The German government has tightened the rules for its review proceedings for M&A involving non-EU investors, with changes to its German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung) that significantly increase foreign investment oversight.
The new rules, which came into force on 18 July 2017, introduce a new notification requirement for non-EU investment in critical infrastructure and security-related technologies, and extend the review periods, potentially causing delays to closings.
Previously, non-EU investors were not required to notify the German government of the direct or indirect acquisition of a German company, unless the company was active in developing or manufacturing defence and encryption technology. Now, the industry sectors subject to a notification obligation have been expanded to cover critical infrastructure and security-related technologies, with the government explicitly identifying energy, water, nutrition, information technology, healthcare, financial services and insurance, and transport and traffic for closer inspection.
Security-related technologies such as certain cloud computing providers, critical infrastructure software design and health telematics will also fall within the new rules.
Investors embarking on mergers and acquisitions where they are acquiring (directly or indirectly) at least 25% of the voting rights in a German company in one of these sectors must now notify the German Federal Ministry for Economic Affairs and Energy, which will determine whether the deal poses a threat to public order or security. The government can decide to initiate formal review proceedings within three months of notice of the signing of the deal, and has the power to prohibit the transaction – or issue deal conditions – on the grounds of public security up to four months after obtaining all the documents.
This effectively doubles the amount of time that the government has to conduct its review, and means that the review periods no longer align with German merger control proceedings, adding a new layer of delays to timetables.
Foreign investors looking to acquire German companies in the impacted sectors will therefore need to factor more time in to their closing schedules, and may wish to consider submitting notifications earlier than they might have done previously. We would encourage acquirers to consider notifying ahead of signing to avoid legal uncertainty, where that is appropriate in the broader context of the deal.
In addition, it is worth noting that the new rules also apply to direct corporate acquisitions by EU entities that have no significant business activities, and no permanent presence in the EU, other than to do with the deal. This rule makes sure that the government can also scrutinize acquisitions by non-EU investors using EU entities to circumvent German foreign investment control.
While the German government has said that, in spite of the introduction of these rules, Germany remains one of the world’s most open economies, we do expect the government to open more investigation procedures than before, and we are already seeing it taking a stricter approach and reopening investigations that were already closed. We can thus expect a further impact on transaction timelines due to the higher number of investigations taking place.