Protectionism versus free movement of capital: the Alstom case

Arnaud Montebourg cannot be stopped. A preacher of economic protectionism, he is widely supported among the left wing of the Parti Socialiste, and some say he was promoted Minister of the Economy, Finances and Industry by François Hollande in order for the latter to tame his electorate.

On Thursday the 15th of May, in reaction to the recent context of a possible takeover of Alstom by General Electrics, the Ministry enacted a decree extending the list of “strategic” sectors in which any foreign investor is subject to prior authorization by the French authorities.

Montebourg, not aware of the negotiations between the two firms, saw red after the announcement of a possible takeover, arguing that Alstom’s leaders lacked “civisme” (public spirit), pointing out the fact that Alstom makes nuclear turbines for EDF’s powerplants.

Deterring investment, you say?
Deterring investment, you say?

The original legislation is a decree of 30 December 2005 that establishes an authorization procedure only in cases precisely described in the decree for foreign investments in certain sectors of activities that can affect public policy, public security or national defense. Those sectors were, until last Thursday, limited to “activities concerning equipment for intercepting communications or eavesdropping; services for evaluation of security of computer systems; some specific dual-use (civil and military) technologies; cryptology; activities of firms that are repositories of defense secrets; research, production or trade in arms, munitions, explosives or other military equipment; or other industries engaged into contracts for supplying the defense ministry with goods or services described above”.[1]

This legislation was ultimately justified by public security and national defense; the link between the sectors protected and the objectives being pretty obvious and straightforward. It notably derived from a similar legislation adopted in the USA after 9/11 where the Committee on Foreign Investment was enabled to block a higher number of foreign takeovers on the grounds of a wider (understand: blurry) definition of “national security”, most probably encompassing purely economic interests.[2]

In our case, the French decree advances the need to “fight tax avoidance and tax fraud”[3] to extend the protected sectors to:

All other activities relating to material, products or services – including the ones concerning security and the good functioning of infrastructure and equipment – that are essential to the safeguard of the country’s interests relating to public order, public security or national defense, listed below:

(a)    Integrity, security and continuity of supplying in electricity, gas, hydrocarbons or any other energy resource;

(b)   Integrity, security and continuity of supplying in water within the respect of public health regulations;

(c)    Integrity, security and continuity of exploitation of transport networks and services;

(d)   Integrity, security and continuity of exploitation of electronic communications networks and services;

(e)    Integrity, security and continuity of an établissement or installation of vital importance relating to national defense;

(f)    Protection of public health”[4]

Two observations:

(1) It is a discriminatory legislation: EU investors are only subject to prior authorization when their goal is to “take control” of a strategic company or to “take control of all or part of the [strategic] sector of activity” of the French company concerned,[5] whereas third countries investors are subject to more stringent rules: any acquisition of more than 33,33% of the French company’s capital or voting rights comes with the need to get an authorization. Moreover, the list of strategic sectors is more limited for EU companies than for third country companies.

(2) The “Montebourg extension” covers many areas of economic activity, including the field of energy where Alstom is particularly active. The decree seems to be adopted on the basis of a mere hostility towards a third country company, General Electrics, whose intention to acquire Alstom was announced one week before.

Such legislation is a blatant restriction on the free movement of capital, one of the four EU economic freedoms. Is it yet illegal, or contrary to the « ultra-liberalism that Brussels imposes us every day » ?  Let us see.

  1. Free movement of capital: the applicable framework

Free movement of capital essentially covers the investment of funds. « Direct investment in a company by means of shareholding with the view to effectively participating in the management and control of a company » constitutes a capital movement.[6] As takeovers represent an effective shift of control of a company, they fall within the scope of free movement of capital as covered by article 63(1) TFEU. They also fall under the free movement of services (article 49 TFEU). However, there is a difference between those two provisions as to their territorial scope of application.

Indeed, article 49 TFEU only applies when the situation is intra-EU, whereas the scope of article 63(1) TFEU is extended to “all restrictions on the movement of capital between Member States and Member States and third countries shall be prohibited”. This scope of application is unique, with comparison to the three other freedoms[7], as capital movement both from non-EU members to the EU and from the EU to non-EU members is covered by this provision.

