On July 11, 2008 the German Federal Ministry of Economics and Technology (Bundesministerium für Wirtschaft und Technologie – BMWi) published a revised draft act to amend the German Foreign Trade Act (Außenwirtschaftsgesetz – AWG) and the corresponding German Foreign Trade Regulation (Außenwirtschaftsverordnung – AWV). The draft act passed the cabinet on August 20, 2008.
Pursuant to the draft act, a new review and clearance procedure shall be established that entitles the BMWi to prohibit or restrict investments in 25 percent or more of the voting rights in German companies by non-German private and public investors. In contrast to the current law, the scope of the draft act is no longer restricted to investments in companies active in the fields of arms or encryption technology, but shall apply to a variety of industries.
Besides the investment threshold of 25 percent, the only further requirement for a prohibition or restriction of a transaction by the BMWi is if the public order or safety of the Federal Republic of Germany is endangered (Gefährdung der öffentlichen Sicherheit oder Ordnung) by the investment and if the investor is regarded as (i) a non-EU entity or (ii) an EU-resident entity with a minimum of 25 percent of the voting rights in such EU-resident entity held by a non-EU entity.
Upon execution of the underlying share purchase agreement or the publication of a tender offer relating to a minimum of 25 percent of the voting rights in a German company, a review period of three months commences. If the BMWi decides to initiate a formal review within such period, it informs the investor accordingly and requests a detailed set of transaction documents. Upon receipt of the documents, the BMWi has another two months to decide whether the transaction shall be restricted or prohibited. Since a prohibition by the BMWi would void the entire transaction with retroactive effect, the draft act provides that an investor may apply for a binding clearance of the transaction in advance – i.e., prior to the commencement of the three-month review period. If the BMWi decides to initiate a formal review, the review period of two months commences upon receipt of the transaction documents.
The draft law creates significant legal uncertainty for global investors. Although the BMWi has estimated that the amendment of the AWG and the AWV would affect only approximately 10 transactions per year, one must consider that the draft law has been issued as a reaction to widespread fears that foreign state funds may take over Germany’s key industries. Therefore, an amended AWG with its vague legal terminology “danger to the public order and safety of the Federal Republic of Germany” could serve as a political means to prevent non-German investors from acquiring Germany’s key industry companies if such an acquisition is unwanted for political reasons.
Against this background, controversy has arisen in Germany regarding whether the draft act is in line with the principle of the free movement of capital under EU law. Compliance with EU law is disputed by German trade associations – e.g., by the Chambers of Industry and Commerce (Industrie-und Handelskammern). However, irrespective of such ongoing discussions, the draft law has already passed the cabinet, so the next step in the legislative procedure would be for the German parliament (Bundestag – BT) to decide on the draft. If the BT approves it, the draft act could yet come into force in 2008.
As a result, any non-German investor would have to review whether the contemplated investment in a minimum of 25 percent of the voting rights in a German company could be subject to a prohibition or restriction by the BMWi. If a corresponding risk exists, the investor has to apply for the clearance of the transaction in advance to avoid legal uncertainty.