The French legal system is generally based on a civil law framework divided into two branches: private law and public law.
Private law (droit civil) applies to situations arising between private persons and within the context of activities not relating to public interest; as such, all matters not specifically deemed to be of public law are considered private. Legal principles are generally based on written sources rather than on precedents.
Public matters generally concern any dealings involving at least one public entity acting in the exercise of its office (including tax matters).
Certain specialised administrative authorities may also act as first instance jurisdictions for matters within their domain. These authorities are known as Autorités Administratives Indépendantes. With respect to M&A transactions, the two most significant bodies are (i) the French market regulating authority l’Autorité des Marchés Financiers (AMF) which rules on matters relating to listed companies, capital markets and market abuse-related criminal offences, and (ii) the competition authority (Autorité de la concurrence) which rules on antitrust matters. Both these bodies have the power to impose administrative sanctions.
The prior approval or notification procedures required in France for foreign investors depend largely on the nature of the target. If the target is a listed company, any potential acquirer may be required to notify the crossing of the relevant thresholds within the share capital or voting rights of the company. This notification is made to the AMF and to the target company itself. For further details, please see 4.3 Disclosure and Reporting Obligations.
Target companies of certain specific sectors are subject to specific prior approvals or notifications due to their regulated nature (please see 3.2 Regulation of Domestic M&A Transactions).
Antitrust approvals may also need to be sought from the Autorité de la Concurrence (please see 6 Antitrust/Competition).
Finally, when a target company operates in a sector which is deemed to be sensitive, the foreign investor must obtain prior approval from the French Ministry of Economy and Finances (the Minefi). This approval is frequently subject to certain conditions which must be met in order to maintain this authorisation and to avoid certain civil and criminal sanctions. The list of sensitive sectors is broad and frequently expanded, and the control by the Minefi is increasing. For further details please see 7 Foreign Investment/National Security.
The COVID-19 pandemic compelled the French government to take certain measures to adapt procedures across all branches of French law.
Foreign investors should bear in mind that the French government introduced a temporary extraordinary measure to protect certain sensitive sectors during the pandemic. This new regulation specifically targets investors from outside the EU or the EEE investing in targets of national importance. It does so by lowering the threshold of investment in companies of sensitive sectors which requires prior authorisation from the French Ministry of the Economy from 25% of voting rights to 10% in sensitive listed companies. This new regulation is, however, accompanied by a new fast-track procedure whereby the French Ministry of the Economy has a ten-day period to determine whether or not the crossing of the 10% threshold requires an in-depth inspection of the investment or whether the authorisation can be delivered immediately. This rule – lowering the threshold of operations requiring prior authorisation from the Ministry, which was intended to last until 31 December 2020 – was extended by a decree dated 30 December 2020, and will remain applicable until 31 December 2021.
This new rule comes after a series of changes in the foreign investment authorisation requirements, the latest of which entered into force in April 2020, independently from the extraordinary legislation adopted because of the sanitary crisis. These changes were threefold.
Firstly, the list of sensitive sectors was expanded to include political or general press publications, agricultural activities contributing to national food safety objectives and R&D activities in quantum technologies or energy storage; the list also now applies uniformly to all foreign investors regardless of nationality, whereas previously the list of sensitive sectors varied according to whether the foreign investor was based inside or outside the EU. Secondly, greater powers of sanction were granted to the Ministry in case of non-compliance by investors. Finally, further clarifications were provided concerning the review process, which was also enhanced.
New legislation has also opened the possibility for French target companies to request a ruling as to whether or not their activities are within the scope of the Foreign Investment Regulation, including at an early stage in the transaction process.
In terms of the structure of M&A deals over the past 12 months, we can firstly note that while lock-box deals tended to be the market norm in the past, closing account price adjustment has made a significant comeback, in response to the uncertainty the pandemic has caused. However, while MAC clauses are more frequently being discussed, they remain rare in most deals in France. The trend of buyers providing representations and warranties insurance has also gained some traction over the past year and is expected to be further generalised in the future.
Deal certainty remains a key concern for most sellers on the French market with strong negotiations taking place around hell-or-high-water clauses (including with respect to FDI regulation).
Public companies are generally acquired through tender offers. These tender offers can be structured around cash, share or mixed considerations. Any shareholder obtaining over 90% of share capital and voting rights in a publicly traded company is entitled to launch a mandatory squeeze-out procedure to acquire the remaining fraction held by minority shareholders. This threshold was lowered from 95% by the PACTE regulation which entered into force in 2019.
Mergers could also be seen as an alternative structure with French or, to a certain extent, European companies but would be difficult to implement with non-European companies. With respect to minority investments in listed companies, they are generally made directly in the company, except if the minority shareholder wants to act in concert with other shareholders – in such cases, the investment could be made through a holding company with the majority shareholder although this is not systematic as it affects the liquidity of the stake.
With respect to private M&A transactions, share deals (as opposed to transfer of undertaking known as a “cession de fonds de commerce”) are the most frequent structure (even for complex private transactions with carve-in/carve-out prior reorganisation where the assets acquired should be isolated in view of its transfer).
As outlined in 4.3 Disclosure and Reporting Obligations, the acquisition of a stake resulting in the crossing of one of the listed thresholds in a public company requires notification to the target company and the AMF. When a threshold of 30% of share capital or voting rights is crossed, a mandatory tender offer must be launched at the maximum price paid by the acquirer over the last 12 months. The same obligation also occurs when a company holding between 30% and 50% of a listed company increases its shareholding with excessive speed (ie, over 1% during a 12-month period).