Unlike 49 TFEU, 63(1) is thus applicable to the Alstom takeover case. It has direct effect,[9] at least a vertical one.[10] Any legal person can therefore rely on the rights conferred by it before national courts, to challenge national legislation. In Skatteverket v. A, the ECJ confirmed that the “third country” dimension of Article 63 has the same material scope as for intra-EU investments, notwithstanding the possibility of special safeguard measures under Articles 64,[11] 65,[12] 66[13] and 75[14] TFEU.[15]

  1. Discriminatory nature of the French legislation

Among other types of measures, article 63(1) prohibits national legislation that operates a discrimination on grounds of nationality, place of residence or place where capital is invested.

Hence, the French legislation is a blatant restriction on the free movement of capital as it directly discriminates between investors as regards their origin,[16] notably by differentiating EU investors from third country investors. This is apparent both from the text and from Montebourg’s public speeches. The measure contrasts with the non-discriminatory nature of a Portuguese rule which imposed potential shareholders to seek prior authorization from the Portugese authorities to hold more than a specified number of shares in certain Portuguese companies, which, still, was qualified as a restriction by the European Court of Justice (ECJ).[18]

In addition to the Portuguese case, the ECJ said in Church of Scientology that “a provision of national law which makes a foreign investment subject to prior authorization constitutes a restriction on the movement of capital”.[19]

A restriction is not, however, illegal per se. It still can be justified on certain grounds. When a measure is a directly discriminatory (e.g. on grounds of nationality) restriction on free movement of capital, a State can justify it by the express derogations found in article 65(1) TFEU. In order to be legal, a discriminatory measure must respect four conditions:

– The goal advanced by the measure must fit the express derogations’ objectives (namely: fight against tax avoidance and tax fraud, public policy, or public security);

– The measure taken must be suitable in order to achieve that goal (that means, it must be efficient);

– The measure taken must be necessary in order to achieve that goal (it must be the least restrictive measure possible);[20]

– The measure must be in conformity with the principle of legal certainty.[21]

If, and only if one of these criteria is not fulfilled, the measure will be deemed contrary to EU law. It is important to know that the ECJ qualifies a lot of national measures as restrictions but is somewhat eager to leave some freedom to the Member States within the context of free movement of capital.[22]

Sadly for the French government, the discriminatory nature of the decree limits the potential lines of justification to the ones found in the express derogations provided by article 65(1)(b) TFEU. This leaves three grounds for a justification:

– Fight against tax avoidance and tax fraud;

– Public policy;

– Public security.

Yet, the Government was a bit careful when adopting this legislation. Next to the classic “public policy – public security” justification used in 2005 now figures a objective of “fighting tax avoidance and tax fraud”. At first I thought it was a joke, but no, no, this is just a new French Government justification of colbertisme.

  1. Analysis of possible justifications

a. Fight against tax avoidance and tax fraud

In Eurobond, the ECJ said that “a general presumption of tax evasion or tax fraud cannot justify a fiscal measure”.[23]

If General Electrics were to challenge the French decree, the ECJ would have to answer the following question: “can a general presumption of tax evasion or tax fraud be suitable and necessary to justify a system of prior authorization discriminating towards foreign investors only?

Please do think about it, try your best, and if you get a “Yes”, e-mail me. I am looking for fairytales to tell my niece.

b. Public policy and public security

The ECJ case law on public policy and public security leaves few space to the States for justifications. While States remain, in principle, free to define what constitutes public policy and public security, these grounds of justification are to be interpreted strictly, i.e. they can be relied on only if there is a “genuine and sufficiently serious threat to a fundamental interest of society”.[24]

It will be needed to assess to which extent all the sectors introduced by the Montebourg decree fit within this strict framework, as justifications provided by the decree are not at all explained. Moreover, for any future significant foreign investment in the fields mentioned by the decree, it will have to be established whether such a genuine and sufficiently serious threat exists.

Moreover, in the French case Church of Scientology, also concerning a rule making direct foreign investment subject to prior authorization, such rule was in breach with legal certainty because of its lack of justification and precision.

Here is the main issue: the approach retained by the ECJ is to operate a thorough analysis of proportionality (suitability – necessity), while such a need for precision and detail in motivating a system of prior authorization to takeovers in “strategic” sectors was recently condemned by the Commission for European Affairs of the Assemblée Nationale, which, on the same line of reasoning as Mr. Montebourg, thinks that “in the field of national security, the Raison d’Etat applies, hence the impossibility to publish the true motivation of a decision”.[25]

It seems however that Mr. Montebourg has publicly stated its support for a takeover from Siemens, a German company, for, notably, the reason that Europeans should be able to defend themselves against foreign invasion, just like Chinese or Americans do.

