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A n O v e r v i e w o f The New Regime for Foreign Investments in France SUMMARY Pursuant to the new regime, direct as well as indirect investment in France, i.e. investment in or acquisition of foreign companies holding interests in French companies, is now subject to an administrative declaration. New filing requirements of certain investments for statistical purposes have been created. The prior authorization formerly required for the sale in France of securities issued by foreign companies has been suppressed1 (thus facilitating private placement in France). The main categories of foreign investment covered by the new regulation are: Statistical declaration Any transaction between a resident and a non resident concerning more than 10% of the equity or the voting rights of a French or foreign target, any real estate transaction by a non resident in France or by a resident outside of France, any acquisition or sale of a non resident company by a resident, and any cross border intragroup transaction must be declared to the Banque de France for statistical purposes, if in excess of 15 million euros. In addition, French financial intermediaries, groups of companies and residents are compelled to file statistical declarations with the Banque de France when they carry out certain transactions or payments in foreign countries above certain thresholds. The creation of businesses and the acquisition of real estate properties in France by foreign investors and the liquidation of direct foreign investments in France must be declared to the Ministry of Economy for statistical purposes, if in excess of 1.5 million euros. Any transaction leading to the creation or the acquisition of a French business or any transaction leading to the taking over of control (i.e. more than 33.1/3% of the voting rights or equity) of a French target is subject to an administrative declaration. Administrative authorization Any transaction dealing with French public order or security, French national defense or French public health is subject to an administrative authorization. The latter category is relatively limited and has been defined in more detail by the new regulation, making it easier for foreign investors to identify the few cases where such an GIBSON, DUNN & CRUTCHER LLP Administrative declaration 1 Under the former regulation, the sale in France of securities issued by companies incorporated in non-OECD or non European countries had to receive the prior authorization of the French Ministry of Economy. 1 authorization has to be obtained. The filing of an administrative declaration is an easily accomplished formality for information or statistical purposes only. However, noncompliance with the regulation governing foreign investment in France can lead foreign investors to be liable for criminal sanctions and, as far as prior authorization is required, to the cancellation of the investment irregularly made. Foreign investors should thus be informed and take care to comply with the necessary filings. AN OVERVIEW OF THE NEW REGULATION To facilitate your reading of this memorandum, an exhaustive list of all the direct and indirect foreign investments covered by the new regulation is attached as Appendix A, with, for each one, an indication of the necessary type of filing. The same information is of course included in the body of this memorandum, in each section detailing the new requirements regarding the administrative declaration or authorization (2.), and the statistical declaration (3.). 1. Definition of French Residents and Non-Residents The new regulation defines French residents as individuals whose main center of interest is located in France, French public servants based in foreign countries and French-based branches of companies of French or foreign nationality. Are defined as non residents, individuals whose main center of interest is located outside of France, foreign public servants based in France and branches of companies of French or foreign nationality not located in France. France comprises metropolitan France, its overseas departments and the collectivities of Mayotte, Saint-Pierre-et-Miquelon, Wallis and Futuna, and Monaco. 2. Foreign Investment Subject to the Filing of an Administrative Declaration or the Request for an Administrative Authorization 2.1 Foreign investment subject to the filing of an administrative declaration: a) The creation of a new business by a foreign company or a non resident individual; b) The acquisition of all or part of a business (wherever situated) from a French company by a foreign company or a non resident individual; c) Any transaction on the equity of a French company by a foreign company or a non resident individual if, after such transaction, the aggregate amount of voting rights or equity share held by all foreign companies or non resident individuals exceeds 33.1/3% of the equity or voting rights of the French target company; or d) The above transactions (a, b or c) if carried out by a French company, when more than 33.1/3% of its voting rights or equity share is held by one or several non resident individuals or foreign companies. GIBSON, DUNN & CRUTCHER LLP Direct Foreign Investment, defined as: 2 Other types of foreign investment: Any transactions, such as the granting of loans or substantial guarantees, the purchase of patents or licenses, the acquisition of commercial contracts or the provision of technical assistance, leading to the de facto takeover of the control of a French company by a foreign company or a non resident individual. Indirect Foreign Investment, defined as: Any transaction not carried out in France, resulting in the change in control of a non resident company holding an interest in a French company, provided that more than 33.1/3% of the equity or voting rights of the French company are held by foreign companies or non resident individuals. 