Certain sectors are regulated by specific independent authorities, such as the Autorité de contrôle prudential et de resolution (the ACPR) for banking and insurance institutions and the Commission de regulation de l’énergie (the CRE) for energy companies. As such, the acquisition or divestment of a stake in companies from these sectors is subject to prior authorisation from the aforementioned authorities. Furthermore, media and broadcasting communications are regulated by the Conseil supérieur de l’audiovisuel (CSA), while the Commission nationale de l'informatique et des libertés – known as the CNIL – handles data privacy. Both these authorities survey M&A activity with media or database transfer issues (when directly transferred to the acquirer).
The Autorité de la concurrence, which controls antitrust regulation in turn examines M&A transactions in regard to French competition law (see 6 Antitrust/Competition (et seq) for more detail about the merger control procedure in France).
For listed companies, only the société anonyme (SA), the Societé européenne and the société en commandite are able to be listed. Corporate governance for SA revolves around either a one-tier or a two-tier board structure, with most companies opting for a one-tier board structure. Of the 31 companies among the 40 listed companies in France with the highest market capitalisation having opted for governance with a Conseil d’administration (Board of Directors), 19 of them have chosen to combine the functions of Chairman of the Board and Chief Executive Officer (61.3%).
Listed companies should comply with the AFEP-MEDEF code, a set of soft law corporate governance rules or explain why they have not complied (“comply or explain” rules). Compliance with these rules is studied by the AMF and the Haut Comité pour le Gouvernement d’Entreprise (HCGE) which each year establish a report listing companies in breach of these guidelines according to a "comply or explain" approach.
The most common type of non-listed company is the Société par actions simplifiée (SAS) which offers greater flexibility. The same one or two-tier governance structures can be applied to these companies as well. The only imperative rule concerning the governance of an SAS is that the company be represented to third parties by one or more directors, the by-laws being free to determine the internal organisation of the company. All of the aforementioned companies offer limited liability to their shareholders or partners. While certain unlimited liability company structures exist (such as the société en nom collectif), these structures are generally viewed unfavourably by foreign investors.
All shareholders with over 5% (this threshold is generally lowered in the by-laws to 0.5%-3% in listed companies) of share capital and voting rights have by law the right to request certain points be added to a General Meeting’s agenda. Any shareholder may send written questions to the board or management in anticipation of a General Meeting to which an answer must be provided. In the event that management is found lacking in its duty to convene a General Meeting, any shareholders holding over 5% of share capital may obtain such a meeting by the decision of a court-appointed officer. Furthermore, all shareholders have access to the information and documentation necessary to understanding the situation of the company.
Finally, a specific protection is accorded to minority shareholders via case law under the form of the prohibition of abuses of majority. All companies must be managed with regard to their own interests, not those of their shareholders, even their majority or controlling shareholders, and as such neither the management nor the shareholders can adopt a decision which directly jeopardises the company’s interests while serving those of one of its shareholders.
As explained in 2.1Foreign Direct Investment in the Current Climate, foreign investors are required to obtain prior authorisation from the Minefi when crossing the threshold of 25% of share capital or voting rights in sensitive French companies or, under COVID-19 extraordinary measures, 10% of French sensitive listed companies.
A disclosure obligation falls upon any investor acquiring or disposing of certain qualifying holdings. Whenever a threshold of 5%, 10%, 15%, 20%, 25%, 30%, 33.33%, 50%, 66.66%, 90% or 95% of the share capital or voting rights of a company is crossed either upwards or downwards, directly or indirectly, the shareholder or ex-shareholder must notify the AMF as well as the company itself of the exact amount of shares and voting rights it possesses. This obligation also exists when these thresholds are crossed through the acquisition or disposal of derivatives. The thresholds which trigger necessary notification of the target company may be amended in the target company’s by-laws to impose a more rigorous reporting obligation on its shareholders towards the company than imposed by law.
Finally, corporations have an obligation to file a beneficial owner form with the clerk of the competent commercial court and to update their entry in the beneficial owners' registry in the event of any change in situation. French law understands the notion of beneficial owner as the natural person who owns at least 25% of share capital or voting rights or who control the company directly or indirectly. Should no such person exist, the beneficial owner notified to the authorities is the legal representative of the company.
The main regulated capital market for large-cap and mid-cap issuers in France is Euronext Paris, with over 800 issuers and a market capitalisation in excess of EUR4 trillion. Alongside it is the organised multilateral trading facility Euronext Growth (previously Alternext), on which entry requirements and reporting obligations are less strict and which receives over 200 smaller-cap companies with a total market capitalisation of under EUR20 billion. Both these capital markets are supervised by the AMF which sets the rules governing the requirements for issuance of shares as well as the offers of potential investors.
With respect to financing and considering the great amount of liquidity currently available, issuers can use both bank financing and/or access to capital markets through issuances of bonds or convertible bonds.
Regulation concerning capital markets in France, as in other EU jurisdictions, requires that issuers present a prospectus prior to public offerings over EUR8 million or any initial public offering on Euronext Paris regardless of amount. Listed companies must abide with reporting obligations on a recurring (annual or semi-annual) or permanent basis.
Recurring information concerns the publication of financial statements, governance information and an increasing amount of regulated information concerning the social and environmental implications of the company’s operations which should also be audited. Permanent reporting concerns the requirement for any publicly traded company to divulge any sensitive information which is likely to impact its share price unless it has a valid reason for not doing so.
A company is only justified in delaying the publication of such sensitive information if the immediate publication is likely to harm its interests, if the delay is not likely to mislead investors, and if the company is able to ensure the confidentiality of the aforementioned information.
Investors should also bear in mind that while in France the control of a company’s General Meetings cannot be achieved below 50% of voting rights, French financial regulations dictate that any shareholder acquiring a stake of over 30% of a listed company’s share capital or voting rights, directly or indirectly, is required to launch a mandatory tender offer on the remaining shares (as explained in 3.2 Regulation of Domestic M&A Transactions). Furthermore, the AMF’s regulations specify that any tender offer which does not result in the offeror holding at least 50% of the share capital or voting rights of the target company becomes null and void. The same principle also applies to any shareholder who holds between 30% and 50%, and who, over a 12-month period, increases his or her shareholding by over 1%.
