Regulatory
Restrictions
on
Foreign Investments
Dr. Eyal Chvika
in France
Friday January 13, 2006
Copyright 2005 Paul, Hastings, Janofsky & Walker (Europe) LLP
Table of Content
I.
Introduction
II.
Non Strategic Investment: Declaration
III.
Strategic Investment: Authorization
IV.
Conclusion
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I. Introduction (1/1)
• Foreign investments in France, such as Israeli investments, are subject to regulatory control
by the French Administration: declaration or authorization required according to the type of
investment.
 Non Strategic Investment  declaration
 Strategic Investment  authorization (Statute on 9 December 2004; Decree on 30
December 2005)
• Reason underlying this control: defense of national interest. Political as opposed to economic.
• Restrictions on Foreign investments exist in other countries - Exon-Florio in USA (IBM-Lenovo
transaction).
Issues not addressed:
• Declarations for statistical purposes.
• Some very specific sectors (for example, press industry).
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II. Non Strategic Investment: Declaration (1/5)
NON STRATEGIC INVESTMENTS REQUIRE A DECLARATION
• Definition of non-resident:
 Nationality is not determinative of residency
 For natural persons  residence, principal center of interests, located abroad
 For legal entities  establishments located abroad
List of foreign investments subject to a declaration filed with the French Ministry of Economy (Treasury
Department):
 Foreign direct investments:
- The creation of a new company in France by a non-resident;
- The purchase or acquisition of all or part of a business of a French company by non-resident;
- All operations made in the Capital of a French company carried out by a non-resident resulting in
non-residents cumulatively holding more than 33.33 percent of the share capital or voting rights
of a French company;
- The same operations carried out by a French company, more than 33.33 percent of the share
capital or voting rights of which is held by non-residents;
- All operations such as the granting of loans or substantial guarantees, the purchase of a patent
or licence, the taking over of a commercial contract, or the provision of technical support, when
they result in a non-resident taking actual control (contrôle de fait) of a French company.
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II. Non Strategic Investment: Declaration (2/5)
 Analysis:
a) There is a threshold of ownership beyond which an acquisition of capital (or voting rights) by
non-residents in a French company qualifies under foreign investments regulation: 33.33 percent.
b) Concerning the 33.33 percent threshold retained for 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 percent or even for only 1 percent of capital or voting rights
in the French target will be covered by the French regulation if the percentage held by nonresidents before the close of the new transaction is higher than 13.34 percent in the first case and
32.34 percent in the second.
As a result, the first non-resident investor acquiring 13.34 or 32.34 percent will not have to do a
declaration. However the second non-resident investor is required to declare even though he
holds a minor percentage of capital or voting rights.
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II. Non Strategic Investment: Declaration (3/5)
Foreign indirect investments:
- Operations carried out abroad resulting in a change in the control of a non-resident company
which has a shareholding interest or voting rights in a French company, more than 33.33 percent
of the share capital or voting rights of the French company being held by non-residents.
 Example 1: Declaration Required
35%
Japanese Company
- change in control French Company
 Example 2: Declaration Required
Japanese Company
- change in control -
Non-Resident
5%
35 %
French Company
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II. Non Strategic Investment: Declaration (4/5)
List of foreign investments subject to an exemption, i.e. operations that do not require a declaration:
- creation or expansion of the activity of an existing French company directly or indirectly owned by
non-residents;
- increases in the shareholding of a French company directly or indirectly owned by non-residents,
when such increases are carried out by an investor already owning more than 50 percent of the share
capital or voting rights of the concerned French company;
- subscription to a capital increase of a French company directly or indirectly owned by non-residents,
as long as such subscription does not result in a higher percentage of shares or voting rights held
directly or indirectly by non-residents;
- direct investments carried out between companies part of the same group i.e., companies more than
50 percent directly or indirectly owned by the same shareholders;
- operations with respect to loans, advances, guarantees, consolidation or forgiveness of debt granted
to a French company directly or indirectly owned by non-residents;
- direct investments in French companies involved in real estate activities other than the construction of
buildings to be sold or leased;
- direct investments amounting to less than 1,500,000 euros in French companies involved in the craft,
retail, hotel, restaurant or local services industries, or in French companies exclusively operating
quarries or gravel quarries;
- the purchase of agricultural land.
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II. Non Strategic Investment: Declaration (5/5)
Filing Date: The declaration is usually filed with the Ministry of Economy, Treasury
Department, upon the occurrence of the first of the following events evidencing the parties’
consent to the operation:
- the conclusion of an agreement;
- the publication of a tender offer in cash or in securities; or
- the acquisition of an asset deemed a direct foreign investment in France.
Sanctions: criminal liability (in particular prison, fine).
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III. Strategic Investment: Authorization (1/8)
STRATEGIC INVESTMENTS REQUIRE AN AUTHORIZATION
List of foreign investments subject to an authorization filed with the French Ministry of
Economy (Treasury Department):
 Distinction between European (including European Economic Area) and nonEuropean investors: it is easier for European.
 Operations subject to an authorization:
 Taking control of a French corporation (L.233-3 of the French commercial code)
 Acquiring all or part of a business of a French corporation
 33.33 % threshold (does not apply to European investors)
 Foreign investments subject to an exemption:
- investment carried out between companies part of the same group, i.e. companies
more than 50 percent directly or indirectly owned by the same shareholder;
- Investor already authorized to take control of a French corporation, that acquires
more than 33.33% of share capital or voting rights of this corporation.
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III. Strategic Investment: Authorization (2/8)
 Nature of the strategic activities:
Statute:
- companies participating, even occasionally, in the exercise of public authority;
- companies engaging in activities such as might endanger public order, public safety
or the interests of national defense; or
- companies engaging in research, production or trading of arms, munitions or
explosive powders or substances.
