Following a proposal by the Federal Government adopted in August 2008, the first chamber of the German Parliament (Bundestag), on 13 February 2008, has passed an amendment to the Foreign Trade and Payments Act and its implementing ordinance, which aims to control acquisitions of German companies by investors based outside the EU and European Free Trade Association (EFTA).
In a nutshell, the main elements of the amendment are as follows.
- Any acquisition of a direct or indirect stake of at least 25 per cent of the voting rights in a resident company by a non-EU and non-EFTA investor may be subject to formal investigations by the Federal Ministry of Economics (‘the Ministry’). In the calculation of the 25 per cent threshold, voting rights held by third parties have to be considered if the investor has agreed with the third party to exercise their voting rights jointly.
- Control is not restricted to specific industry sectors or types of investors (eg sovereign wealth funds).
- Ministry investigations may be initiated within three months of signing by requesting comprehensive information on the transaction.
- The Ministry is entitled, within two months of receiving the requested information, to prohibit or otherwise restrict the transaction.
- Restrictions may be imposed only if the transaction is considered a ‘threat to public order or security’. This requirement is to be interpreted narrowly and in line with EU law.
- Restrictions are subject to the approval ?? of the Federal Government.
- There is no legal obligation to notify the Ministry of a transaction. However, investors may apply for a binding clearance certificate (see below).
- The validity of the acquisition is subject to a condition subsequent that the Ministry prohibits the purchase within the specified time limits.
Acquisitions by EU and EFTA investors may also be subject to control
The amendment also allows for the control of acquisitions by investors based inside the EU and EFTA. However, two conditions must be fulfilled for the control to apply:
- a non-EU and non-EFTA investor must hold at least 25 per cent of the voting rights in the acquirer; and
- there must be indications of an abusive or circumventory structuring that is intended to undermine the control of the acquisition.
The latter prerequisite has been introduced late in the legislative process. According to the legislative materials, it aims to restrict the control of indirect acquisitions by non-EU and non-EFTA investors to cases in which the direct acquirer appears to be a mere ‘artificial construction’. This will apply, for instance, to companies without any significant own economic activity (‘letterbox companies’). That is to be examined on the basis of the actual presence of the company in the form of business premises, personnel and equipment. Similarly, according to the reasoning, an artificial construction shall be assumed to be present if the acquisition does not seem to make any economic sense.
Abusive or circumventory structuring means that the transaction structure has been deliberately chosen to undermine the control of the acquisition. If, therefore, the founding of the EU- or EFTA-based company primarily serves other purposes (eg tax purposes), the control arguably does not apply. The burden of evidence to demonstrate that there are indications of an abusive or circumventory structuring that is intended at undermining the control of the acquisition lies with the Ministry. However, in certain cases (ie letterbox companies) such abusive intent could be assumed and it will then be up to the investor to prove that there is an economic sense behind the relevant structure. Thus, it has to be carefully assessed in every case whether the authorities may have reasons to believe that the structure is abusive or circumventory.
Investors may apply for a binding clearance certificate
Investors may apply for a binding statement by the Ministry that the transaction is not considered a threat to public order or security (clearance certificate). The application must include information on the planned transaction, the investor and his business area. It may be made before signing. Unlike in the Federal Government’s proposal, the Ministry is now obliged to grant the certificate if there are no concerns over public order or security (no discretion). Furthermore, the clearance is considered to be given if the Ministry does not decide to open further investigations within one month of the application for clearance.
Compatibility with EU law?
Despite the changes made in the legislative process, doubts remain over whether the amendment is in line with EU law. In August 2008, Freshfields Bruckhaus Deringer issued an expert opinion with the Federation of German Industries (BDI; on the basis of the Federal Government’s proposal). This assessment came to the conclusion that the proposed legislation infringes the EC Treaty’s provisions on the free movement of capital within the EU. In particular, it does not meet the tests of legal certainty, foreseeability and proportionality inherent in the principle of free movement of capital. Similar legislation has been struck down by the European Court of Justice (ECJ) in other cases, most recently the Spanish law that had been applied in E.ON’s takeover offer for Endesa and in Acciona’s and Enel’s competing bids for the power company. Similar provisions in the French jurisdiction are subject to infringement proceedings before the European Commission. It is possible that the Commission could also initiate infringement proceedings against Germany once the amendment enters into force.
Effects on transactional practice
The amendment’s effects on transactional practice cannot be underestimated. The new potential restrictions must be considered in any transaction. How to deal with the new requirements depends on the concrete transaction structure and the investor’s and target’s business areas. If the new investigation procedure is in principle applicable, parties should at least consider applying for a clearing certificate and provide for a respective closing condition in the sale and purchase agreement. It is to be expected, though, that the Ministry will exercise its right of control only in scarce cases.
The proposal must still pass a vote in the second chamber of the German Parliament, the Federal Council (Bundesrat). It is then expected to enter into force shortly after its promulgation by the president, most likely in March 2009.