The German Federal Ministry for Economic Affairs and Energy (“German Ministry”) may review and even prohibit certain acquisitions of domestic companies by foreign investors, mainly for security reasons. With Germany generally known as an open economy, the review procedure has been conducted in a fairly swift and generous manner. However, in light of recent developments, this will probably change, and such change seems to be in line with an increasingly protective business environment we are observing globally. As a recent example, the Chinese government released a revised draft of the Foreign Investment Industrial Guidance Catalogue, which introduces certain restrictions on outbound investments. (Please refer to our December 12, 2016 Legal Update for more details.)
Recent Developments in Germany
Over the course of this year, the German Ministry also seems to have tightened its review procedure and probably developed a more rigid approach:
• EEW: In February 2016, the German Ministry cleared the EUR 1.4 billion Energy from Waste (EEW) acquisition by Beijing Enterprises in a rather swift process advised by our Firm. This was the first large energy infrastructure investment by a Chinese investor in Germany and the largest Chinese foreign direct investment in Germany at the time.
• Kuka: In August 2016, the acquisition of industrial robot manufacturer Kuka by Chinese Midea Group (around EUR 4.5 billion) was cleared by the German Ministry, again fairly swiftly after the exclusion of its US business from the transaction. Such clearance, however, led to controversial discussions in the media
The German Ministry has been criticized in light of Kuka’s strategic position, in particular for the German automotive industry.
• Osram: In October 2016, the German Ministry initiated an in-depth review with respect to the EUR 400 million acquisition of German Osram’s light bulbs unit Ledvance by a Chinese investor consortium. Recently, the Chinese investor’s interest in the transaction has decreased significantly.
• Aixtron: Also in October 2016, the German Ministry revoked an already issued clearance of the EUR 670 million takeover of German semiconductor equipment supplier Aixtron by Chinese investor Fujian Grand Chip Investment Fund (FGC). The revocation was based on new information regarding potential security-related issues. The competent US authority, the Committee on Foreign Investment in the United States (CFIUS), has issued a recommendation that the sale of Aixtron should be stopped. Following that recommendation, US President Barack Obama blocked the completion of the transaction due to US national security concerns, but only with regard to the US assets held by Aixtron. (Please refer to our December 8, 2016 Legal Update for more details.) As a result of the veto, FGC’s voluntary public takeover offer failed.
Overview of the German Foreign Investment Review Procedure
German foreign investment review differentiates between a cross-sector and a sector-specific approach. The latter is more rigid, but limited to companies involved in the sale or production of certain defense- and/or encryption-related products.
• The cross-sector review applies to all sectors (see the examples mentioned above) and is triggered in case of (i) a direct or indirect acquisition of (ii) at least 25 percent of the shares (iii) in a domestic company (iv) by a non-EU or non-EFTA company and (v) leading to risks for “public order or security.”
• If the German Ministry intends to prohibit the deal, such prohibition would require the approval of the federal government (i.e., the cabinet of all federal ministers).
• A cross-sector review does not require a notification, but usually the buyer has an interest in requesting a clearance certificate and the German Ministry will issue such certificate if there are no concerns.
• The review periods are fairly short (one to three months) but can be extended if the documentation to be provided is not complete.
• A decision of the German Ministry can be challenged in German administrative courts or ultimately in European courts.
Issues for Consideration
In our experience, the following issues should be taken into account to obtain a foreign investment clearance from the German Ministry:
• The short review periods are only triggered if the documents are complete, which the German Ministry is sometimes reluctant to confirm. As a result, the German Ministry may factually extend the review period, in particular to involve other ministries. This may have a material impact on the timeline of the transaction.
• If new substantial information comes to the German Ministry’s attention, it can re-open an examination or even withdraw a previous decision. (See the Aixtron transaction above.)
• “Public order or security” are very general terms. There is limited German or European caselaw available in this respect. However, the available court decisions usually define these terms in a very narrow way, which makes a prohibition generally more difficult to justify.
• A prohibition would have to be backed by the federal government and, consequently even Chancellor Angela Merkel would have to be involved. Such cases usually attract public attention.
• Following the clearance of the Kuka transaction, several legislative changes have been discussed within the German Ministry. It is likely that those discussions may lead to a specific proposal within the next few months that would then be discussed on a German and European level. A German legislative proposal could probably be even more rigid than a draft on the European level.
The handling and probably also the legal basis of the German foreign investment review procedure may change and may become more rigid. Such development will probably have a negative impact on deal certainty or at least on the timeline of an M&A transaction. Foreign investors in Germany are advised to kick off that workstream at an early stage, and they may need more information and more detailed insights when dealing with the (new) implications of a German foreign investment review procedure.
It is not necessarily less likely to obtain clearance, but there may be more pitfalls and a more cumbersome procedure than we used to have in recent years. Good preparation, coordination and sound legal advice will be more important than ever.