Trend towards higher scrutiny of inbound transactions by the Federal Ministry for Economic Affairs and Energy
To avoid any security risks, the Federal Ministry for Economic Affairs and Energy may review the acquisition of domestic companies by foreign buyers in individual cases.
Generally, German law provides for a liberal investment climate and only very limited restrictions on foreign investments. However, the Federal Ministry for Economic Affairs and Energy (the "Ministry") may prohibit or restrict certain foreign investments pursuant to the Foreign Trade and Payments Act (Außenwirtschaftsgesetz —"AWG") and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung —"AWV"). The latter entitle the Ministry to review acquisitions by foreign investors based outside the European Union (EU) or the European Free Trade Association (EFTA).
Such review includes a general, non-sector-related prohibition right ("catch-all") if the acquisition endangers "public order or security" (öffentliche Ordnung oder Sicherheit) of the Federal Republic of Germany. In addition, foreign investments in certain sectors like defense and IT security are subject to mandatory notification.
Although the AWG/AWV review is not mandatory for all acquisitions, as a matter of best practice foreign investors will often initiate a review process as a precautionary measure by asking the Ministry for a non-objection certificate (Unbedenklichkeitsbescheinigung) to ascertain if the transaction could reasonably affect public order or security. If the target company is active in one of the sensitive sectors (defense and IT security), a notification to the Ministry by the direct acquirer is mandatory.
TYPES OF DEALS REVIEWED
Acquisitions of German companies (via asset or share deal) by non-EU-based investors or acquisitions of a direct or indirect stake in a domestic company, after which the direct or indirect share of the acquirer's voting rights in the domestic company reaches or exceeds 25 percent, can be subject to review. The calculation of voting rights must take into account any agreement on the joint exercise of voting rights.
EFTA-based investors (Iceland, Liechtenstein, Norway and Switzerland) are treated the same way as EU-based investors. The Ministry is also entitled to review transactions involving an EU-based investor in which non-EU-based investors hold (directly or indirectly) at least 25 percent of the voting rights, if there are indications of circumvention of foreign investment control (e.g., if the EU-based acquirer is a mere acquisition vehicle without any entrepreneurial activities).
The sector-specific review mentioned above applies to all non-German investors in contrast to the general review process, which only applies to non-EU/EFTA-based investors.
SCOPE OF THE REVIEW
The Ministry may object to or restrict an acquisition if it threatens public order or security. Public security concerns the functioning of the state and its institutions, i.e., safeguarding the state's existence in the face of internal and external influences. The review is not limited to specific sectors. The Court of Justice of the European Union has expressly recognized the relevance of public security to safeguarding telecommunications and electricity services at times of crisis or safeguarding services that are of strategic importance. Additionally, pursuant to one of the most important principles of administrative law, any decision to prohibit or limit the acquisition can only be justified on the grounds of public order or security if it is proportionate.
Any Ministry decision may be challenged before a German court.
- For many years, there were no prohibitions of foreign investments in Germany reported.
- More recently, there is a growing trend by the German regulator to more closely scrutinize transactions, especially in the tech industries.
- While the changing mood has become obvious on a number of recent transactions and is reflected in a strategy paper published recently by the Ministry, the threshold in the current legislative environment remains high, requiring an actual and sufficiently serious danger for public order or security. Mitigation measures may include, for instance, ring-fencing of important IP and know-how, the condition to divest certain of the target company's activities or to keep certain production units in Germany.
TRENDS IN THE REVIEW PROCESS
Although the foreign investment review process is not publicly accessible, recent acquisitions have shown that the Ministry has become more sensitive about acquisitions by non-EU/-EFTA investors, especially in the technology sector. Recently, two cases received strong attention, namely the acquisition of AIXTRON SE by a Chinese investor, as well as the strategic investment of the Chinese lighting company MLS and the financial investor Yiwu in the Osram's light bulb business.
Reportedly, various German government departments have commissioned consultations on a policy paper that might finally lead to a substantial expansion of the Ministry's review and veto rights.
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
Parties to M&A transactions— whether public or private—should carefully consider the risk of foreign investment control procedures as typically being part of the due diligence process. If AWG/AWV rules apply, it may be appropriate that the acquirer initiates discussions with the Ministry even before the signing of an SPA, or, in case of a public deal, the announcement of the transaction. Depending on the timing and the type of offer, the purchase agreement or the public takeover offer and a related business combination agreement will contain corresponding condition precedents and covenants.
In sensitive sector transactions, foreign investments meeting the above-mentioned thresholds must be communicated to the Ministry and should not be closed before the acquisition is approved or deemed to be approved by the Ministry.
REVIEW PROCESS TIMELINE
For transactions, other than sector-specific transactions, the Ministry may initiate an ex officio review within three months after the signing, or the announcement, in case of a public takeover. If the Ministry opens a review on grounds of public order or security, the acquirer will typically have to meet extensive documentation requirements with the support of the target company, which may cause a significant delay for the approval process to start. Within two months following receipt of all necessary documentation, the Ministry may either (i) issue a non-objection certificate, (ii) prohibit the acquisition or (iii) issue "instructions" (taking the form of mitigation measures) in order to ensure public order or security, the two latter cases requiring approval by the German Federal Government. Prohibitions and instructions with respect to acquisitions in sensitive sectors can be issued without German Federal Government approval.
To accelerate the process and gain certainty on the outcome of any review, the acquirer will typically apply for a formal and binding non-objection certificate. Such certificate is deemed to have been issued if the Ministry fails to open an examination procedure within one month of receiving the application.
If the target company is active in one or more of the sensitive sectors, the acquirer must notify the Ministry in writing and file the necessary documentation. The Ministry then explicitly approves the transaction, opens a review or does not respond. If the Ministry does not open a formal review within one month after the investor's notification, the approval is deemed to be granted.
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