Software companies specifically affected
On 12 July 2017 the German Government resolved on a change of the German Foreign Trade Regulation (Außenwirtschaftsverordnung – “AWV”) with regard to the provisions for acquisitions of German based companies by non-EU buyers. Already under the current German Foreign Trade Regulation each transaction where a non-EU buyer directly or indirectly acquired at least 25% of the voting rights in a German company was subject to a potential review by the German Federal Ministry of Economics and Energy (Bundesministerium für Wirtschaft und Energie – “BMWi”).
Structures to avoid such review procedure, such as setting-up a EU-resident subsidiary acting as special purpose vehicle for the acquisition of a German company, are rendered as circumvention and do not affect BMWi’s right to review such transactions and to exercise its rights. However, so far the right to review did not play an important role in many cases. The reason for this is that the review is generally related only to a scrutiny whether the acquisition might endanger the public order (öffentliche Ordnung) or security (Sicherheit) of Germany. Obviously, most transactions are uncritical and do not fulfil these criteria. When the German legislator implemented this review right for company acquisitions in 2009 he expected that only in a very view cases BMWi would initiate review proceedings ex officio.
The legal framework for a foreign investment review by BMWi differs generally between certain sector-unspecific provisions applicable to all company acquisitions and certain special sector-specific rules for acquisition of target companies in identified “critical” industries such as defence technology. By amending the provisions in sections 55 et seqq. AWV the German Government now tightened both sector-specific as well as sector-unspecific provisions despite prior public criticism from German trade associations which render this as too far reaching and unnecessary investment barrier for foreign investors.
New special provisions for selected industries
Under the sector-unspecific provisions it was implemented that a potential endangerment of the public order or security of Germany may in particular exist if the acquisition relates to a company which is active in certain industries which are deemed to be of key importance for the German infrastructure such as operators of “Critical Infrastructures” within the meaning of the German Act on the Federal Office for Information Security (Gesetz über das Bundesamt für Sicherheit in der Informationstechnik – BSIG). Such industry areas are energy, information technology and telecommunication, transport and traffic, health, water, nutrition as well as financial institutions and insurance.
Software companies serving critical infrastructures in the focus
The new AWV further stipulates that not just the acquisition of operators, but also of software companies which develop or amend sector-specific software that serves critical infrastructures are rendered to potentially endanger Germany’s public order or security. Sector-specific software shall be in the following sectors:
- ENERGY: Software for power plant control technology, grid control systems or control technology for the operation of facilities or systems for supply of power, gas, fuel, heating oil or district heating;
- WATER: Software for control, process or automation technology of plants for supply of drinking water or waste water disposal;
- INFORMATION TECHNOLOGY AND TELECOMMUNICATION: Software for the operation of facilities or systems for voice and data transmission or data storage and data processing;
- FINANCIAL INSTITUTIONS AND INSURANCE: Software for the operation of facilities or systems of cash supply, card-based payment, conventional payment transactions, the settlement and processing of securities and derivatives transactions or the provision of insurance services;
- HEALTH: Software for the operation of a hospital information system, the operation of facilities or systems for the distribution of prescription medicines and the operation of a laboratory information system;
- TRANSPORT AND TRAFFIC: Software for the operation of facilities or systems for the carriage of passengers and goods by air, rail, sea and inland waterways, road transport, public transport or logistics; and
- NUTRITION: Software for the operation of facilities or systems for food supply.
Further, the acquisition of a company rendering CLOUD COMPUTING SERVICES is subject to stricter scrutiny by BMWi if the infrastructure used for such services by the target company exceeds certain defined thresholds.
Further changes for sector-specific companies
In addition to the changes for sector-unspecific companies the German Government also provided for amendments of the provisions for certain sector-specific (very critical) industries by inter alia adding producers of military intelligence and assistance to the list.
Extended review rights of BMWi
Further, the relevant review periods and rights of BMWi have been significantly changed which will likely impact the German M&A practice also in areas where an endangerment of the public order or security is excluded.
So far BMWi could only initiate a review proceeding if it formerly notified the direct acquirer within three months after conclusion of the underlying contract in personam (schuldrechtlicher Vertrag). In the absence of a notification obligation so far for acquisitions of sector-unspecific companies in many cases BMWi simply did not become aware of the conclusion of such contract. As a result many transactions involving non-EU buyers more or less “silently” became effective without BMWi being involved.
This “gap” has now been closed by stipulating that the three months’ period will only start after BMWi having obtained knowledge of the conclusion of the contract. Proceedings without knowledge of BMWi will only be excluded if an ultimate period of five years has lapsed since the conclusion of the contract.
In addition the acquisition of those sector-unspecific companies where the AVW now defines a particular potential of endangerment of the public order or security is now subject to a notification obligation to BMWi.
Consequences for German M&A practice
The new rules are expected to significantly change the approach for dealing with acquisitions of non-EU buyers. So far in “uncritical” cases the parties often jointly decided not to notify the transaction. This was of course done against the background that after three months following the signing without BMWi becoming active the deal was anyhow “safe”. Since now the three months’ period will only start after BMWi obtained knowledge of the conclusion of the contract it is no longer possible to simply wait until the lapse of the three months.
In practice this will mean that much more transactions involving non EU-buyers will be notified to BMWi by requesting the issuance of a certificate of non-objection (Unbedenklichkeitsbescheinigung) under section 58 AWV in order to institute the applicable review period under the AWV. Otherwise, buyers would run a contingent risk for up to five years that the purchase is still subject to a review and objection by BMWi, in other words that the deal is permanently at risk. SPAs with non-EU buyers in future are therefore expected to generally contain a closing condition of non-prohibition of the transaction by BMWi. Such condition precedent will be deemed satisfied if (i) BMWi either issued a certificate of non-objection (ii) or a certificate of non-objection has not been issued within the time frame prescribed by the AVW without a formal investigation having been initiated by BMWi.
To such extent it is noteworthy that the time frame for a reaction by BMWi is now no longer aligned to the relevant review period set forth for German merger control filings. Whilst so far BMWi had to respond within one month, which was in line with the reaction period of the German Cartel Office for merger control filings, BMWi now has up to two months. Such prolonged period may lead to delays of transaction closings.