France is not immune to the reinforced control throughout the EU resulting from the publication of the European Commission’s guidelines on the protection of Europe’s strategic assets on March 25, 20201 calling on Member States to use all available mechanisms to protect critical health infrastructure and other critical sectors). Building on the significant development of its FDI screening framework in 2018 and 2019, the French government has further broadened its scope to include French biotechnology companies.
1. Overview of the French FDI control regime
FDI in France have been regulated since the promulgation of Law n ° 66-1008 of December 28, 1966 relating to external financial relations, supplemented by successive implementing decrees and ministerial orders.2. In recent years, France has continued to strengthen and expand the FDI control regime. Following the decree of November 29, 2018 and the law of May 22, 2019 (PACTE), a decree and a ministerial decree of December 31, 2019 (i) broadened the list of “sensitive activities”, (ii) refined the concept of foreign investors / investments for European and non-European investors, and (iii) clarified the role of the French Ministry of the Economy by introducing a two-step review process for eligible investments.
The objectives fall within the scope of the control regime when the following criteria are met:
- An investor is considered a foreign investor if he is (i) a natural person of foreign nationality, (ii) a natural person of French nationality not resident for tax purposes in France, (iii) a foreign entity, or (iv) an Entity French controlled by one or more persons / entities mentioned above. Anyone belonging to the chain of control of an entity mentioned in (iii) or (iv) above is considered a foreign investor. As a result, when French investors belong to the chain of control of a foreign investor, their own investment could fall under the rules of FDI screening.
- Target business activities are qualified as “sensitive activities” when they are likely to endanger the interests of national defense, public order and / or public security (eg defense; critical infrastructure such as energy, transport; and R&D in critical technologies such as cybersecurity, etc.)
- The transaction may result in (i) the acquisition of control of a French entity3, (ii) the acquisition of all or part of a branch of activity of a French entity, or (iii) for investors outside the EU / EEA, the direct or indirect holding of 25% or more of the voting rights a French entity (lowered in 2019 compared to the previous threshold of 33.33%); it being specified that investors from the EU / EEA are only exempted from this last provision insofar as their chains of control do not include persons outside the EU / EEA (certain exceptions are foreseen for transactions between affiliated entities)
The review process has also been clarified recently:
- Given the uncertainties over the definition of the “sensitive activities” concerned, foreign investors are entitled to ask the French Ministry of the Economy to assess whether a planned transaction falls within the scope (provided that the negotiation of ‘such an operation is sufficiently advanced)
- The review follows a two-step process, with a full assessment only required when it appears that French national interests need to be protected by prohibiting the investment or allowing it under certain conditions.4
2. Expansion to French biotechnology companies
The ministerial decree of April 27, 2020, supplemented last week by a decree and a ministerial decree dated July 22, 2020, (i) temporarily lowered the screening thresholds for non-EU / EEA investors in listed companies entering into the scope of control from 25% to 10% of the voting rights (this new provision being applicable until December 31, 2020 only), and (ii) permanently broadened the list of “sensitive activities” to include R&D linked to biotechnologies.
Investments in certain activities deemed critical for the protection of public health were already subject to FDI controls and prior authorization due to the nature of their end products. However, investments in their R&D are not in themselves within the scope, the issue of protecting public health being, in this regard, too remote and prospective. While this expansion may appear to only clarify (and not expand) the previous regime (since biotechnology, as long as it is used in the context of a “sensitive activity” (other than biotechnology itself), were already covered by a larger activity.5), this new regulation brings a significant change: biotechnologies are not only the ones you can buy on the market, but also those at the R&D stage.
No legal definition is provided, which means the new scope of filtering is unclear. In the absence of any other directive, one could refer to the OECD definition, ” biotechnology is defined as the application of science and technology to living organisms, as well as their parts, products and models, to modify living or non-living materials for the production of knowledge, goods and services“, Supplemented by an indicative definition based on a list: technologies based on DNA / RNA, proteins and other molecules, cell and tissue culture and engineering, process biotechnology techniques, gene and RNA vectors, bioinformatics and nanobiotechnology6.
In view of the difficulties encountered during the management of the COVID-19 epidemic, the French authorities have most likely sought to strengthen the control of FDI in companies whose activities are linked to research on the COVID-19 vaccine.
Another reason for the expansion of the scope is the unprecedented volatility of the stock markets and the decline in market capitalization at the start of the pandemic. French healthcare companies appeared potentially vulnerable to opportunistic takeovers by foreigners. Although the negative impact on listed companies in this sector (as measured by the CAC Health Care index7) was relatively limited compared to that of French companies in general (measured by the CAC 40 index, i.e. -13% against -27%), a large majority of these companies saw their stock market values fall.
3. Prospects and potential impacts
Broad language and the lack of a legal definition could lead to scrutiny of a remarkable range of businesses, including those whose business is not related to the health sector per se. Such a large margin of maneuver in assessing the scope of compulsory controls can make the prior selection at the initiative of potential investors a systematic feature of any investment in these areas.
The French authorities have long deplored the difficulties encountered by French biotechnology companies in financing their activities and their R&D. Tech companies, and especially biotechnology companies, need pocket funding to grow. It is likely that the uncertainties surrounding foreign investment in French biotech companies will inadvertently affect their funding opportunities and be detrimental to ongoing and future fundraising processes.
The new and broader regulatory environment will require potential foreign investors (and in particular non-EU / EEA members) to navigate an increasingly complex network of regulations. This new constraint could weigh heavily on future venture capital operations in this sector.
However, although its precise impact is not clear, this extension to biotech companies primarily means that the FDI control regime will apply to biotech transactions, which basically means, in a large majority of cases, prior authorizations. rather than bans.
The traditional policy of implementing IDE screening will certainly provide a useful guideline and reference in the near future. At the same time, donors will have to integrate the issues of FDI into their risk assessment when considering French biotechnology companies, whether for an investment or an exit.
2 The resulting regime being codified in Articles L. 151.1 to L. 151-7 and R. 151-1 to R. 153-17 of the Monetary and Financial Code.
3 Pursuant to Article L. 233-3 of the French Commercial Code, “control” is defined as (i) direct or indirect holding of the majority of voting rights, (ii) de facto control, and ( iii) the power to appoint or remove the majority of the officers of the company or of the members of its board of directors. Pursuant to the decree of December 31, 2019, the French authorities may also refer to paragraph III of article L. 430-1 of the French Commercial Code, namely the possibility of exerting a decisive influence on the activity of an entity, including (i) access and user rights over all or part of the assets of the entity concerned, and (ii) contractual and other rights that confer decisive influence over the corporate bodies of that entity .
4 In the latter case, the foreign investor may have to (i) guarantee the sustainability of the activities concerned in France, (ii) ensure that the expertise of the French company is not disclosed to a foreign person, ( iii) adapt the corporate governance of the French target, (iv) commit to reporting, or (v) even sell part of the target’s shares to a “friend” investor approved by the Ministry of the Economy .
5 Artificial intelligence and robotics were already on this list; Medical technology companies were therefore subject to prior authorization because these technologies are often part of it.
7 Index of 50 French listed companies active in the healthcare sectors, for example diagnostic companies, medical technology companies and biotechnology companies.
8 See for example the special report to the French Parliament: http://www.assemblee-nationale.fr/12/rap-off/i2046-01.asp.