Stricter regime for reviews of inbound transactions applied by the Federal Ministry for Economic Affairs and Energy
Following a surge in political initiatives for stronger investment control at the German and European level, the German Federal Government recently amended the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung—AWV), which entered into force on July 18, 2017 Pursuant to the Foreign Trade and Payments Act (Außenwirtschaftsgesetz—AWG) together with the AWV, the Federal Ministry of Economic Affairs and Energy (the Ministry) is entitled to review inbound transactions by foreign investors based outside the European Union (EU) or the European Free Trade Association (EFTA). The Ministry may prohibit or restrict a transaction if it poses a threat to the German "public order or security" (öffentliche Ordnung oder Sicherheit) of the Federal Republic of Germany.
Recent acquisitions have shown that the Ministry has become more sensitive about acquisitions by non-EU/EFTA investors, especially in the technology sector.
While the German government remains committed to the liberal investment climate, the recent amendments to the AWV brought about significant changes in the landscape of German investment control reviews.
The AWV distinguishes between a cross-sectoral review for all industries and a sector-specific review that applies only with respect to particularly sensitive industries, the scope of which has now been extended from arms and military equipment as well as encryption technologies to other key defense technologies such as reconnaissance, sensor and protection technologies.
More substantial changes have been made with respect to the cross-sectoral review, namely by expanding the previously applied criterion of "public order or security" to a non-exhaustive list of criteria to be taken into account when determining a threat. The list focuses around "critical infrastructures" in specific industries, such as energy, information technology and telecommunications, transport, health, water, etc. Furthermore, as a response to international transactions becoming increasingly complex and sensitive, the review periods were extended significantly. This leaves the Ministry with considerably more time to perform its review process, having a significant impact on the overall transaction timetables. In addition, the mandatory notification, which was previously only required for sector-specific reviews, will now also expand to the cross-sectoral review.
The completion of the investment review process is by law not required for the consummation of a transaction. However, foreign investors often decide to initiate the review process by submitting an application to the Ministry for a non-objection certificate (Unbedenklichkeitsbescheinigung) in order to obtain legal certainty. Depending on the transaction at hand, the parties may also be subject to a general notification obligation. Prior to the amendments to the AWV, the obligation to notify the Ministry of a transaction was limited to the sector-specific review but now also extends to the cross-sectoral review if the transaction fulfills the above-mentioned criteria and is, therefore, likely to pose a threat to the public order or security. Upon notification, the Ministry has three months to decide whether to open formal investigations.
Types of deals reviewed
The Ministry is entitled to review all acquisitions of German companies by non-EU-based investors (whether by way of asset and share deal) or acquisitions of a direct or indirect stake in the company should the direct or indirect share of the acquirer's voting rights reach 25 percent. The calculation of voting rights must take into account any agreement on the joint exercise of voting rights. The Ministry is also entitled to review transactions involving an EU-based or EFTA-based investor (Iceland, Liechtenstein, Norway and Switzerland) in which non-EU-based investors hold (directly or indirectly) at least 25 percent of the voting rights, if there are indications of circumvention of foreign investment control (e.g., if the EU-based acquirer is a mere acquisition vehicle without any entrepreneurial activities). In contrast to this sector-specific review, the general review process only applies to non-EU/EFTA-based investors.
Scope of the review
Intervention measures by the Ministry require a threat to public order or security. As mentioned above, the AWV as amended, non-exhaustively stipulates that the acquisition of shares or assets in the following may endanger public order or security:
- Operators of critical infrastructure that is of particular importance for the functioning of the community
- Companies developing or changing industry-specific software for the operation of critical infrastructure
- Companies entrusted with organizational monitoring measures for telecommunication facilities
- Companies providing cloud computing services above a certain volume
- Companies engaged in the area of telematics infrastructure
- For many years, there were factually no prohibitions of foreign investments in Germany reported
- While the changing mood has become obvious on a number of recent transactions, the threshold in the current legislative environment still remains high, requiring an actual and sufficiently serious danger for public order or security
- The amendments to the German foreign investment review process introduce a stricter security regime and extend the review periods with considerable implications for the transaction timelines
Trends in the review process
Although the foreign investment review process is not publicly accessible, recent acquisitions have shown that the Ministry has become more sensitive about acquisitions by non-EU/EFTA investors, especially in the technology sector, which is supported by the criteria mentioned above. The current market climate, in that regard, is characterized by the Ministry's increasing awareness and persistent efforts towards enhanced scrutiny.
How foreign investors can protect themselves
Parties to M&A transactions—whether public or private—should carefully consider the risk of foreign investment control procedures as typically being part of the due diligence process. If AWG/AWV rules apply, it may be appropriate that the acquirer initiates discussions with the Ministry even before the signing of an SPA, or, in case of a public deal, the announcement of the transaction. Depending on the timing and the type of offer, the purchase agreement or the public takeover offer and a related business combination agreement will contain corresponding condition precedents and covenants.
In sensitive sector transactions, foreign investments meeting the above-mentioned thresholds must be communicated to the Ministry and should not be closed before the acquisition is approved or deemed to be approved by the Ministry. Any Ministry decision may be challenged before a German court.
Review process timeline
The review process is typically initiated by the parties applying for a non-objection certificate. Due to the recent amendments, the Ministry now has two months (instead of one) to decide whether to issue such certificate or open the formal review procedure. Upon expiration of this period, the non-objection certificate is deemed to have been issued.
The period available to conduct the formal review has been extended from two to four months. The period starts upon the receipt of all necessary documentation. Also introduced by the recent amendments to the AWV is the suspension of the period for as long as negotiations on mitigation measures are conducted between the Ministry and the parties involved. In order to safeguard public order or security, the Ministry may prohibit the transaction or issue "instructions" (taking the form of mitigation measures). Except for acquisitions in sensitive industry sectors, such interventions require the approval by the German Federal Government.
2017 update highlights
- The scope of sector-specific reviews was extended to key defense technologies such as reconnaissance, sensor and protection technologies
- With cross-sectoral reviews, the previously applied criterion of "public order or security" was extended to a non-exhaustive list of criteria to be taken into account when determining a threat
- The Ministry now has two months (instead of one) to decide whether to issue a non-objection certificate or open the formal review procedure. Also, the period available to conduct the formal review was extended from two to four months. In addition, that period is now suspended for as long as negotiations on mitigation measures are conducted between the Ministry and the parties involved
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