Mergers and Acquisitions
M&A Update: Fundamental tightening of German foreign investment control approved
The parliamentary process for the “First Act on the Amendment of the Foreign Trade and Payments Act” (Erste Gesetz zur Änderung des Außenwirtschaftsgesetzes), by means of which the German foreign investment control regime is further tightened, has been completed. The Bundestag (Federal Parliament) had already passed the 1st amendment of the AWG on 18 June 2020. Now the Bundesrat (Federal Council) has also approved it – on 3 July 2020 in its last session before the summer break. The introduction of an investment control approval in combination with a prohibition on “gun jumping” backed by sanctions for acquisitions of German target companies active in certain sensitive civilian sectors is a particularly hot topic for the cross-border M&A practice. The 1st amendment of the AWG will soon take effect and it can also affect pending transactions.
Comprehensive foreign investment control regime under current German law
German foreign investment control is governed by the Foreign Trade and Payments Act (Außenwirtschaftsgesetz – “AWG”) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – “AWV”).
- What is known as sector-specific foreign investment control applies to (direct or indirect) acquisitions by any foreign investor of at least 10% of the voting rights in German target companies active in particularly sensitive industry sectors, such as the manufacture or development of war weapons/military equipment and encryption technology. The completion of foreign investments of this kind is subject to the statutory condition precedent of the approval of the Federal Ministry of Economics and Technology (Bundeswirtschaftsministerium – “BMWi”).
- Irrespective of the relevant industry, (direct or indirect) acquisitions reaching or exceeding certain shares in voting rights in German target companies by non-EU/EFTA investors are subject to cross-sector foreign investment control. The BMWi may review, restrict or even prohibit such an acquisition if it poses a threat to public order or security. To this end, the acquisition agreement is subject to a statutory condition subsequent of the BMWi prohibiting the intended acquisition. There are two different thresholds within the cross-sector foreign investment control regime: Foreign investments in German target companies active in certain civilian security relevant industries, such as critical infrastructures are subject to a mandatory notification to the BMWi if 10% or more of the voting rights are acquired (“Notifiable Acquisitions”). All other foreign investments in German target companies are subject to a 25% threshold, and such acquisitions – though they are subject to control by the BMWi – neither require regulatory approval nor do they need to be notified to the BMWi.
A gun-jumping prohibition backed by criminal sanctions
The 1st amendment of the AWG introduces for the first time a gun-jumping prohibition for Notifiable Acquisitions. To this end the AWG distinguishes as follows: On the one hand, the legal closing of the transaction is made subject to a condition precedent that the transaction is cleared by the BMWi or the time-periods for review have expired – as with sector-specific investment control. Any legal acts serving the consummation of the transaction are temporarily invalid. On the other hand, the gun-jumping prohibition prohibits specific closing-related activities to the benefit of the purchaser:
- Facilitation of the exercise of voting rights,
- Grant of profit distribution claims attached to the acquisition,
- Provision of company-related information in connection with the activity of the target that triggers the notification duty,
- Provision of company-related information that the BMWi classifies in an order as being important for the essential security interests of the Federal Republic of Germany or for public security and order in the Federal Republic of Germany.
A violation of the gun-jumping prohibition is subject to criminal sanctions: Natural persons exercising closing-related activities carry a prison sentence of up to five years or a fine.
The group of Notifiable Acquisitions has grown and grown as a result of the many reforms over recent years, most recently the 15th Regulation amending the Foreign Trade and Payments Ordinance (the “15th Amendment of the AWV”). At the current time, Notifiable Acquisitions include, in particular, acquisitions of domestic companies that operate critical infrastructures or develop/design industry-specific software for their operation, which offer cloud computing services on a certain scale, or which develop or produce certain products in the field of healthcare and infection protection.
Standardisation of time-periods under foreign investment control legislation
To date, the AWV sets separate time-periods for sector-specific and cross-sector investment control proceedings. Under the 1st amendment of the AWG the time-periods for foreign investment control are now being standardised and based on an act of parliament.
Instead of the current three months for cross-sector investments, the BMWi must now always decide within two months after gaining knowledge of the acquisition (but no longer than five years from signing) whether it is going to open a formal foreign investment review into the acquisition in question. For the purposes hereof, ‘knowledge’ shall also mean receipt of the written notification and outside of any notification requirement receipt of an application for the grant of a certificate of non-objection.
