Second public veto in France against a US investor

On 5 October 2023, Flowserve, a US multinational active in the provision of fluid motion and control products and services, announced that the French Ministry for the Economy had rejected its acquisition of two French subsidiaries of Velan Inc., Segault and Velan SAS. These companies manufacture and supply valves for French nuclear submarines and nuclear reactors.

Although prohibitions remain few in number, this prohibition is worth noting as it is the second public veto by the French Ministry for the Economy prohibiting an acquisition by a US investor. In most EU jurisdictions, investments from the US are - where they raise certain prima facie public interest concerns - typically mitigated but still cleared by relevant regulators. Prohibitions against US investors are very rare.

The precedent for this was the planned acquisition of Photonis, a high-tech French company supplying critical products (night vision systems) for the defence industry in France, by the US company Teledyne, which was blocked by the French Minister for the Economy in December 2020. The issue at stake for the French government in that case was to guarantee the continued supply of equipment that was not covered by the International Traffic in Arms Regulations - the takeover of the French target by an American company would have posed a serious risk to the French defence industry’s ability to export.

While the exact rationale behind the prohibition of Flowserve has not been made public, a similar reason has been put forward to explain the outcome, as the acquisition could have brought the Charles de Gaulle aircraft carrier and French nuclear submarines under the scope of US regulations that may limit companies’ freedom to export. In the French government’s view, this could have made the French naval defence industry dependent on American decisions.

It appears that the remedies and undertakings offered by Flowserve were not considered sufficient by the French ministries to satisfactorily address these risks, as indicated by Velan in its statement. This is noteworthy insofar as behavioural supply remedies do often solve ITAR-related concerns in other foreign investment control proceedings.

Another point in common with Photonis was - undoubtedly - the active role played by French members of parliament. In the latest case, the envisaged transaction prompted numerous parliamentary questions to members of government leading the Ministry of Armed Forces to announce - somewhat hastily - that France would veto the transaction. In the end, it took a further five months (almost eight in total) for this refusal to materialise.

This prohibition illustrates France’s determination to retain control over its supply chains in highly sensitive sectors (a concern that can be seen in the guidelines published by the Ministry for the Economy), as well as to protect itself from the very broad application of certain foreign (particularly non-EU) regulations, specifically certain US regulations, notably ITAR - which is also a concern for other European foreign investment regulators. Against this backdrop, it is key for investors to consider at an early stage of planning what commitments they would be prepared to make to address the concerns of the various ministries.