Investment funds are subject to the same reporting and prior authorisation obligations as industrial buyers. In the event of an FDI filing before the Minefi, the request for prior authorisation must also mention the identity of the fund managers (société de gestion) of investment funds within the shareholding chain of the sensitive target, as well as the persons controlling these managers (see our comments in 7.1Applicable Regulator and Process Overview).
The merger control regime is enforced by the Autorité de la concurrence (FCA), an administrative authority independent from the government.
For a transaction to be reportable, two conditions must be met. First, it must constitute a "concentration" – ie, it must entail a lasting change of control over an undertaking. As a practical matter, the notion of concentration covers mergers, acquisitions of sole or joint control and the creation of full-function joint ventures. Second, the parties to the concentration must meet the applicable jurisdictional thresholds:
There are specific, lower thresholds for the retail sector and for the overseas territories. However, there is no sectoral exemption such that whenever a transaction meets the above-mentioned criteria, it must be notified to the FCA.
The review process involves:
The pre-notification is an informal and confidential phase during which the notifying submits a draft form and addresses questions from the FCA. While not mandatory, it is highly advisable in practice. It may last from a few weeks to several months for complex cases.
Phase I lasts 25 working days and is extended by 15 working days if the parties submit remedies. It can also be extended by 15 additional business days if the parties ask for the review to be suspended or if they do not respond to a request for information ("stop the clock"). At the end of Phase I, the FCA can issue an unconditional clearance, a clearance with commitments, or – if the concentration raises serious doubts – a decision to open an in-depth review (Phase II).
In Phase II, the FCA has 65 working days to issue a decision. This review period can be extended by 20 working days if the parties submit remedies, or amendments to remedies previously submitted. It can also be extended by 20 additional business days if the parties request, when necessary, to stop the clock (eg, to work on the commitments). At the end of Phase II, the FCA can issue an unconditional clearance, a clearance with commitments or – if all competition concerns identified have not been solved by the proposed remedies – a prohibition decision.
Within 25 working days from the notification of the final decision of the FCA, the Ministry of Economy can review the case himself for reasons of "general interest other than the maintenance of competition" (industrial development, competitiveness in an international context, social welfare, etc). This “power of evocation” was introduced in the statutes in 2008 and has since been used only once (in 2018 for reasons relating to the safeguarding of employment and social welfare, following the FCA's prohibition decision regarding the acquisition of certain shares and assets of Agripole (William Saurin) by Cofigeo). In other words, this power is used only in exceptional cases and most merger control reviews end up after a final decision by the FCA.
Merger filing is mandatory and suspensive, such that the parties cannot implement their concentration before receiving clearance. There are a few exceptions to the standstill obligation. First, there is an automatic exemption for takeover bids provided the acquirer notifies the transaction without delay and does not exercise the voting rights attached to the securities until clearance. Second, the parties may request an individual derogation if they can demonstrate that this is strictly necessary, in particular in light of the target’s financial difficulties. This derogation is typically granted in acquisitions of target companies subject to insolvency proceedings.
The test applied by the FCA is similar to the one applied by the European Commission, namely the “significant impediment of effective competition” test. The FCA assesses the three types of effects that can be produced by a concentration:
As part of its assessment, the FCA considers a range of criteria, including: combined market shares, level of market concentration, relative market shares of competitors, closeness of competition, production capacities, barriers to entry, existence of a maverick, buyer power, etc.
If the parties have a combined market share below 25% (for a horizontal merger) or each have a market share below 30% in their respective markets (for a vertical merger), the transaction is eligible for a simplified procedure. Otherwise, the parties must submit a standard form. Above a threshold of 35-40% combined market share, a more detailed competitive assessment is generally required to demonstrate the absence of competition concerns.
If a concentration raises serious competition concerns, the parties can propose commitments. Remedies can be proposed at any point during the procedure: in Phase I or Phase II, or even during pre-notification. In order to be accepted by the FCA, the commitments must be necessary, effective and proportionate. They must be capable of being implemented effectively within a short period of time and must not raise additional competition concerns.
Structural commitments (eg, divesture of assets to a suitable buyer) are preferable inasmuch as they can prevent, durably, the competition concerns identified and do not require long-term monitoring measures. However, the FCA may also examine behavioural commitments (eg, granting access to key networks or infrastructure in a non-discriminatory and transparent manner) provided that they are limited in their duration. The FCA tends to accept behavioural remedies where competition concerns result from vertical links or arise in conglomerate structures.
The use of injunctions is rare. The FCA only considers imposing this type of remedies in Phase II and when the notifying party refuses to offer commitments while the transaction significantly harms competition or if the commitments offered by the parties are insufficient.
Decisions of the FCA can be appealed before the Administrative Supreme Court (Conseil d’Etat) within two months from the date of the notification of the decision (for the parties) or from the publication of this decision on the website of the FCA (for third parties).
If the parties fail to notify a reportable concentration to the FCA or implement it prior to receiving the FCA’s clearance decision ("gun jumping"), the FCA may (i) order the parties to notify their transaction, subject to a daily penalty payment until they do so, or (ii) impose a fine of up to 5% of the acquirer’s French turnover (plus, where applicable, that of the target) for companies and of up to EUR1.5 million for individuals. In 2016, the FCA fined Altice EUR80 million for implementing its acquisition of SFR prior to receiving clearance. No criminal sanctions are provided for in the statutes.
Foreign investments in France may require prior authorisation by the French Ministry of the Economy and Finances (Minefi). This procedure aims at protecting target companies in sensitive business sectors, namely:
This list was expanded as a part of the changes to foreign direct investment rules taking place in 2020.