To what extent is the decree is the only and least restrictive way to protect public policy or public security or to what extent is it a « means of arbitrary discrimination » prohibited by article 65(3) TFEU? This, a Court would have to answer, if ever asked to decide.

4. My own political arbitrary interpretation of the Alstom case

Montebourg’s move is, politically speaking, intelligent: it will reassure the left electorate of François Hollande before the European elections; the Commission has not yet reacted, probably by fear of a massive rise of nationalist votes in one week; it could trigger a debate on the harmonization at the EU level of the strategic sectors for the European economy, in which some protection against foreign investment could be useful (here I think about telecommunications, in which European operators are subject to takeovers by foreign firms with critical size).

Yet, as intelligent the move can be considered to be, it will be difficult to hide the amateurism of the government in the Alstom case. Difficult to hide the real motivation behind the decree: purely economic reasons (or may I see purely political reasons?). Difficult to hide the fact that the French Minister of Economy, instead of cleverly using his knowledge, influence and networks, working hand-in-hand with French and foreign companies to get a good deal, had to use his last weapon, legislation, in order for national interests to be taken into account.

Such deterrence for investment, if not condemned by the ECJ in a few years, can have, as of today, dramatic consequences on the attractiveness of France.


[1] Former article R153-2 Code Économique et Financier (CMF);jsessionid=D59547CAB3F231110F3BDF9E577274D9.tpdjo06v_1?idSectionTA=LEGISCTA000006170957&cidTexte=LEGITEXT000006072026&dateTexte=20140518

[2], p. 20.


[4] New article R153-2 CMF;jsessionid=D59547CAB3F231110F3BDF9E577274D9.tpdjo06v_1?idSectionTA=LEGISCTA000006170957&cidTexte=LEGITEXT000006072026&dateTexte=20140518

[5] Article R153-3 CMF.

[6] Case C-367/98 Commission v. Portugal (Golden Share) [2002] ECR I-4731, para.38.

[7] Goods, services, persons.

[8] Barnard, The Substantive Law of the EU, Fourth Edition, Oxford University Press, p. 584.

[9] Case C-101/05 Skatteverket v. A [2007] ECR I-11531, para. 21.

[10] For a controversy on the horizontal effect of 63(1) TFEU, see the Volkswagen case.

[11] (1) Temporal exclusions of measures adopted before 31 December 1993 (2) Possibility of adopting harmonization measures (3) Possibility for the Council to adopt “step backwards” measures as regards liberalization.

[12] Express derogations justified by 95(1)(a) Taxation systems 95(1)(b) fight against tax avoidance, public policy or public security.

[13] Necessity to preserve the balance of payments (exceptional measures).

[14] Framework for administrative measures concerning capital or payments in order to prevent and combat terrorism or related activities. See the Kadi case.

[15] Case C-101/05 Skatteverket v. A [2007] ECR I-11531, para. 38.

[16] The definition of an « investment » changes whether it is made by a company registered under French law but under foreign control (R153-5-1 Code Monétaire et Financier), a company registered under the law of another EU Member State (R153-3 CMF) or a company registered under the law of a third country (R153-1 CMF). Under article L151-3 CMF, all these companies are subject to a prior authorization system if they want to significantly invest in a French company operating in certain sectors of the economy.

[17] Good. You are actually reading the footnotes and noticed one was missing.

[18] Case C-367/98 Commission v. Portugal [2002] ECR I-4731, para. 46.

[19] Case C-54/99 Association Eglise de Scientologie de Paris v. The Prime Minister [2000] ECR I-1335, para. 14.

[20] Case C-367/98 Commission v. Portugal [2002] ECR I-4731.

[21] This requirement is specific to the free movement of capital. See Case C-54/99 Eglise de Scientologie [2000] ECR I-1335, para. 22.

[22] As underlined in Case C-446/04 FII [2006] ECR I-11753, para. 121.

[23] Case C-478/98 Commission v. Belgium (Eurobond) [2000] ECR I-7587, para. 38.

[24] Case C-348/96 Calfa [1999] ECR I-11, para. 11.

[25], p. 26.

Protectionism versus free movement of capital: the Alstom case

Une réflexion sur “Protectionism versus free movement of capital: the Alstom case

  1. A great demonstration of french amateurism indeed. But I am less convinced by the political criticism. Does this kind of measure hurt so much competivity of a whole country ? This kind of investment (strategic areas…) seems to be thought well before action and I don’t think it will be a real threat for someone really motivated. At least government will have to accept an offer. If Hollande keeps on his liberal move, he won’t be able to pay the prize of a « patriotic » choice.

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