addition, indirect shareholdings are largely covered by the regulation and thus the terms “direct foreign investments” used across the regulation are to a great extend improper.

 

2.  Foreign investments in France remain “free” (subject to the prior authorization regime in certain sectors, as already mentioned in the introduction): this relates to the principle of free financial relations between France and other countries; notwithstanding, certain formalities are nevertheless required (filing requirements): these take the form either of statistical filings aimed at establishing the French trade balance or of administrative filings aimed at “assuring the defense of [French] national interests” (Article L 151-2 of the French Commercial Code).

 

3.  The filing requirement regime is, in fact, composed of the following different sub-regimes that function independently from one another, which can provoke in certain cases a “straddling” between the various filing requirements where a single transaction may trigger several filing requirements:

 

- “administrative” filings must be carried out with the Directorate of the Treasury (Minister of the Economy) (Article 6 of the Decree);

- “statistical” filing requirements must be carried out with the Bank of France (in the instances set forth in Articles 2 and 4 of the Decree) or with the Directorate of the Treasury (in the instances set forth in Article 5 of the Decree).

 

4. The New Regulation also covers investments carried out abroad by French residents abroad as well as in certain instances already mentioned above, investments carried out in France by French residents or by French entities.

 

5. There exist two distinct thresholds of possession beyond which an acquisition of capital (or voting rights) by non-residents in a French company is qualified, pursuant to the New Regulation, as a “direct foreign investment:”  10% for purposes of statistical filing requirements (Bank of France and the Treasury) and 33.33% for administrative filing requirements; the New Regulation makes clear that these thresholds are not absolute and that the administration may retain different ones in order to take into account the reality of the control being exercised on the French target concerned.

 

6. Concerning the 33.33% threshold retained for administrative filing requirements, it must be calculated at the close of the investment transaction at stake, on the basis of the global shareholding in the target company, even if the current transaction only concerns a minor percentage of capital or voting rights: for example, a transaction for only 20% or even for only 1% of capital or voting rights in the French target will be covered by the New Regulation if the percentage held by non-residents before the close of the new transaction, is higher than 13,33% in the first case and 32,33 % in the second.

 

7. All transactions between affiliated companies, such as the granting of loans or substantial warranties, the purchase of patents or licenses, the acquisition of commercial contracts or the contribution of technical assistance, that leads to actual non-resident control of a French company, or further, certain real estate investments or transactions of simple investment, can equally be qualified as foreign investments in the sense of the New Regulation and therefore be covered by its provisions.

 

8.  The administrative filing requirement regime contains a series of exceptions, such as for example, the incorporation of a French company, certain extensions of French companies’ activities or increases in the foreign ownership thresholds, certain intragroup transactions, certain investments made in companies active in certain industrial sectors (restaurants, hotels, hospitals, etc.).

 

9. Certain filing requirements are triggered during the live of the foreign investment; consequently the New Regulation extends beyond the acquisition stage, for example, upon a change of control that takes place in a foreign-based acquisition vehicle that holds a shareholding in a French entity or upon the resale by the foreign investor of its investment in the French target; the rather large scope of the New Regulation will in turn require a constant monitoring to achieve strict compliance.

 

10.  Administrative filings with the Directorate of the Treasury must be carried out as  “at completion of the first event that materializes the agreement between the contracting parties”, in other words, as early as at the time of signing any investment protocol, binding term-sheet or acceptance of a binding offer letter, etc. thus well in advance of the “closing” of the transaction; the statistical filings with the same Treasury  must be carried out “at the time of the completion of the transaction,” presumably, at closing; finally, filings with the Bank of France must be carried out within 20 days from the date of payment.

 

11.  The regime of applicable sanctions, in particular, for defaulting on complying with statistical filing requirements is rather severe since Articles 9 of the Decree and L 165-1 of the Monetary and Financial Code incorporate the contents of Article 459 of the Customs Code that provides for significant sanctions such as jail sentence, loss of certain civic rights, publication of condemnation, etc.

 

III.  Critique of the New Regulation:

 

The New Regulation has the dual merit of clarifying the situations in which a filing is mandatory and increasing the holding threshold by foreign companies or non-resident persons in the capital or voting rights of listed French companies above which an administrative filing is required (33.33% instead of 20% in the predecessor regulation).

 

Unfortunately, the New Regulation is, in our opinion, still clearly unsatisfactory for three principle reasons:

 

- first of all, the scope of the “statistical” filing requirements, in view of establishing the French trade balance with the Bank of France (Articles 2 to 4 of the Decree) and those with the Direction of the Treasury (Article 5 of the Decree), is considerably enlarged, notably by the creation of new filing requirements, which shall have the effect of provoking a multiplication of filings especially upon the occurrence of complex acquisition transactions; consequently, practitioners will have to try to simplify, as much as possible, the manner by which compliance with all applicable legal requirements can be achieved, among others, by favoring the spirit of these provisions over their exact letter (for example, upon contribution of securities that were issued by a French entity to the capital of a foreign entity or reciprocally, upon contribution of securities that were issued by a foreign entity to the capital of a French entity); it should be possible, for example, to regroup in one single filing the disclosure of various transaction steps or, alternatively, a series of transactions linked one with another, that would otherwise give rise, if they were each considered on an isolated basis, to numerous filings; it should be equally possible to establish a single filing in the name of a legal entity and to have an authorized agent (for instance, an attorney acting as counsel to said entity) signing the filings instead of preparing various filings in the name of each shareholder of that legal entity;

 

- further, the New Regulation is as inadapted as its predecessor to the timing constraints of today’s transactions, insofar as the regulation requires that a certain amount of confidential information be supplied to the authorities very early on in the acquisition process, even if, for example, the transaction is subject to various conditions precedent; consequently, it will be necessary to proceed with certain filings during the preparation stage of the contemplated transaction (i.e., upon the signature of a binding offer letter, term-sheet, time line, etc.) in order to meet the rather strict filing deadlines;

 

- finally, the vague and imprecise drafting of the New Regulation, renders necessary, in a certain number of cases, to initiate some preliminary informal discussions with the civil servants at the relevant administrative services in order to be assured as much as possible of their own interpretation of such-and-such provision: furthermore, where doubt subsists, recourse to preliminary written question might turn out to be necessary; such a recourse to the civil administration’s assistance presents the major inconvenience (aside from questions of confidentiality) of losing time precisely at the moment where the different actors participating in the transaction cannot spare it; thus, it will be necessary to sometimes arbitrate between the degree of legal certainty and the oftentimes “time-crunched” requirements of a transaction’s calendar.