The necessity for prior authorisation is triggered when a foreign investor contemplates acquiring the control of such a French company, all or part of a business division of such a company, or – if the investor is from outside the EU or RRA – more than 25% of the voting rights of such a French entity. This latest threshold was lowered from 33.33% in April 2020. Additionally, foreign investors acquiring a stake of over 10% of voting rights in a listed sensitive company are required to seek prior authorisation from the Minefi in accordance with COVID-19 specific temporary legislation, as explained in 2.1 Foreign Direct Investment in the Current Climate.
The notion of a "foreign investor" is broadly defined. The concept covers not only foreign individuals or entities, but also those not tax domiciled in France, as well as French entities controlled by one of the above. Furthermore, recent legislation has widened the definition of the chain of control. As of 1 April 2020, as long as one of the entities present in a chain of control is domiciled abroad, the prior authorisation procedure before the Minefi is required, and even if the ultimate controlling entity is French. This new rule has had a significant impact on practice, especially for French private equity firms using a foreign entity as a part of their holding structure.
Finally, 2018 legislation expanded the possibility to obtain a preliminary ruling on behalf of the Ministry of the Economy and Finances as to whether or not an operation might be subjected to the prior authorisation procedure for foreign direct investment. While previously only the potential investor could request such a ruling, upon authorisation from the target company, this target company can now request the ruling on its own.
Upon receipt of the application and subject to its completeness as discussed with the Minefi, the Minefi has 30 days to conduct an initial review of the proposed investment. Within that timeframe the Ministry will inform the applicant of whether it authorises the proposed investment or whether it requires further inspection of the application. The potential in-depth examination of the application extends the term of the final decision by an additional 45 days. Should no answer be received during either of these periods, the Ministry is presumed to have turned down the request. In addition to this, a fast-track procedure exists for the initial examination of foreign investments made under COVID-19 related legislation.
The criteria according to which foreign investment applications are evaluated do not vary according to the structure of the investment. The structure of the investment is only taken into account in order to determine if a foreign entity is a part of the chain of control (as explained in 7.1Applicable Regulator and Process Overview). Furthermore, any conditions attached to the authorisation must respect the principle of proportionality. The Minefi may, however, take into account whether or not the foreign investor has had relations with foreign governmental entities.
In practice, the Minefi might treat investors differently according to their country of origin. While very few transactions have ever been blocked by the Minefi (except the proposed acquisition of Photonis by Teledyne earlier in 2020), it is probable that control will become stricter as new legislation has introduced a measure allowing parliament to review authorisations granted by the Minefi sometimes years after they have taken place and under a new government. This potential for parliamentary criticism is likely to incite the Minefi to be particularly rigorous in its scrutiny of foreign investments.
The Minefi’s assessment can result in a refusal only if it believes that the investment will endanger national interests such as the preservation of confidential defence information, technical know-how related to strategic industries, the integrity of vital supply chains and communication networks, and the performance of public contracts necessary for public safety or military operations. The health sector in France is also considered of sufficient strategic importance that any investment in this sector from a foreign entity must respect the structure of the French health system (for example, the coexistence of the public and private health sector).
Prior authorisation for foreign direct investments by the Minefi may be subject to the investor granting certain undertakings. These commitments principally aim at preserving industrial abilities, research and development capabilities or the related technical knowledge, as well as the integrity, the security and the continuity of the operations of establishments, installations or projects of vital importance to national defence. These undertakings also protect transport and telecommunications networks, public health, or the performance of contractual obligations resulting from public contracts or contracts concerning public order, public security public defence interests or research, production or distribution of arms, ammunition or explosive substances.
In practice, these commitments usually revolve around the following points: maintaining French headquarters and sometimes management, conducting the sensitive activities with a French company and maintaining technical and human industrial capacities in France, maintaining R&D rights, keeping IP rights in France and maintaining them free from International Traffic in Arms Regulations, continuing to perform contractual obligations in the sensitive sector and to perform business at normal market conditions, protecting the access to information relating to the sensitive sector, designating a person in charge of reporting and communicating with the French state, setting up a security committee where a representative of the state has a veto right on certain important decisions, and finally the right to be involved in the resale process of the French target, sometimes going as far as requesting to propose a buyer selected by the Minefi.
The conditions attached to the authorisation must, however, be proportional. As a result, when an authorisation results in long-term undertakings on behalf of the foreign investor, the recent PACTE legislation granted a greater margin to the Ministry of the Economy and Finances to amend them after the investment to adapt them to new economic circumstances or a change in strategic priorities of the state. The introduction of this new rule is mainly aimed at ensuring that these conditions do not become obsolete, thus preserving both the foreign investors from being held to excessively strict undertakings and the public interests that the Minefi seeks to protect from ineffective protective measures. As such, conditions may be modified upon request of the foreign investor in the following cases:
The last two scenarios also allow the Ministry of the Economy and Finances to initiate a revision, any revision being reserved only for the cases where the foreign investor holds direct or indirect control over the target company and with proportionality to the national interests being protected.
The Minefi has the power to police as well as to administer sanctions in order to enforce foreign direct investment regulations.
Concerning policing powers, two situations can arise: either the foreign investor has completed an investment which should have been subjected to the review of the Minefi but has not been, or the investor has obtained prior authorisation from the Minefi but did not respect the conditions under which this prior authorisation was granted.
In the first case the Ministry has three options – it can either request:
The Minefi may also have to impose that a public agent be tasked with observing the target company and ensuring that it respects national interests, with the ability to block any decisions from any governing bodies of said company in breach of the aforementioned interests.
Should prior approval have been requested and obtained but undertakings made by the foreign investor not been complied with, the Minefi has the option to:
All of these options may be enforced with daily fines for as long as the foreign investor refuses to comply with the Minefi’s requests, other pecuniary sanctions, as well as several types of conservatory injunctions. These injunctions may result in the suspension of voting rights of the foreign investor within the target company or the impossibility for said investor to either sell assets or receive dividends from this investment.
