Investments in German businesses may be subject to new control procedures screening foreign investments in the spirit of the U.S. Exon-Florio Amendment rules. The new rules, effective as of April 24, 2009, are triggered by an acquisition of 25% or more of the voting rights in a German company by a non-EU/EFTA resident party.
When announcing the new law, the German government went to great lengths to play down the impact of the new rules and to issue a positive message to investors, emphasizing that the scope of the new law would be very limited, the control criteria public order and public security would be affected only in rare and exceptional cases, and the new measures would not allow industrial policy making and would not change Germany’s open investment policies.
The true practical impact remains to be seen. While there are no advance notification or filing obligations, depending on the business sector concerned, investment agreements may need to take account of uncertainty regarding potential prohibitive or restrictive orders until expiry of the applicable investigation periods and/or delay final closing accordingly. For investors desiring legal certainty upfront, they may prefer to opt for applying for a binding advance comfort letter from the authorities.
Similar to foreign investment controls in other countries, the new investment control rules are intended to protect German public order and public security interests. The new regime complements existing rules for the military sector. “Public order” and “public security” are restrictive concepts that must be interpreted in accordance with stringent EU law tests requiring a genuine and sufficiently serious threat to a fundamental interest of society. From that perspective, it can indeed be expected that investigations and prohibitive or restrictive orders will be applied only in exceptional cases, as the government announced. This will likely only affect large acquisitions in sensitive business sectors such as energy, infrastructure, telecommunications and services sectors of strategic relevance, particularly in cases of supply crisis situations. However, the new law, on its face, is generally applicable and not limited to any specific transaction size or specific business sectors.
The new law covers any acquisition of a German resident business, or of direct or indirect participation interests therein, including public tender offers, if the transaction will result in the non-EU/EFTA resident buyer/investor holding directly or indirectly 25% or more of the voting rights in the target business. The 25% threshold is determined on a group basis, including (i) voting rights held by affiliates (at least 25% controlled by the buyer/investor) or (ii) voting rights held by third parties subject to joint voting agreements with the buyer/investor. The broad wording of the 25%+ post-transaction threshold might be interpreted to also cover any subsequent, follow-up investment that would increase the voting rights, but there is no clear authority on this issue.
Using EU/EFTA based subsidiaries as acquisition vehicles will not necessarily help to escape the new law: Investments by EU/EFTA-based companies are also covered if at least 25% of their voting rights are held by shareholders from a third country and if circumstances suggest that such acquisition structure was used in order to circumvent the rules or otherwise may be considered an abusive structure. Only acquisitions of existing companies are relevant, the formation of new companies is not subject to the new law. But, of course, the new law could apply to transactions where the new company serves as an acquisition vehicle.
Procedures / Investigation Periods
(3 + 2 months):
The parties to a transaction do not have to report the transaction to the Federal Ministry of Economics and Technology (the “Ministry”), which is entrusted with enforcing the new rules. The Ministry is expected, on its own initiative, to review public media information, merger control filings (which will be shared by the merger control authorities) and other sources to identify any potentially sensitive transactions. The imposition of enforcement measures is limited by the following two investigation periods:
3-month period: Only within three months after signing (not closing) of the acquisition/investment agreement, or the publication of the tender offer, respectively, may the Ministry initiate a formal in-depth investigation.
2-month period: In the event of initiation of an in-depth investigation, the prospective investor will be informed and required to submit details on the transaction (to some extent similar to merger control filing details); the Ministry has two months after receipt of complete information to decide on the matter.
If the Ministry does not act within these periods, the transaction is deemed approved. If the Ministry wishes to prohibit the transaction or impose other restrictive measures (such as restriction of voting rights), it has to obtain the prior consent of the Federal government including all Federal Ministers. It is likely, however, that only exceptional cases will be escalated to such top government level.
Despite the envisaged exceptional application, the rules will have a wider impact due to legal uncertainty pending conclusion of the respective investigation periods. The acquisition/investment agreements or tender offers remain legally valid during the investigation periods, but they are subject to a condition subsequent (suspensive condition) tied to the adoption of measures by the government. If measures are imposed, the transaction agreement becomes void and any closed transaction must be unwound. Compliance can be enforced by way of fines and a government appointed trustee. There is, therefore, legal uncertainty until conclusion of the aforementioned investigation periods by (i) expiry of the
3-month period without action by the Ministry, or (ii) in the event of opening of an in-depth investigation, expiry of the
2-month period without adoption of measures or (iii) a prior approving decision during the course of any in-depth investigation.
Even though enforcement measures are unlikely in most cases, acquisition/ investment agreements may have to contain related closing conditions or allocate the risks and costs of any subsequent unwinding of the transaction or the implementation of any restrictive orders that might result from any indepth investigation, and should obligate the parties to cooperate in any related submissions. Postponing closing until the expiry of the respective investigation periods will frequently not be a feasible option, as this may result in excessive delays between signing and closing. In many cases, the initial 3-month “waiting” period may already be too long for the parties, and in critical business sectors the delay can amount to more than 5 months if an investigation is initiated (if, for instance, the parties have failed to provide “complete” information triggering the start of the 2-month period). In clearly uncritical cases, parties might decide to take calculated risks and simply go ahead with closing regardless of the investigation waiting periods. However, the safer, and relatively quick, solution is to apply for a comfort letter.
Legal Certainty Through Comfort Letter Procedure:
The application for a binding comfort letter requires an outline of the basic elements of the planned transaction, as well as information on the prospective investor and its business. The prospective investor may submit the application prior to signing the acquisition agreement, provided that the basic parameters of the transaction are already fixed. If the Ministry does not initiate an investigation within one month after receipt of the complete application, the transaction is deemed approved. Since the application is not particularly burdensome, this will frequently be the preferred practical solution, particularly in cases where government enforcement measures cannot be clearly excluded at the outset.
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"New German Investment Controls," Private Equity Focus