Traditionally the German Foreign Trade and Payments Act (Aussenwirtschaftsgesetz (AWG)) only provided for restrictions on the import and export of weapons and related technologies. In the case of the acquisition by a foreign investor of a German company that produces these sensitive products, notification was required to the German Federal Ministry of Economics and Technology (Bundesministerium für Wirtschaft und Technologie (BMWi)). The BMWi had the power to prohibit the acquisition where this was necessary to protect the security interests of the Federal Republic of Germany. However, only acquisitions in the above-mentioned sectors could come under the scrutiny of the BMWi.
Recent amendments to the AWG, as well as to the German Foreign Trade and Payments Regulations (Aussenwirtschaftsverordnung (AWV)) that came into force on 24 April 2009, have given the German authorities much wider rights to review and potentially restrict investments by investors from outside the EU or the European Free Trade Association (EFTA) – comprising Iceland, Liechtenstein, Norway and Switzerland – into Germany.
This article sets out the details of the new regulatory regime.
Analysis of the amendments to the AWG and the AWV
What kind of investments are subject to a possible review by the BMWi?
Only transactions where an investor from outside the EU or the EFTA wishes to acquire, directly or indirectly, 25% or more of the voting rights of the German company are caught by the new legislation. ‘German company’ in this context means a company that is resident in Germany, either because it is incorporated or registered in Germany or because the management is carried out in Germany. Investors from the EU or EFTA are not subject to the new legislation. If the acquiring company is based in the EU or EFTA but more than 25% of its voting rights are held by a company based outside the EU or EFTA, the acquisition will still be subject to the new regulatory regime.
Unlike the old legislation, the new legislation is applicable to all sectors.
Threat to Germany’s public security and order
An acquisition that falls under the criteria set out above can only be restricted if Germany’s public safety and order is under threat as a result of the proposed transaction. This means that there has to be an actual threat to one of the fundamental interests of German society for the restrictive regime to apply. The new German legislation refers to the EC Treaty and the rulings of the European Court of Justice (ECJ) to clarify what is meant by a threat to Germany’s public security and order. Any prohibition by the BMWi of a transaction must be a reasonable and proportionate response to the threat if it is to comply with the legislation.
In previous rulings, the ECJ has stated that public safety and order may be affected in the case of an acquisition of a company that is active in telecommunications, electricity or strategic services. However, it is clear from the legislation and the guidance provided by the BMWi that cases for potential review and restriction will not be limited to telecommunications, electricity or strategic services.
Review procedure
The new legislation gives the BMWi the possibility to commence a review of the investment within three months of the conclusion of the transaction (ie the signing of the sale and purchase agreement) or the publication of the decision to submit a bid (in the case of a public takeover). If the BMWi decides to commence an investigation the purchaser will be informed accordingly. If a review is announced within that three-month period, the non-EU/EFTA purchaser will be under an obligation to provide the BMWi with all the relevant information and documents that are required to assess the transaction. The BMWi will publish the list of documents that have to be provided in the German Federal Gazette (Bundesanzeiger). The BMWi will have two months from the receipt of the relevant documents and information to make a decision whether or not to prohibit the transaction. If the two-month period lapses without the BMWi having taken any action to prohibit the acquisition, it will be barred from taking any action thereafter. Where the BMWi does decide to prohibit an acquisition, it will be challenged in front of a competent Administrative Court in Germany.
It is important to note that there is no obligation to notify the BMWi in advance. However, in cases where the acquisition requires merger clearance by the German Federal Cartel Office (Bundeskartellamt) or in the case of a financial services-related transaction where the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)) is involved, both the Bundeskartellamt and BaFin will inform the BMWi of any proposed transactions that may need to be investigated.
To avoid the uncertainty of the three-month waiting period, the legislation gives parties the possibility to apply for pre-clearance. To that effect the potential investor may apply for a so-called certificate of non-objection from the BMWi prior to signing the sale and purchase agreement or making a bid. These certificates confirm, in a legally binding way, that the proposed acquisition of the German company will not endanger German safety and order. The BMWi has to deal with an application for the issue of a certificate of non-objection within one month of receiving the application. There will be deemed clearance if the BMWi fails to deal with the application within that one-month period.
In the case of a prohibition that could not be or was not successfully challenged in the Administrative Courts, the participation that was acquired will have to be returned to the seller. However, while the examination procedure is ongoing, the legal transaction remains valid and the underlying contracts continue to be binding. Validity will only be lost once an acquisition has been prohibited.
Conclusion and comments
There have been a lot of critical voices claiming that the new legislation will send out the wrong signal at a time of global economic slow down. In particular, there have been concerns that the legislation has been designed to keep sovereign wealth funds out of Germany. This has been denied by the German Federal Government, which points out that Germany is not alone in implementing this kind of legislation. Countries including Australia, Canada, China, France and The Netherlands also have rules that allow the government to examine foreign investment into their respective countries.
Looking at the initial draft legislation, the result, which has now become law, could have been much worse from a non-EU investor’s point of view. The original draft legislation gave the German government the right to review and potentially restrict investment by any non-German investor, including investors from EU and EFTA countries. The possibility of making a pre-signing/pre-bidding application for a certificate of non-objection has given investors, who are subject to the legislation, the possibility to achieve certainty as to the BMWi’s position in relation to a specific project. Furthermore, the reference to the case law of the ECJ means that the threshold that has to be exceeded for a prohibition to become a realistic option appears to be rather high. Nevertheless the new legislation introduces a new hurdle that has to be overcome whenever a non-EU/EFTA investor is considering making an acquisition in Germany.
By Carsten Rumberg, partner, McGrigors LLP.
E-mail: carsten.rumberg@mcgrigors.com.