Sanctions from the Minefi may have very substantial consequences. The completion of such an investment without prior authorisation may result in the invalidity of the operation. Obtaining such an authorisation through fraudulent means, such as by failing to disclose vital information, may result in the retraction of the authorisation. Failure to comply with conditions to the authorisation or with an injunction from the Minefi may also result in pecuniary sanctions.
These pecuniary sanctions may rise to the extent of the following:
All of these sanctions were revised by the recent PACTE legislation in order to ensure maximum effectiveness.
There are no other regimes applicable to foreign direct investments in France. However, as explained in 3.2 Regulation of Domestic M&A Transactions, certain administrative authorities may require prior notification of any transaction leading to the acquisition or divestment of a stake in companies of their specific sector. In certain cases, foreign investors may need to obtain a non-objection decision from one or several of these authorities prior to completing their investment.
French companies organised as corporations are subject to French corporate income tax (CIT), payable annually on the net income realised on the business operated in France, as well as on gains derived from real estate assets located in France and on income whose taxation is attributable to France under a double tax treaty. In other words, profits realised outside of France are not taxable in France under French domestic tax law.
The standard CIT rate for 2020 was 28% (and 31% for companies whose turnover exceeds EUR250 million for the fraction of their taxable profits exceeding EUR500,000), but should decrease, as per current applicable law, to 26.5% for 2021 (27.5% for companies whose turnover exceeds EUR250 million) and to 25% as from 2022. In addition to this, a social contribution of 3.3% may also apply, and is computed on the CIT liability (ie, not on the taxable profit) exceeding EUR763,000.
Of course, passive income realised by French companies (or attributable to a French permanent establishment of a non-French company) would also be taxable in France, and may benefit from specific regimes. For example, under the French participation exemption regime, which is subject to a certain number of conditions, CIT would be computed on 5% of the dividend (or 1% of the dividend, in certain intragroup situations), resulting in an effective tax rate of approximately 1.3% for 2021, and on 12% of the long-term capital gain, resulting in an effective tax rate of approximately 3.2% for 2021.
Partners in French partnerships are subject to tax on their share of the partnerships’ net income, although the taxable result is computed at the level of the partnership itself.
Finally, companies doing business in France may be liable to VAT and/or payroll tax (computed on the basis of the wages paid, when and to the extent the company is not liable to VAT), as well as to local ancillary taxes.
Under French domestic law, no withholding tax is levied on outbound interest, except in very specific cases (ie, interest paid in a “non-co-operative jurisdiction” – the French “black list” – in which case a 75% withholding may apply)
Outbound dividends are subject to a withholding tax under French domestic law. The rate depends on the beneficiary of the dividend: for legal persons, the withholding tax is levied at the same rate as CIT (ie, 26.5% for 2021) and at 12.8% for individuals.
Exemptions from withholding tax may apply when dividends are paid to a qualifying parent company resident in the EU under certain additional conditions. To the contrary, dividends paid in a non-co-operative jurisdiction are subject to a 75% withholding tax.
The applicable rates may be reduced or eliminated under double tax treaties, which may apply subject to certain conditions, including holding commitments, holding percentages and, as the case may be, a principal purpose test or a limitation on benefits clause.
Shares and goodwill may not be amortised from a French tax standpoint, hence, contrary to some jurisdictions, taxpayers generally seek the benefit of tax rollover regimes (eg, in mergers and contributions) rather than tax step-ups.
Net operation losses may also be carried forward with no limitation in time and may be used to offset future profits each year up to EUR1 million plus 50% of the profits exceeding this threshold.
Besides, the French tax consolidation regime is pretty efficient and is quite commonly used. It allows corporations and their subsidiaries (held directly or indirectly at more than 95%), to set off profits and losses of the members of the group, to neutralise certain intragroup transactions, and to benefit from reduced rates on certain intragroup flows (eg, dividends).
The deduction of interest has undergone drastic limitation over the past few years. Although interest paid to a shareholder is deductible to the extent its rate does not exceed the annual average rate published by the French tax authorities or, when paid to a related company, provided the rate is arm’s-length, some limitations apply: following transposition of ATAD 1, the deductibility of net financial costs is capped at 30% of the “tax EBITDA” or EUR3 million (for thinly capitalised companies, such thresholds are respectively reduced to 10% or EUR1 million), and under the transposition of ATAD 2, hybrid situations entail a rejection of the deduction of the interest. In addition, the “Charasse amendment” precludes the deduction of interest when a company is purchased by another company – which belongs to the same tax consolidated group – from a related party.
Additional strategies include specific IR regimes.
Capital gains deriving from the sale of “substantial shareholding”, defined under French domestic law as a participation of more than 25% of the rights in the profits of the French company, are subject to a withholding tax at the standard CIT rate. However, the French Supreme Court recently ruled that such withholding is incompatible with EU principles (although further developments are expected in that respect). To the contrary, when the shares being disposed of do not qualify a “substantial shareholding”, no French withholding applies (unless the seller is resident in a non-co-operative jurisdiction, in which case a 75% withholding applies, regardless of the percentage of the shareholding).
In practice though, a certain number of double tax treaties will exempt from French withholding tax the capital gains realised on the disposal of French shares.
Capital gains derived from the sale of shares in companies whose assets are mainly real estate located in France are generally subject to a withholding tax (rates depending on the beneficiary).
A general anti-abuse rule provided by Article L 64 of the French Tax Proceedings Code (FTPC) allows the administration to disregard deeds and arrangements that are fictitious or exclusively tax-driven. In addition to this, Article 205 A of the French tax code – which only applies for the purposes of CIT – provides that arrangements put in place mainly for tax purposes will not be taken into account, and a comparable and more general anti-abuse rule set forth at Article L 64A of the FTPC also covers arrangements that are mainly tax-driven.
