Following a wave of recent takeovers of major German technology companies by foreign (notably Chinese) investors, the German government is increasingly applying Germany's foreign investment control regime, which was amended seven years ago to an industry-sector unspecific investment control instrument. These developments, illustrated by two recent decisions, may give certain investors pause for concern with respect to German investments, in terms of predictability, timing, and even feasibility.
I. The Recent Cases
On 21 October 2016, the German Federal Ministry of Economics and Energy (the "Ministry") withdrew the approval of the EUR 670 million takeover of German Aixtron SE, which supplies equipment to the semiconductor industry, by Chinese investor Fujian Grand Chip Investment Fund LP. More than six weeks after the parties had received a "Clearance Certificate" on 8 September 2016, the Ministry reopened the foreign investment review proceedings taken in connection with the public takeover offer, citing security concerns that Aixtron products could be used for military purposes.
On 27 October 2016 less than one week later the German government stopped another Chinese investor consortium, comprising strategic investor IDG Capital Partners, Chinese lighting company MLS and financial investor Yiwu, in its more than EUR 400 million acquisition of German Osram's light bulbs unit Ledvance. In this case, no "Clearance Certificate" had been obtained, but the government called for opening an in-depth foreign investment control review after the transaction had been notified.1
The two recent examples appear to be the latest signs of a growing protectionist reaction by the German government to push back on the wave of foreign takeovers of domestic key industries in particular China's appetite for foreign cutting-edge technology businesses. Following the acquisition of German industrial robot maker Kuka AG by China's Midia Group Co. for EUR 4.5 billion earlier this year, German policy makers have initiated an open debate on effective measures to block or impose conditions on foreign takeovers and acquisitions in strategic industries, particularly by investors with ties to foreign governments, such as foreign sovereign wealth funds.
German foreign investment reviews, let alone a reopening procedure, create significant legal uncertainty for a sales transaction, as the timeline of the review is highly unpredictable. Customary long-stop dates and rescission rights in public takeovers and private sales transactions are likely to be triggered/exceeded, since statutory review periods do not in most cases formally commence. This is because the review period only begins when the Ministry has received a complete notification. Recent practice suggests a quite arbitrary handling of the launch of the formal review period by the Ministry, i.e., (1) by declining to confirm completeness of the notification and/or (2) by taking the position that the launch of the review period can be pushed back through continuous rounds of further information requests. While such position seems difficult to reconcile with the underlying statutory framework, the de facto approach by the Ministry has the potential to frustrate certain inbound investments. Indeed, a foreign investment review of an acquisition can take months until there is clarity on whether or not a deal goes through (well beyond what is envisaged by the statutory framework).
II. German Foreign Investment Rules
German foreign investment rules have not attracted much attention for a long time. For starters, their scope was limited and the political will to employ them was even less.
However, today's foreign investment control proceedings in Germany are based on the Foreign Trade and Payments Act (Auenwirtschaftsgesetz - AWG) and the accompanying Foreign Trade and Payments Ordinance (Auenwirtschaftsverordnung - AWV), which establish a review and clearance procedure enabling the German government to block or restrict direct or indirect investments by foreign investors of 25 percent or more of the voting rights in German target companies2. Before 2009, the scope of such foreign investment review was limited to investments in the fields of defence or encryption technology, but since then, it has been extended by the German legislator to all industry sectors.
Foreign investment review proceedings can be opened by the German government if "the public order or security" or "material security interests" of the Federal Republic of Germany are endangered by the envisaged investment. This also includes transactions outside of Germany where foreign investors acquire a non-German target company which directly or indirectly holds at least 25 percent of the voting rights in a German company. Technically, German foreign investment control rules distinguish between (1) industry-sector specific review proceedings in the fields of defence or encryption technology, which need to be notified to the Ministry (non-compliance would however not trigger administrative fines, unlike, e.g., in German merger-control proceedings), and (2) industry-sector unspecific review proceedings outside such sensitive sectors where a notification to the Ministry by the investor is voluntary.
In industry-sector unspecific review proceedings, if no notification is submitted, the Ministry may decide to open a formal review process within an initial period of three months upon execution of the underlying share purchase agreement or the publication of a tender offer. The investor is then requested to submit a detailed set of documents and information. Only upon complete provision of such documents and information does the two-month review period commence - during which the government may decide whether to restrict or prohibit the respective transaction.
As mentioned above, the newly staffed decision chamber within the Ministry shows stark reluctance to confirm completeness of the notification, thereby creating uncertainty about the launch (and length) of the review period.
Foreign investors may notify the Ministry and apply for a binding "Clearance Certificate", which shortens the initial period of three months to one month, during which the Ministry must decide whether or not to open a formal review. In sector specific review proceedings, a one-month review period launches after the mandatory notification of the transaction by the investor. If the Ministry decides to initiate a formal review, a one-month review period commences upon complete receipt of the requested documents, which, again, will in most cases not be confirmed. In practice, the unpredictable timing of the review process can lead to a factual roadblock to getting the deal through.
Moreover, even if a binding Clearance Certificate has been obtained by a foreign investor, the Aixtron case shows that the German government will not hesitate to withdraw a Clearance Certificate if it turns out later that "the public order or security" interests or "material security interests" of the Federal Republic of Germany could be endangered even a significant time after the initial clearance of a transaction.
The recent Aixtron and Osram cases reveal a significant legal risk and uncertainty for foreign investors arising from the German foreign investment control regime. After expanding control proceedings to all industry sectors in 2009, the German government has a tool against foreign state funds and foreign investors seeking to take over significant key technologies in Germany. In particular, the vague legal terminology of the legal regime "the public order or security" or "material security interests" provides German authorities with a useful instrument to block global investors from acquiring German public and private companies.
The two most recent reviews related to attempted Chinese takeovers. However, the German foreign investment control regime applies to other foreign investments as well: (1) the mandatory sector specific review (in the fields of defence or encryptions technology) applies to all foreign, i.e. non-German investors whereas (2) the sector unspecific review outside such special sectors only applies to non-EU investors (UK investors might soon fall into the latter category after Brexit).
Foreign investors may face significant disadvantages from the recent shift of German foreign investment control proceedings, particularly in competitive auction sales transactions. While this seems particularly true for certain investors (notably Chinese) and certain industry sectors (however, not necessarily limited to those protected by the sector-specific review procedure), there is growing unease on the Ministry's new stance on foreign investment generally. These concerns are exacerbated through an arbitrary and unpredictable process. It would seem to be helpful if German courts were to be tasked to concretise the powers and duties of the Ministry in the area of foreign investment control to ensure that Germany remains open for business3.
In the meantime, foreign investors need to carefully review whether a contemplated acquisition or tender offer could be subject to a German foreign investment control review, bearing in mind that a prohibition by the German government would void the entire transaction with retroactive effect. Attention needs to be paid in particular to the closing mechanics of transactions, in order to optimize timing and to avoid unpredictable legal uncertainty for a transaction that becomes the subject of a complex investment review process. Legal risks associated with the German investment control regime can be minimized, but they cannot be eliminated, as the German investment control rules allow the German regulators to step in on an industry-wide basis.