2.2 Foreign investment exempt from administrative declaration: The creation or development of the business2 of an existing French company held directly or indirectly by foreign companies or non resident individuals (a "Foreign Held French Company")3; The increase of interest in a Foreign Held French Company if the shareholder increasing its or their interest was already holding at least 50% of the equity or voting rights of the Foreign Held French Company; The subscription to an increase in share capital of a Foreign Held French Company, provided that the foreign company shareholders or non resident individual shareholders do not increase their percentage of interest (i.e. no dilution of the aggregate portion of shares or voting rights held by the French shareholders); 1.5 million euros (see 3.2.1 below). 3 Although the terms are not defined by the legislator, we believe that when more than 33.1/3% of a French company's equity or voting rights are held directly or indirectly by foreign companies or non resident individuals, such company will be deemed by the French administration to be a Foreign Held French Company since this is the threshold above which a foreign investment in the equity or voting rights of a French company has to be declared, pursuant to the new decree. However, the French administration may consider that a French company is a Foreign Held French Company even when such threshold is not reached, on the basis of the factual control exerted over the French company (i.e. the French administration may take into account options held by the foreign shareholder on the remaining share of equity or voting rights of the French company, the existence of a shareholders' agreement, the business relationship between the foreign shareholder and the French company, etc.). GIBSON, DUNN & CRUTCHER LLP 2 Subject, however, to a filing with the Ministry of Economy for statistical purposes if the investment exceeds 3 Direct Foreign Investment made between companies belonging to the same group, i.e. companies having more than 50% of the equity or voting rights of which are held directly or indirectly by the same shareholders4; Any transactions regarding loans, guarantees, cancellation of debt or subventions, or subsidies to branches, granted to a Foreign Held French Company by its foreign company shareholders or non resident individual shareholders; Direct Foreign Investment made in French companies having a real estate activity, not being that of the construction of buildings for sale or rent; Direct Foreign Investment of less than 1.5 million euros made in French companies conducting their activities in the craft, hotel or restaurant, neighborhood shopping or exploitation of quarries businesses; and Acquisition of agricultural land5. 2.3 Foreign investment subject to prior administrative authorization: Direct Foreign investment that could possibly have an impact on French public order or security: a) Investment made by a person who has or has had during the previous 10 years, or is seriously suspected of having, an illicit activity in connection with drugs, fraud, procuring, money laundering, terrorism, bribery, criminal organization; b) Investment made in the gambling business, including casinos, or private business subject to specific regulations in France; Direct Foreign Investment that could cause serious risk to public health in France. 4 See Section 3.1.4 hereunder: a declaration for statistical purposes is required if the direct foreign investment exceeds 15 million euros. GIBSON, DUNN & CRUTCHER LLP Direct and Indirect Foreign Investment made in France in connection with national defense, weapons or explosives; and 5 Subject, however, to the filing of a declaration with the Ministry of Economy for statistical purposes if the agricultural land is for the production of wine (see 3.2.1 below). 4 2.4. The Administrative Declaration or Request For Administrative Authorization 2.4.1 Content The administrative declaration or the request for administrative authorization to be sent to the Ministry of Economy6 takes the form of a letter providing the following information regarding: The investors and the ultimate individual shareholders of the investors (i.e. if the non resident investor is a foreign private company, the identity of the individuals or government entities ultimately controlling such investor. If the non resident investor is a foreign listed company, the identity and location of residence of board members of the company and the identity of the individual shareholders ultimately holding an interest representing 5% or more of the holding company. If the investor is a UCIT, the identity of its managers); The target company information); and (basic corporate and financial The investment (equity share of the target before and after the investment, possible options on the remaining share of equity, total amount of the investment, means of payment). 