Anti-hybrid rules were introduced by the Finance Bill for 2020, implementing the ATAD 2 directive to eliminate mismatches in relation to payments between affiliated entities (ie, inter alia, deduction in one state without inclusion of the taxable income in the other state, or deduction/non-taxation in either state).
Regarding transfer pricing rules, France follows the OECD Guidelines and, in particular, applies the comparable uncontrolled price method. Consequently, specific sets of rules prevent indirect transfers of profits abroad between affiliated enterprises.
French labour and employment law is based on both state-level sources (ie, the Constitution, laws and regulations codified in the Labour Code, case law) and professional-level sources (ie, industry-wide and company-wide collective bargaining agreements, unilateral decisions of the employer, company practices), to which are also added international and European legal conventions.
State-level sources generally provide for the basic rules that apply in labour and employment law: different types of contracts, execution and termination of employment, equal rights and non-discrimination, rights of trade unions, etc. Professional-level sources complete these provisions on a wide range of subjects (eg,minimum wage, working time, severance indemnity), it being noted that some legal rules belong to “public order” – ie, they cannot be derogated from, while others can, notably by way of collective bargaining agreement.
National collective bargaining agreements concluded at industry-level are very common and their application is, in most cases, mandatory in all companies belonging to the same industry. Agreements negotiated at the company level are also common.
Finally, in companies of 50 or more employees, works councils composed of representatives elected by the employees must be informed and/or consulted on any project that has a significant impact on the company’s share ownership or activities, or on the working conditions of the employees. The works council does not hold any veto right.
Employees are usually remunerated in cash on a monthly basis, according to the number of hours or days worked. In addition, collective bargaining agreements commonly provide for supplementary compensation (eg,individual/company-based performance bonus, pension plans, health and welfare plans).
Some employees, usually managers, may also receive compensation in the form of long-term incentive plans (eg, bonus, phantom shares, free shares), which may cease to apply in the context of an M&A transaction when it is granted as part of a group-level LTIP or is based on group’s performance criteria. If such compensation has been formalised under the employment contract, it should be replaced with an equivalent compensation in the new group, since contractual compensation (including bonuses) cannot be modified without the employee’s consent.
In any case, claw-back clauses are strictly regulated in France – ie, they are only authorised in very specific business sectors like credit institutions or financing companies regarding variable remuneration of risk-takers in the case of unacceptable behaviour with respect to risk-taking.
Works Council’s Consultation
In the context of M&A transactions, information/consultation of the works council of the target, the seller, and/or the purchaser may be required. In this case, any consultation process must be completed prior to taking any definitive decision with respect to the transaction. Failure to complete such process when required is a criminal offence.
Effect on Employees’ Rights
In the case of a share deal, as there is no change in the employing entity, the individual and collective status applicable to the employees (ie,employment contracts, collective bargaining agreements, etc) remain unchanged. In the case of an asset deal, employees may be automatically transferred along with the assets to which they are assigned if they together qualify as “autonomous economic entity” (ie, a standalone business operation). In this case, the transfer is mandatory for all parties. The employment contracts must continue to be performed under the same terms as prior to the transfer, and the employees must retain the same remuneration. The collective bargaining status applicable within the transferor company continues to apply until it is renegotiated, or for a maximum period of 15 months.
When a foreign investment is subject to review by the Minefi under the conditions detailed in 7 Foreign Investment/National Security, the Ministry is likely to look for reassurance from the investor that the proposed acquisition will not result in the transfer of strategic elements of industrial, military or otherwise sensitive French know-how overseas. This technical knowledge can, as explained in 11.2 Intellectual Property Protections, be protected by various intellectual property rights and, as such, investments made in sensitive sectors by foreign investors may be subject to certain IP-specific commitments being made by the investor.
These commitments may include not transferring the IP rights outside of France, maintaining them free from International Traffic in Arms Regulations, and sometimes granting “golden shares” of the target company to the French state, allowing it to block the sale transfers of intellectual property or know-how outside of France. As a result, companies dealing in particularly strategic or sensitive IP are likely to be more thoroughly protected by the Minefi’s review, as was the case in the recent proposed acquisition of Photonis by Teledyne earlier in 2020, the only decision in recent memory to result in an effective blockage of the investment by the Minefi, and in which the target company developed highly strategic military night-vision devices.
France is considered to provide strong intellectual property protection, especially regarding copyright. There is no particular sector subject to specific difficulties or limitations in obtaining protection. However, intellectual property protection is subject to certain limitations/requirements depending on the rights at stake. What follows is a summary of the main intellectual property rights specificities in France.
An invention must comply with the following strict conditions to be patented: it has to be a technical solution to a technical problem, must be new, involve an inventive process and be capable of industrial application.
In addition, patentable pharmaceutical products require a prior marketing authorisation by the national health products authority (Autorisation de mise sur le marché) in order to be marketed. This authorisation is generally only granted after several years.
Finally, the French intellectual property office (INPI) does not accept French patent applications relating to crossing and selection processes of plants and animals obtained by crossing and selection.
Trade mark law is harmonised at the European level by the Regulation (UE) No 2017/1001 and the Directive (UE) No 2015/2436, which have been transposed in France. Signs that can be represented in an appropriate form using generally available technology may be registered as trade marks as long as their representation is clear, precise, self-contained, easily accessible, intelligible, durable and objective.
A design must comply with the following conditions to be registered: it must be new, have an individual character and be non-functional.
To be protected by copyright, a creation must be original and be fixed in a material form. If a creation complies with its requirements, it will be protected as soon as it is created, without any further formal requirement. However, ideas or concepts are not protected by copyright.
The EU General Data Protection Regulation 2016/679 (GDPR) has direct application in France. The other principal, but not exclusive, source of data protection law is the Loi Informatique et Libertés, which supplements the GDPR. Both are enforced by the French data protection regulator, the CNIL.
