The German Government passed a proposed amendment to the Foreign Trade Act on 20 August 2008. The amendment intends to control acquisitions of resident companies by investors based outside the EU and EFTA. The proposed amendment would allow the Ministry of Economics to prohibit or restrict any transaction in any sector involving the direct or indirect acquisition of a 25 per cent stake in a German company by a non-EU/ EFTA company for reasons of public order or security of Germany. The proposed amendment will be passed to Parliament for approval and is expected to enter into force at the beginning of next year.
Following a first proposal in December last year, the Federal Government has now passed the proposed amendment to the Foreign Trade Act that intends to control acquisitions of German companies by investors based outside the EU and EFTA (European Free Trade Association).
Acquisition by a non-EU or non-EFTA investor may be subject to formal investigations
In a nutshell, the main elements of the proposal are as follows.
- Any acquisition of a stake of at least 25 per cent of the voting rights in a resident company by a non-EU or non-EFTA investor (or a resident company in which a non-EU or non-EFTA entity holds at least 25 per cent of the voting rights) may be subject to formal investigations by the Federal Ministry for Economics.
- There is no restriction to specific industry sectors.
- Investigations by the Ministry may be initiated within three months of signing, ie by requesting comprehensive information on the transaction.
- The Ministry is entitled, within two months of having received the requested information, to impose restrictions; in particular to prohibit the transaction as such.
Restrictions may only be imposed if:
- the transaction is considered to be a ‘threat to public order or security’; and
- the Government consented to it.
Until the relevant time periods have elapsed or a decision has been taken, the validity of the acquisition is subject to a condition subsequent.
The purchaser may also apply for a statement of compliance by the Ministry at any time. But regarding the decision of the authority on such application by the investor, there are no specific time limits provided for in the proposed amendment. There is no obligation to notify a transaction to the Ministry.
Voting rights indirectly held by non-EU or non-EFTA investors or by voting consortia also to be included in the 25 per cent limit
The proposed legislation also applies if, after the transaction, the non-resident acquirer indirectly holds at least 25 per cent of the voting rights in the resident company. However, indirectly held voting rights in the target would have to be added to the relevant voting rights only if the non-resident investor holds at least 25 per cent of the voting rights in the direct stakeholder of the target. Even voting rights held by third parties would have to be considered under the proposed legislation if the investor has agreed with the third party to jointly exercise their voting rights.
Compatibility with EU law?
There are doubts as to whether the proposed legislation is in line with EU law. Freshfields Bruckhaus Deringer issued an expert opinion together with the Federation of German Industries (BDI) in July 2008. The assessment comes to the conclusion that the proposed legislation infringes the EC Treaty’s provisions on the free movement of capital within the EU; in particular it does not meet the tests of legal certainty, foreseeability and proportionality.
The European Commission has already requested information from the German Government on the proposed amendment to the Foreign Trade Act. It may well be that the Commission initiates infringement proceedings against Germany once the proposed amendment enters into force.
The proposal must still pass a vote in the German Parliament. Readings should start shortly after the summer break. Stakeholders will have the chance to advance their view, particularly during the experts’ hearings. Although for political reasons it seems unlikely that the proposal will not be passed, it might at least be possible to further define under what prerequisites the Ministry may take action and/or the procedure, in particular regarding timing. As the validity of an acquisition is subject to a condition subsequent until the provided investigation period has elapsed or a decision has been taken, this time period should be as short as possible. The amendment is expected to enter into force at the beginning of next year.