2.4.2 Timeline The declaration must be submitted at the time of the occurrence of the first event related to the agreement between the parties, defined as follows: Signing of a binding agreement; or Publication of the purchase or exchange offer; or The failure of the Ministry of Economy to rule within two months of reception of a complete7 request for authorization is deemed an approval. 6 Ministère de l'Economie, Direction du Trésor, Bureau des investissements étrangers en France 139 rue de Bercy, 75572 Paris Cedex 12, France, Tel +33 (0)1 44 87 72 85 or +33 (0)1 44 87 72 87 GIBSON, DUNN & CRUTCHER LLP Acquisition of an asset that constitutes a Direct Foreign Investment. 7 If the initial request is incomplete, the two month period will commence only at the time of receipt by the authorities of the necessary complementary information. 5 3. The Statistical Declaration Declaration to the Banque de France8 3.1 3.1.1 Monthly Declaration to be made by French Financial Intermediaries French banks, UCITS and financial institutions are compelled to complete monthly statistical declarations related to any kind of payments made in France between residents and non residents amounting to more than 12,500 euros, based on information provided by the residents concerned. 3.1.2 Monthly Declaration to be made by French Companies or Groups of Companies with an ongoing business relationship with Foreign Countries The companies or groups whose operations with foreign countries exceed during a calendar year the amount of 30 million euros in at least one of the following categories of services or revenues of the balance of payments are compelled to make a monthly declaration of all their operations with non residents to the Banque de France for statistical purposes: Services: Transport, insurance, travel, communication and information systems, construction services, financial services, license royalties and fees, other services to companies, personal, cultural and entertainment services; Revenues: Employees' compensation, investment revenues, direct investment revenues, portfolio revenues, other investment revenues. Companies having crossed this threshold in 2001 have to reach an agreement with the Banque de France regarding the modalities of their declaration before January 1, 2004. Those companies which cross this threshold during any of the subsequent fiscal years must reach an agreement with the Banque de France within one year from the end of such fiscal year. Declarations to be made by Residents Residents directly carrying out operations (including from bank accounts opened in foreign countries or by way of offset of receivables) in foreign countries of 1 million euros or more are compelled to make a monthly declaration of such operations to the Banque de France for statistical purposes. Residents are compelled to declare, for statistical purposes, their assets or claims located in foreign countries or their debts towards foreign entities or individuals, in excess of 10 million euros. GIBSON, DUNN & CRUTCHER LLP 3.1.3 8 Banque de France, Direction générale des études et relations internationales, Direction de la balance des paiements. 6 3.1.4 Information to be provided on a once-only basis in case of Substantial Investment The following investments must be declared for statistical purposes when they amount to at least 15 million euros, within 20 business days of their payment: Direct foreign investment is defined differently for statistical declaration obligations ("Statistical Direct Foreign Investment"): a) Any acquisition or sale by a non resident in a resident company, if as a result of such acquisition, the non resident holds at least 10% of the equity or voting rights of the resident company; b) Any intragroup transaction (loans, etc.) and real estate investment; and c) The acquisition or sale of real estate properties in France by non residents9; and their liquidation. Any acquisition or sale by a resident in a non resident company, if as a result of such acquisition, the resident holds at least 10% of the equity or voting rights of the non resident company; and The acquisition or sale of non resident companies by residents; The acquisition or sale of real estate properties in foreign countries by residents. GIBSON, DUNN & CRUTCHER LLP The content of the statistical declaration is almost identical to that of the administrative declaration (see section 2.4.1 above) although less comprehensive on certain items. The declaration must be sent upon closing of the transaction. 9 Also subject to the filing of a declaration with the Ministry of Economy for statistical purposes (see 3.2.1 below). 7 3.2 Declaration to and the Informing of the Ministry of Economy 3.2.1 Statistical Declaration The creation of business and the acquisition of real estate properties in France by foreign investors and the liquidation of foreign investments must be declared for statistical purposes. The exhaustive list has been inserted in the form of footnotes in this memo as an explanation or as complementary information to other filing requirements or exemptions. In addition, the liquidation of a Statistical Direct Foreign Investment in France has to be declared to the Ministry of Economy for statistical purposes. The Ministry of Economy must also be informed of the implementation of any authorized transactions (even if only partially or not implemented at all). 