The GDPR has extraterritorial effect by virtue of its Article 3(2) which provides that the regulation applies to the processing of personal data of individuals who are “in the Union” by an entity not established in the Union, where at least one of the following two criteria are met: (i) goods or services are offered to individuals in the Union, regardless of whether payment is expected; or (ii) the behaviour of individuals in the Union is monitored, in so far as that behaviour takes place in the Union.
Only those processing activities covered by the criteria set out above are subject to the requirements of the GDPR. To date, the CNIL has not enforced the law outside of the European Union.
Enforcement actions by the CNIL are expected to increase over the months and years to come. Since the law came into effect in 2016, there has been a period of adjustment for all parties, and relative leniency on the part of the CNIL. However, there are signs that this will not last; Google and Amazon both received hefty fines (EUR100 million and EUR35 million, respectively) at the beginning of December 2020, relating to their use of online cookies. The maximum sanction for breaches of the GDPR is 4% of global annual revenues, or EUR20 million, whichever is higher. Provable economic losses is not explicitly listed as one of the criteria to be considered by regulators when setting the amount of a fine, but it may be relevant to assessing the overall gravity of the relevant breach.
All significant matters have been previously dealt with.
Tech and Data Regulation
Increased regulation of the tech sector in Europe is a continuing trend, and a number of important legislative proposals – aimed at both updating old laws and introducing entirely new rules – have been put forward in the past few months. Many of the initiatives have emerged as part of the European Union’s Digital Single Market strategy, which was launched in 2015 as a means of harnessing the transformational changes introduced by digitalisation, for the benefit of the entire EU community, including through the articulation of a harmonised approach to rule-making in this sector.
Although not originating in France, many of these new rules must either be transposed into French law or implemented directly in the context of existing legal frameworks. This is the case, for instance, with the EU Copyright Directive, which will have a significant impact on many online platforms. France was the first EU country to implement any of the Directive’s provisions, with some controversy, and the status of this project is presented in more detail below.
Other significant outputs of the Digital Single Market strategy are the Digital Services Act and the Digital Markets Act, the draft texts of which were recently issued. The themes and priorities of the legislative package were the subject of much discussion, including in the form of an EU-wide public consultation. The publication of the proposed regulations was eagerly awaited, and the second part of this article provides a brief overview of the more significant provisions, and their relevance for the French market.
Finally, French implementation and enforcement of the EU General Data Protection Regulation remains a key area as the French data protection regulator has made clear its intent to step up enforcement actions and sanctions – both financial and non-monetary. The third and final part of this article will provide an overview of regulatory enforcement trends and recent decisions, and an update regarding how the French regulator has responded to the European Court of Justice’s decision in the Schrems II case, which is having a meaningful impact on international transfers of personal data.
French implementation of the EU Copyright Directive
The EU Copyright Directive (the “Directive”) was adopted on 17 April 2019, with a view to updating the copyright and neighbouring rights regime to new digital technologies. The controversy surrounding certain of its provisions and their potential impact on some internet platforms has been well documented. Most focus has been on Articles 15 and 17 of the Directive, which impose a set of new (and potentially costly) obligations on online content aggregators and content-sharing service providers.
France was the first country to begin implementing the Directive in July 2019, with a law that creates neighbouring rights for press agencies and publishers, thereby transposing Article 15 of the Directive. Thus, since 25 October 2019 in France, websites that reproduce press content (or an excerpt thereof) must obtain prior authorisation from the corresponding press agency or publisher, and pay them a licence fee for such use.
This new regime has given rise to intense litigation, particularly between Google and French press publishers regarding the compensation obligation, and the case has gone all the way to the Paris Court of Appeal; in October 2020, it was decided that Google was compelled to negotiate remuneration for publishers and agencies in exchange for indexing their press content. For companies with business models that involve news aggregation, it is now clear that they will incur additional costs in the form of licence fees (and expenses associated with negotiating these) to be paid to press publishers and agencies, as well as clear legal risks for non-compliance.
France is on the verge of implementing, by means of a government ordonnance (the “Order”), the remaining provisions of the Directive, including the highly contentious Article 17 that targets online content-sharing providers, such as YouTube, TikTok and Dailymotion. The Order will be adopted before 7 June 2021, which is the deadline imposed by the Directive for its transposition by member states.
Although the draft Order will not be available for public review before its adoption (unless there is a leak), its provisions are likely to mirror the draft Law on Audio-Visual Communication and Cultural Sovereignty in the Digital Age (Projet de loi relatif à la communication audiovisuelle et à la souveraineté culturelle à l'ère numérique) – the “Draft Law” – that was published in December 2019 in order to implement the Directive in France, before its parliamentary review was interrupted because of the COVID-19 crisis.
In general terms, the new regime will add a heavy burden on online platforms that allow the sharing of content uploaded by its users. Such platforms (online content-sharing service providers) will have to obtain authorisation from the content rights-holders (ie, the author, the producer, the performer or any other rights-holder, as the case may be) for sharing by their users.
In the absence of any such authorisation, a platform can be held liable for publication of the content unless it is able to demonstrate the following:
Under the Directive, application of the new regime has a relatively broad scope, although some activities – such as online marketplaces, electronic communications services providers, non-profit online encyclopaedias or open-source software developing and sharing platforms – are excluded. Such scope may be further narrowed in France by the Order (or a subsequent decree), which will certainly provide for quantitative criteria to be taken into account to exclude small platforms (eg, the number of files uploaded by users, the type of files and the audience of the platform).
In any event, the technical and organisational measures that will need to be implemented in order for platforms to benefit from the defence, in the absence of authorisations (and some content producers, notably in the audio-visual sector, have made clear that they will not grant the necessary licences) will add additional operational costs for impacted platforms. The absence or lack of such measures will expose the platform to copyright infringement actions and to the payment of damages to rights-holders for use of their work.