 

We are delighted to observe, however, that beyond an apparent formalism, the various personal in charge at the Bank of France and the Treasury, who are generally available and competent, are adopting an essentially pragmatic approach once they are presented particular facts: for example, the Bank of France satisfies itself with responses given on  a pre-printed form (these forms are, in reality, identical to those used under the prior regulations and named “account-summary”) whether upon realization of foreign investments in France, French investments outside of France or the liquidation of either of these types of investments.

 

IV. Example:

 

Certain effects of the New Regulation can be illustrated by the following example:

 

A non-French investor (“Acquirer”) entered into on October 10, 2003 a binding term-sheet with the shareholders of a French target company - that is moreover already up to 30% owned by non-resident shareholders- (“Target Company”) by whose terms (i) he would acquire on March 10, 2004 at the latest, 10% of the capital and voting rights of the Target Company and (ii) the vehicle put in place by the Acquirer for completing the acquisition is a French company (“NewCo”) in the process of incorporation.

 

The filing requirements stemming from the New Regulation should be as follows:

 

a. Further to the signature of the term-sheet, that is on  October 10, 2003:

 

- the acquisition by NewCo of 10% of the capital of the Target Company will amount to a transaction carried out by NewCo in a resident company whose capital and voting rights, after the transaction, will be owned, whether directly or indirectly, in excess of 33.33% cumulatively by foreign entities or persons who are physically non-residents: the transaction should, consequently, trigger an administrative filing requirement with the Directorate of the Treasury in the name of NewCo (art. 6 and 1.4, II, d) of the Decree);

 

b. Upon the incorporation of NewCo by the Acquirer, a specific fling may be required depending on the amount of NewCo’s share capital (art. 5 of the Decree and art. 5 of the Order);

 

c. Within 20 working days after the closing date (that is, March 30, 2004)

 

- the shareholding of the Acquirer through NewCo in the Target Company, being at least of 10% of the share capital or voting rights, should qualify as “direct foreign investment in France” for the purposes of statistical filing requirements and should equally trigger a separate filing with the Bank of France (art. 4,1 and art. 1,4,I of the Decree);

 

d. After completion of the acquisition, the following potential transactions will give rise to new filing obligations upon completion date (in case of filing with the Treasury) or within 20 working days from such date (in case of filing with the Bank of France):

 

- the sale by NewCo of its shares in the Target Company or the sale by the Acquirer of its shares in NewCo to a third party acquirer, should trigger statistical filing requirements at the level of  NewCo or at that of the Acquirer, with the Directorate of the Treasury (art. 5 of the Order) as well as with the Bank of France (art. 4,1 of the Decree), since either of such sales should qualify as a “liquidation” of a direct foreign investment;

 

- certain modifications at NewCo’s level, e.g., decrease in the percentage of foreign shareholding upon entry of French residents to NewCo’s capital, change in the corporate name or of registered address, should also be reported to the Directorate of the Treasury by a specific filing (art. 5 of the Order);

 

- likewise, a similar recapitalization as immediately above at the level of the Target Company (the effect of which would be to reduce the percentage of foreign ownership in the Target Company’s capital) should trigger a new filing requirement by the Target Company to the Directorate of the Treasury.

 

The application of the New Regulation to situations where French residents would acquire a shareholding in a French target entity through a special purpose vehicle incorporated abroad, would be even more complex:

 

- for example, if NewCo is that foreign special purpose vehicle and the Acquirer is a French investor, a sale of NewCo shares by the Acquirer to a third party acquirer should first give rise to statistical filing with the Treasury on NewCo’s name since the sale, although carried out abroad, will have the effect of indirectly modifying the composition of the share capital of the French Target Company (art. 5 of the Order) in addition to that of NewCo; a second statistical filing with the Bank of France should be required in the above example since the transaction would amount to a sale of a non-resident company (NewCo) by a resident company (the Acquirer) (art. 4,2 of the Decree); finally, an administrative filing should also be required in the Acquirer’s name since the same transaction will have the effect of modifying the control of a non-resident company (NewCo) itself having a shareholding in the French Target Company (art. 6 and 1,4,IV of the Decree).

 

V.  Conclusion:

 

We anticipate that practitioners in the future will become more vigilant to comply with the various constraints required by the New Regulation and will be advising their clients to respect them strictly, although with a certain pragmatism that is encouraged by the French authorities themselves. It will be necessary, however, to monitor constantly these obligations during the entire lifetime of foreign investments in France or French investments abroad.  It will be crucial to take these constraints into account as at the early stage of the acquisition process then to remain quite reactive, in order to avoid missing the various deadlines set forth by the New Regulation.

 

We also anticipate that informal contacts will become more common with the Directorate of the Treasury and with the competent services of the Bank of France, in order to obtain some assurances in respect of the correct interpretation of the texts which are sometimes drafted in a vague and complex manner, all the more when confronted to complex acquisition structures using for example foreign-based acquisition vehicles.

 

 

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