Where the BMWi opens a formal foreign investment review, the 1st amendment of the AWG is introducing a uniform time-period of four months from receipt of the full documentation. Within those four months, the BMWi must then decide whether to clear the acquisition/grant a certificate of non-objection or whether to restrict or prohibit the acquisition. In this context, the 1st amendment of the AWG also introduces for the first time a rule stating that the running of the time-period is suspended if the BMWi makes a request for further information or documents concerning the acquisition. In addition, the BMWi can extend the time-period by three months if the review procedure is associated with special difficulties of a factual or legal nature. Irrespective of that extensions of the time-period are possible with the consent of the purchaser and the seller. As a result, certain constraints will be placed on the BMWi’s previous practice of extending the time-period for the formal review of an investment practically without restriction and as it wished by means of new requests for information. In light of the newly introduced flexibilities, the practical impact of the four months time-period is likely to remain rather limited.
The new rules on time-periods also apply to pending transactions if and to the extent the BMWi does not become aware of the transaction until after the 1st amendment of the AWG enters into force.
New review criterion
Where cross-sector foreign investment control is concerned, the material review criterion will also be changed by the 1st amendment of the AWG. Investment control in this area will further on not only protect the public order or security of the Federal Republic of Germany, but also of other Member States or in relation to projects or programmes of EU interest (e.g. Galileo, Copernicus, Horizon 2020). In addition, foreign investments can already be restricted or prohibited if the acquisition “potentially impairs” the public order or security. Up until now, an actual threat to the public order or security was required for a restriction or prohibition.
Further tightening of German foreign investment control upcoming
The 1st amendment of the AWG is the second step in a series of reforms of the German foreign investment control regime in 2020. The 15th amendment of the AWV, which already came into force on 3 June 2020, was – especially in connection with the COVID-19 pandemic – aimed at strengthening governmental control of foreign investments in German target companies active in the healthcare and infection protection sectors (see here for further information). Once the 1st amendment of the AWG has come into force, the Federal Government plans – as a third and, as far as we know, final step – to amend the AWV once again (“16th amendment of the AWV”), which amendment is expected to come into force in the autumn of 2020.
The most important changes that are already foreseeable as a result of the 16th amendment of the AWV once again concern Notifiable Acquisitions: The notification requirement is expected to be further expanded and is also to include foreign investment in companies active in the field of so-called critical technologies. These are likely to include in particular artificial intelligence, robotics, semiconductors, biotechnology and quantum technology. The completion of these Notifiable Acquisitions would then in future also be subject to a statutory condition precedent of the BMWi’s approval; closing-related activities would be prohibited and subject to criminal sanctions. This tightening of the German foreign investment control regime is intended to ensure not only the security and public order of the Federal Republic of Germany, but also its “technological sovereignty” in the future.
Moreover, it is to be expected that the 16th amendment of the AWV will also include provisions for the further implementation of Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (“EU Screening Regulation”), in particular with regard to the cooperation mechanism between Member States and between Member States with the European Commission regulated therein.
Gleiss Lutz commentary – Implications for M&A
The introduction of an approval requirement coupled with a gun-jumping prohibition backed by criminal sanctions means that the 1st amendment of the AWG will have a substantial impact on German M&A practice. For international investors, a detailed risk analysis under German foreign investment control law will become more crucial than ever in order to avoid obstacles to closing, unexpected delays in the deal schedule and even criminal sanctions for violating the gun-jumping prohibition. In this context, not only the notification duty and the gun-jumping prohibition are to be taken into account in the timing, the closing mechanism and the risk assessment of a Notifiable Acquisition; in addition, the due diligence process must in future also be reliably structured in such a way that the prohibition on the provision of – as far as investment control is concerned – sensitive information is observed. In that respect, well-established instruments, which are e.g. used for the observance of competition law requirements can be applied.
The way the gun-jumping prohibition is coupled with a corresponding criminal offence is especially noteworthy. A violation of the gun-jumping prohibition in German and European merger control law “only” constitutes an administrative offence punishable with a fine. Furthermore, in European merger control law it is not the acting individuals but only the undertakings, which are subject to a fine. At the same time, the merger control prohibition on gun-jumping is not limited to a defined catalogue of closing-related activities but also covers legal acts, where the legal consequence provided for by the AWG is “only” temporary invalidity. Thus, the investment control and the merger control gun-jumping prohibitions have a different scope.
The 1st amendment of the AWG can also affect pending transactions that have not yet been closed by the time of the entry into force of the respective legislative changes. The relevant legal situation should therefore be assessed thoroughly before closing, for the upcoming changes to the law for Notifiable Acquisitions mean that it is not only the legal validity of the closing of the transaction that may be at stake. Parties to the relevant transactions may also face significant risks under criminal law.
All in all, international investors should be aware of the increasing foreign investment control requirements – not just in Germany, but in many other countries as well. International investors should therefore analyse the relevant (worldwide) risks under foreign investment control law and develop appropriate solutions as early in the transaction timetable as possible.