Other elements of the Directive may be fine-tuned by the Order or through subsequent decrees. In particular, as to the territorial scope, targeted platforms will likely be those that provide users in France with unauthorised access to protected works, irrespective of the place of broadcast or the company’s country of establishment. The forthcoming French regime is also likely to require that authorisation from rights-holders be obtained in the form of a formal contract, which was not made clear in the Directive.
The Digital Services package
One of the most significant legislative developments for the tech sector in 2021 will be the introduction of the European Commission’s much anticipated Digital Services Act and Digital Markets Act (DSA). The DSA constitutes a package of rules aimed at modernising and harmonising the legal framework applicable to digital services in Europe. According to the Commission, the package “will strengthen the Single Market for digital services and foster innovation and competitiveness of the European online environment". A key objective is to update the legislative framework introduced by the eCommerce Directive 2000/31/ec, back in 2000.
The proposals, which take the form of regulation, and are thus directly applicable in each European member state, have two main pillars:
More specifically, the Digital Services Act maintains the liability exemptions contained in the eCommerce Directive, and the law specifically provides that intermediaries are not subject to a general monitoring obligation and that mandatory processes for dealing with illegal and harmful online content are introduced – for instance, in the form of user complaints and appeal mechanisms. Additionally, there are rules relating to targeted advertising, and increasing the transparency obligations of online platforms in a number of areas. Each member state is to designate an authority responsible for enforcement, called the Digital Services Co-ordinator, and proposed sanctions can be as high as 6% of annual income or turnover.
In relation to competition and consumer protection, the Digital Markets Act seeks to impose asymmetric obligations on the gatekeepers that operate "core platform services", which include online intermediation services, online search services, social networks, advertising services, video-sharing platforms, cloud services, operating services and number-independent interpersonal communication services). Gatekeepers will be designated by the European Commission and will be subject to specific obligations, such as refraining from combining personal data from different services, mandating certain information sharing and the requirement to ensure the interoperability of their platforms for other services. Fines for non-compliance may be as much as 10% of the gatekeeper’s total turnover in the preceding financial year.
In France, a legislative proposal (loi Avia) – aimed at imposing stricter content takedown obligations on platforms – was struck down by the country’s Constitutional Court in June 2020, on the grounds that application of the rules would have a disproportionate impact on freedom of expression. Nonetheless, it is clear that the overall objective pursued in Europe, through the combined effect of the DSA, the Copyright Directive (see above), and the various national and supranational efforts aimed at stemming the spread of disinformation, is a fundamental shift in the character of the content disseminated online, and an operational transformation of the responsible platforms.
GDPR enforcement in France and response to Schrems II
In the area of data regulation, French implementation and enforcement of the EU General Data Protection Regulation 2016/679 (GDPR) remains a major issue for companies, particularly those with data-driven business models. The data protection compliance landscape is in constant evolution, in line with the decisions and recommendations issued by European and national authorities, of which the Schrems II decision is a striking example. In addition, we have seen that in a post-Brexit landscape, the French data protection authority (CNIL) appears determined to assume an important role amongst the European data protection authorities, and on the domestic front has made clear its intention to increase enforcement activities.
Schrems II impacts
The Schrems II decision (Data Protection Commissioner v Facebook Ireland Ltd, Maximillian Schrems) issued by the European Court of Justice (ECJ) on 16 July 2020 was perhaps 2020’s most important data protection compliance challenge, in particular for the increasing number of companies whose operations involve international exchanges of personal data. The ECJ decision invalidated the EU-US Privacy Shield decision, which allowed for certain transfers of personal data between the European Economic Area (EEA) and the USA to occur without further formality.
In addition, while the ECJ validated the use of the EU-approved Standard Contractual Clauses (SCCs) to govern such transfers, the decision also made clear that their execution could not be a stand-alone act and that supplementary measures would need to be implemented by controllers, if necessary, to achieve a level of protection for transferred personal data that is substantially equivalent to that guaranteed within the EEA. According to a survey published by Digital Europe in December 2020, 85% of respondents rely on SCCs to transfer personal data outside the EEA in compliance with the GDPR, and the information technology sector is the largest user.
At the time of writing, the European Commission has issued new draft SCCs that address the impacts of the Schrems II decision, and the European Data Protection Board (EDPB) has published draft compliance guidance. Both are subject to public consultation and should be finalised at the beginning of 2021.
Taken together, the ECJ decision, EDPB guidance and the European Commission’s SSCs set out a high compliance threshold for international data transfers, with burdens and legal uncertainty that weigh primarily on European data exporters.
Although several European data protection regulators have issued independent statements or recommendations regarding their interpretation of the impact of the Schrems II decision and the nature of the compliance measures required, in particular regarding the legality of data transfers to the USA, the CNIL has not yet publicly adopted a specific position. The EDPB recommendations should, therefore, guide international transfer of personal data in France for the time being. The impacts of the ECJ decision will continue to be felt through 2021.
The CNIL’s enforcement priorities and actions
In June 2020, the CNIL published its annual report, detailing the activities carried out during the previous year and setting its objectives for the following years. The CNIL’s main areas of focus will be the digital issues at stake in the daily lives of French people, with a view to ensuring increased individual control over their personal data.
In line with that strategy, the respect of data subject rights is an essential issue and figured prominently in the CNIL’s recent enforcement action against two entities that are part of the Carrefour group. The two companies were fined an aggregate total of EUR3.05 million.
The rules relating to cookies and other tracking technologies vary slightly from jurisdiction to jurisdiction within the EU, since the obligation to obtain consent for their use stems from national implementation of a directive, not the GDPR itself.
To conclude, if companies processing personal data in France have so far been able to benefit from a certain leniency on the part of the CNIL, it is now clear that this will not continue. There is no doubt that the trend towards more sanctions will gather pace in the future.