Foreign M&A in Germany under government scrutiny
The government is placing continued focus on acquisitions by foreign companies in Germany
The German government is placing continued focus on acquisitions by foreign companies in Germany
In recent months, several foreign acquisitions of German companies have cast a spotlight on German foreign investment law. In particular, acquisitions by Chinese companies have raised political attention and concerns that key technologies and know-how would be bought up and transferred from Germany to China.
These developments are an important reminder of the relevant provisions of the German foreign investment control regime when planning foreign acquisitions of German companies.
Background – recent cases
In October 2016, the German Ministry of Economic Affairs and Energy (BMWi) examined two acquisitions of German companies by foreign investors under German foreign investment law.
The first case concerned the intended acquisition of German technology company Aixtron by a Chinese consortium, Fujian Grand Chip Investment Fund (FGC). Aixtron specialises in manufacturing machinery for semiconductors, and its technology can be used to produce light-emitting diodes, lasers and solar cells. The BMWi issued a certificate of non-objection in September 2016. However, after receiving previously unknown information on public security, it withdrew the certificate of non-objection a few weeks later in October 2016 and initiated a new investigation. In parallel, US authorities scrutinised the transaction under US national security rules because Aixtron has one subsidiary in California. After US president Barack Obama prohibited the transaction in December 2016, FGC abandoned the proposed acquisition.
The second case concerned the acquisition of the German lamp manufacturer Ledvance, a subsidiary of Osram Licht, by a different consortium of Chinese investors. Ledvance produces lighting systems for private and industrial use. The parties applied for the so-called certificate of non-objection, which led to a formal examination by the BMWi in October 2016. The outcome of the examination is still pending. Reportedly, the Ministry has concerns with respect to data protection, as Ledvance's wireless light control system (which can be accessed via smartphone) may give the Chinese investors access to personal user data.
The cases of Aixtron and Ledvance are only two examples that show how important it is to consider German foreign investment law in the planning of foreign acquisitions when German target companies are involved. Delays in the acquisition process can be substantial and take up to five months.
German foreign investment control regime
Foreign investments are governed by the Foreign Trade and Payments Act (the Außenwirtschaftsgesetz or AWG) and the ordinance that implements the rules set out in the AWG, the Foreign Trade and Payments Ordinance (the Außenwirtschaftsverordnung or AWV).
In general, the conditions for foreign investments in Germany are favourable. The BMWi stresses that Germany has a very open economy that welcomes investment by foreign companies in Germany. However, the BMWi is empowered by the AWG and AWV to conduct (i) sectorial and (ii) cross-sectorial examinations of corporate acquisitions, and to impose conditions or restrictions or even prohibit the acquisition if it concludes that it poses a risk to essential security interests or to public order and security in Germany.
Sector-specific examinations are carried out in cases where the essential security interests of Germany may be endangered, particularly in the following sectors:
weapons, ammunition and armor material;
specially-designed engines or gears to drive battle tanks or other armored military tracked vehicles; and
IT security functions to process classified state information.
Cross-sectorial examinations are carried out regardless of the specific sector if the public order or security of Germany is endangered. The AWG and AWV do not contain a definition of public order or security, and these legal terms seem far-reaching and open to interpretation. However, it is recognised that these terms have to be interpreted on a case-by-case basis in light of EU law, particularly articles 36, 52(1) and 65(1) of the Treaty on the Functioning of the European Union, and the jurisprudence of the European Court of Justice (ECJ). In previous cases, the ECJ ruled that public order or security must be interpreted narrowly. Risks to these values can only be accepted if there is a 'genuine and sufficiently serious threat to a fundamental interest of society so that a minimum supply of goods of general interest cannot be guaranteed any longer'.
It is generally recognised that energy, telecommunication and water are essential to public order and security. In addition, public transportation and healthcare as well as data protection can also be of strategic importance for the proper functioning of the state and its institutions. A risk to the German public order and security could also exist if the acquirer is a foreign state fund whose primary focus is on national strategic interests.
Particular care is necessary if the German target company manufactures products that could be used for both civilian and military purposes (so-called dual use) or nuclear or security purposes, or if it specialises in key engineering and technology industries of particular interest to the German state. The list is not exhaustive, and the risks to the public order and security have to be carefully considered in each individual case.
Scope of the investment control regime
In foreign acquisitions, the German foreign investment control regime is only relevant if the following four conditions are met.
Firstly, the target company has to be a domestic resident. This can be a company that is based or headquartered in Germany.
Secondly, the ultimate acquirer must be foreign, ie a person or company that does not reside in the EU or the European Free Trade Area (EFTA) (Iceland, Norway, Liechtenstein and Switzerland). In order to avoid an abusive approach or a circumvention of the German rules, the residency of the ultimate acquirer is relevant. Irrelevant is whether the direct acquirer is a company or an acquisition vehicle set up for the purposes of the transaction to acquire the German target company.