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III. Strategic Investment: Authorization (3/8)
Decree: European and non-European investors face the same strategic sectors but
European investments are facilitated: authorization subject to more restrictive conditions
for European investors as to the strategic sector concerned.
- Money games;
- Private security;
- Pathogenic or toxic agents;
- Interception of correspondence and communications equipment;
- Services rendered within certified evaluation centers;
- Security of information systems;
- Dual technologies (relating to civil and military activities);
- Cryptology;
- National defense secrets;
- Arms, munitions or explosive powders or substances;
- Engineering and supply of equipment contracts to the Ministry of Defense.
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III. Strategic Investment: Authorization (4/8)

Analysis:
a) Israeli companies may be concerned by this new regime of authorization since a lot of
well known Israeli companies act in particular in the technological, high-tech,
pharmaceutical, telecommunication and military businesses.
b) notions used under French Law are still very broad (for instance, public order, public
security) and enable a political review of the investment.
Public Order: The ministry of Economy characterized a threat to public order by taking
into account the behavior of the natural person investor, his honorability, past pardoned
condemnations, and absence of explanation on the origin of the funds, in order to reject
an investment in the movie industry (Conseil d’Etat, 15 April 1996).
National Defense: A company in the automobile equipment sector present worldwide
(Valeo) was considered as a national defense company because an insignificant part of
its turnover came from the construction of an equipment used for French tanks.
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III. Strategic Investment: Authorization (5/8)
Written request:
Prior to making an investment, the investor can by written request question the Ministry of
Economy if the investment is subject to an authorization. This Ministry has two months to
issue a response. If no response is issued within this time period, the authorization is not
deemed granted.
Description of authorization procedure:
 Filing date: The request must be sent prior to the contemplated operation. Upon
receiving the request, the Ministry of Economy has two months to issue a response. If no
response is issued within this time period, the authorization is deemed granted.
 Foreign investment subject to conditions: The Ministry of Economy may subject its
authorization to the fulfillment of certain conditions defined in part by the Decree. The
Ministry of Economy exercise its power in accordance with the proportionality principle.
Indeed, such a process often results in a negotiated settlement between the foreign
investor, the target company and the Ministry of Economy.
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III. Strategic Investment: Authorization (6/8)

The main conditions are:
- Preservation by the investor of the continuity of activities; industrial, R&D,
know-how capacities; securing supplying or execution by the French Company of
contractual obligations relating to public procurement or public safety contracts; interests of
national defense; or
-
Sale of the strategic activity to a corporation independent from the foreign investor.
Example: In January 2004, foreign investment funds (Doughty Hanson) purchased the Saft
Group ("Saft") batteries business from the French company Alcatel. On the grounds that certain
Saft batteries are used for defense purposes, the French Government imposed stringent
conditions to its approval of the sale, including a requirement that:
- the Saft headquarters remain in France, along with all research centers and production facilities
serving French military purchasers;
- in case of relocation, there are penalties to be inflicted on Saft, and criminal liability on the chief
executive of the investment funds (Source Press); and
- certain legal entities of Saft also granted to the French Government a right of first offer in case
of change in control of Saft, that was cancelled within the IPO process and for the future (Source
IPO Documents).
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III. Strategic Investment: Authorization (7/8)
Example (Continued): Saft bought an Israeli company, Tadiran Batteries Ltd ("Tadiran"), in 2000. As a
result of the acquisition of Saft by the investment funds, Tadiran, the Israeli subsidiary of Saft, committed
to the Israeli Ministry of Defense ("MOD"):
- to keep confidential any information relating to batteries orders from the MOD and classified according
to the norms of the Israeli Security Directorate (this was considered as a legal risk factor in the IPO since
Saft can not have access to certain technical and commercial information, and can not disclose it to the
public);
-
that its general manager be an Israeli citizen that went through a very strict security check; and
- any change in control of Tadiran shall be notified to the MOD and is subject to a prior authorization of
the Chief Scientist Office and the Investment Center of the Israeli Ministry of Industry and Commerce.
Saft
French Company
- Change in control -
Doughty
Hanson
100 %
Tadiran
Israeli Company
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III. Strategic Investment: Authorization (8/8)
Reasons why a foreign investment can be refused:
- serious presumption that the foreign investor may commit certain offences (money
laundering, terrorism, drug traffic, corruption); or
- protection of national interests is not assured.
Sanctions:
The Ministry of Economy may impose a range of sanctions for failure to respect the
authorization regime:
-
an investment made in violation of French Law may be enjoined;
- the parties may be required to modify the operation or return to the status quo ante
within a twelve months period, at their own expense;
- pecuniary sanctions that shall be no more than double the amount of the irregular
investment, and have to be proportional to the gravity of the failure, may be imposed by
the Ministry of Economy in case of non compliance with the injunction;
-
criminal liability (in particular prison, fine);
-
nullity of all commitments and agreements if prior authorization was not granted.
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IV - Conclusion
 Be aware of declaration process in case of a foreign investment in France;
 even though the authorization process is often qualified as political, relationships
between Israel and France are good:
a) Israel desk at OSEO – Anvar;
b) Cooperation on a scientific level between Israeli and French Institutions and
Corporations within the European Research Program;
c) Israeli companies find an interest in France as a gate to European Market and Euro
Zone;
d) Euronext (French equivalent to the US NYSE/NASDAQ) is very interested to have
additional Israeli Companies traded on Eurolist / Alternext.
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Contact Information
Dr. Eyal Chvika
Paul Hastings
30, avenue de Messine – 75008 Paris
Tel. +33 1 42 99 04 75
Fax +33 1 45 63 91 49
E-mail : eyalchvika@paulhastings.com
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