3.2.2 Information In addition, and even though such transactions are not considered as investment, French companies held directly or indirectly by foreign shareholders10 or their liquidators are compelled to inform the Ministry of Economy of the following events: The decrease of any foreign interest in their equity, even if such decrease is not a disinvestment (for instance, following an increase in capital not subscribed to by a foreign shareholder); Any substantial modification regarding their existence or activity: termination of an activity, change in their corporate name or registered office, liquidation, etc.; and 4. Sanctions in case of Non-Compliance with the Obligation to File a Declaration or Request for Authorization Non-compliance with the obligation to make a statistical declaration can be sanctioned by a maximum of five years' imprisonment, confiscation of the fraudulent investment and a fine of up to an amount equal to twice the amount of the investment irregularly made. Non-compliance with the obligation to make an administrative declaration should be subject to identical sanctions11 , although the new decree only refers to a fine of up 10 Which probably means that more than 33.1/3% of the equity or voting rights of such companies are held by GIBSON, DUNN & CRUTCHER LLP Any transaction made outside of France indirectly modifying the holding of their equity (giving the identity of and the interest held by the new shareholder), except for transactions leading to an administrative declaration. foreign shareholders (see previous footnote 3). 11 Section 459 of the Code des douanes. 8 to 750 euros. This is due to an inaccuracy in the drafting, and will probably be amended by a complementary legislative text. Non-compliance with the obligation to file a request for administrative authorization can be sanctioned by injunction of the Ministry of Economy to modify or cancel the investment made in violation of the regulation, nullification of the investment made and a fine of up to an amount equal to twice the amount of the investment irregularly made. GIBSON, DUNN & CRUTCHER LLP 9 Appendix A Investment covered by the Regulation Any acquisition by a non resident in a resident company, if as a result of such acquisition, the non resident holds at least 10% of the equity or voting rights of the resident company; Obligation Statistical declaration Any acquisition by a resident in a non resident company, if as a result of such acquisition, the resident holds at least 10% of the equity or voting rights of the non resident company; Any cross-border intragroup transaction (loans, etc.) and real estate investment; The acquisition or sale companies by residents. of non resident Direct foreign investment, defined as: a) The creation of a new business by a foreign company or a non resident individual; b) The acquisition of all or part of a business (wherever situated) from a French company by a foreign company or a non resident individual; c) Any transaction on the equity of a French company by a foreign company or a non resident individual if, after such transaction, the aggregate amount of voting rights or equity share held by all foreign companies or non resident individuals exceeds 33.1/3% of the equity or voting rights of the French target company; or d) The above transactions (a, b and c) if carried out by a French company, when more than 33.1/3% of its voting rights or equity share is held by one or several non resident individuals or foreign companies. Administrative declaration Any transactions, such as the granting of loans or substantial guarantees, the purchase of patents or licenses, the acquisition of commercial contracts or the provision of technical assistance leading to the de facto takeover of the control of a French company by a foreign company or a non resident individual. Indirect foreign investment, defined as: Administrative declaration Any transaction not carried out in France, resulting in the change in control of a non resident company holding an interest in a French company, provided than more than 33.1/3% of the equity or voting rights of the French company are held at more than by foreign companies or non resident individuals. Direct foreign investment that could possibly GIBSON, DUNN & CRUTCHER LLP Other types of foreign investment: Administrative declaration Prior administrative authorization 10 have an impact on French public order or security: a) Investment made by a person who has or has had during the previous 10 years, or is seriously suspected of having, an illicit activity in connection with drugs, fraud, procuring, money laundering, terrorism, bribery, criminal organization; b) Investment made in the gambling business, including casinos, or a private business subject to specific regulations in France. Direct and indirect foreign investment made in France in connection with national defense, weapons or explosives. Prior administrative authorization Direct foreign investment that could cause serious risk to public health in France. Prior administrative authorization Copyright © 2003 Gibson, Dunn & Crutcher LLP GIBSON, DUNN & CRUTCHER LLP 11