Thirdly, the German foreign investment law applies if the acquirer intends to acquire directly or indirectly 25% or more of the voting rights in the German company. Not relevant are acquisitions of voting rights under 25% and the mere acquisitions of equity or shares if no voting rights are attached. Because voting rights have to be acquired, option rights, preemptive rights and similar rights that do not convey voting rights are not subject to German foreign investment rules.
Finally, the acquisition must pose a risk to the essential security interests of Germany in cases where the target company operates in the weapons, military and certain IT security functions sectors. In cases where the target company operates in other sectors (for instance, in the energy or telecommunications sectors), the acquisition must pose a risk to public order and security.
In practice, the specific analysis of the above four conditions may raise a number of issues. For example, the BMWi has a certain amount of discretion in its assessment whether essential security interests or public order and security are concerned. In addition, the law does not specify whether asset deals or mergers (amalgamations) are subject to German foreign investment rules. Furthermore, the calculation of the voting rights can be challenging if the ultimate acquirer indirectly holds shares in the target company.
Other interesting issues may arise in connection with transactions by acquirers that reside in the British Channel Islands or the Isle of Man, as can be the case with private equity companies. The BMWi regards these residents as foreign, ie outside of the EU and EFTA, and the transaction may thus fall under the German foreign investment control regime.
Proceedings and timeline
There are two ways in which an acquisition can be brought to the attention of the BMWi: self-application by the acquirer and an examination undertaken by the BMWi.
If the intended transaction involves specific (military or IT security) sectors mentioned above, it must be reported in writing to the BMWi.
In all other cross-sectorial cases, the foreign acquirer can apply for a certificate of non-objection proactively. In such case, the ministry has one month to examine the case and grant the certificate of non-objection. The latter is deemed to have been granted if the BMWi does not open a formal examination procedure within one month of receipt of the application.
If it initiates a formal examination, the period starts with the receipt of the complete documentation and ends after two months. The possible outcome can be the granting of a certificate of non-objection or the imposition of conditions or restrictions. The latter can be for example the maintenance of a certain level of production of supply for a certain period of time, production site or other guarantees or obligations not to outsource production or branches to foreign countries, etc.
The BMWi can also prohibit the acquisition. However, this is a last resort and only relevant if there is an actual risk that the security interests of the German state are in danger. The BMWi can enforce a prohibition decision, for example by prohibiting or restricting the exercise of voting rights in the target company, or by appointing a trustee to bring about the unwinding of a completed acquisition.
Violations of imposed conditions or restrictions or prohibitions of transactions can result in fines of up to €500,000 ($525,450).
Furthermore, the legal validity of the agreement will be suspended retroactively as far as German law and Germany are concerned if the BMWi prohibits the transaction. As a result, the transaction would have to be wound up. It is thus recommended that the agreement be concluded under closing conditions.
Examination by the BMWi
In cross-sectorial cases, and if the acquirer did not apply for a certificate of non-objection proactively, the BMWi can initiate a formal examination within three months after the conclusion (signing) of the transaction agreement or the publication of the public takeover offer. The review period of three months starts regardless of whether or not the BMWi has received knowledge of the agreement. The acquirer is under no obligation to inform the BMWi about the conclusion of the agreement.
The BMWi sources information from publicly available information, such as newspapers, but also from the German competition authority and the Federal Financial Supervisory Authority. It will initiate formal investigations if it deems that the public order and security of Germany may be at risk. In case it decides to open an in-depth examination procedure and require a complete documentation of the acquisition, it will come to a final decision within two months after receipt of the full documentation. The possible outcome will be the same as mentioned above.
The examination period of three months should be a reason for acquirers to make an application proactively in order to obtain legal certainty with regard to the admissibility of the transaction and the timeline for completion.
If the BMWi imposes conditions or restrictions or prohibits the acquisition, the affected parties can take legal recourse against the BMWI's decision before the pertinent courts.
When planning and managing mergers and acquisitions that involve German target companies and acquirers that are not resident in the EU or the EFTA, legal counsel should carefully consider whether the circumstances of the specific case call for an application under German foreign investment control rules prior to the closing of the acquisition.
In certain critical cases, counsel might consider contacting the BMWi and discussing the issue with them informally so that the participants in critical transactions would aim to learn about the position of the BMWi early on. It may also be recommendable to submit an upfront application, to shorten the delay of a formal examination by the BMWi. Without it, the examination can take up to five months after the agreement has been signed. In a worst case scenario, it could impose conditions or restrictions or even prohibit the transaction (although we are not aware of any transaction that has been prohibited so far).
Voluntary applications for a certificate of non-objection are fairly simple to make and similar to merger control filings made in Germany or before the EU Commission. Typically, the antitrust adviser would make both the competition and the foreign investment filing, which can be both cost- and time-efficient.
By Dr. Andrea Pomana, Debevoise & Plimpton (Frankfurt)