Mergers and Acquisitions
M&A update: German foreign investment control regime further tightened
In a cabinet resolution adopted on 19 December 2018, the German Federal Government decided to further tighten the rules for the control of foreign investments in German companies.
- Foreign investments in the area of critical infrastructures and in sectors that are particularly relevant for security will be subject to the review powers of the Federal Ministry for Economic Affairs and Energy (“BMWi”) once the foreign investor acquires a share in voting rights of just 10% (and not 25%, as has been the case thus far).
- The group of critical infrastructures is being extended in this context to include parts of the media industry.
- For this reason, in future, considerably more M&A transactions will be subject to the review powers of the BMWi. Even though the conditions under which the Ministry is able to prohibit or restrict a transaction remain unchanged, this reform will entail additional constraints for international M&A.
The amendment will enter into force the day after it is published in the Federal Gazette, which is expected to occur soon.
Investment control based on the law as it currently stands
As a result of the amendment of the Foreign Trade and Payments Ordinance (“Ordinance Amendment”) resolved by the Federal Cabinet on 19 December 2018, the BMWi will be allowed to review security-critical holdings of foreign investors starting at a voting rights’ share of just 10%. At present the threshold for investment control by the BMWi is 25% of voting rights, i.e. as the law currently stands it may only review a share purchase if the foreign investor acquires 25% or more of the voting rights in a German company. Once the threshold is reached, the Foreign Trade and Payments Ordinance distinguishes between two different forms of investment control:
- In the area covered by cross-sectoral investment control, where the BMWi has a right of examination irrespective of the industry to which the domestic target company belongs, it can examine share purchases by foreign investors who are domiciled outside of the EU and EFTA. Transactions only have to be reported to the BMWi in this area if they take place in particular industries, the so-called critical infrastructure industries. Critical infrastructures currently include energy, water, food, telecommunications, transport, finance, insurance, and healthcare.
- Sector-specific investment control is only possible, on the other hand, if the domestic target company operates in an especially security-critical industry, e.g. the production or development of weapons of war and military equipment, or IT security products for the processing of classified government information. Investments of this kind are even subject to special clearance and this also applies in the case of investors from other EU countries.
The Ordinance Amendment will see the threshold for foreign investments in critical infrastructures and companies that, due to their particularly security-critical status, are subject to sector-specific investment control drop from 25% to 10% of the voting rights. Therefore, as soon as a foreign investor acquires shares that provide 10% or more of the voting rights in a critical infrastructure company, the purchase transaction has to be reported to the BMWi; where sector-specific investment control applies, acquisitions of 10% or more of the voting rights require clearance from the BMWi. This therefore gives the BMWi wider powers to examine foreign investments.
The government’s reason for the former 25% threshold was that 25% or more of the voting rights can give the investor a blocking minority and therefore significant influence over the management. As justification for the 10% threshold, which is even lower than the 15% called for by Minister for Economic Affairs Peter Altmaier, the government refers to the OECD’s benchmark definition (2008). According to this definition, where a purchaser acquires 10% or more of a company, this generally already constitutes a direct investment, which points to a long-term interest on the part of the investor and a wish to exert control.
However, the main reason behind the reduction of the threshold for German investment control probably is the increasing number of acquisitions by Chinese investors and, in particular, cases like “50Hertz”: In the summer of 2018, State Grid Corporation of China, a state-owned company, planned to purchase 20% of the shares in 50Hertz, one of the four German electricity transmission system operators. The planned acquisition was below the 25% voting rights threshold and therefore outside of the scope of current German foreign investment control. In order to nevertheless block the acquisition, because of security concerns and in order to protect critical infrastructures, the government ultimately instructed KfW, a German state-owned bank, to purchase the share in 50Hertz. The 50Hertz case therefore shed a light on the limits of German foreign investment control.
‘Critical infrastructures’ extended to include media industry companies
Critical infrastructures will in future also include media industry companies that “play a role in shaping public opinion by means of radio, telemedia or printed media, are relevant to the current situation and have a widespread impact”. Investments in this industry that reach the new threshold of 10% must therefore also be reported to the BMWi, giving the Ministry the right to review them.
Implications for M&A
Where critical infrastructures and sector-specific investment control are concerned, the lowering of the threshold will have a significant impact on M&A. Foreign investments in these sectors will now require notification or (within the scope of sector-specific control) clearance and be subject to the review powers of the BMWi once they reach the new threshold of just 10% of the voting rights. This means that the BMWi will also be able to examine smaller transactions to determine whether these endanger the public order or safety or significant security interests of the Federal Republic of Germany. For this reason, it will also be necessary in many acquisitions of minority interests in German companies involving less than 25% of the voting rights to carry out a detailed risk analysis that carefully examines the field of business of the target company, the acquirer and possible security concerns. Moreover, in some of these cases it might be advisable – or even necessary – in future to allow for more time between signing and closing.
However, where critical infrastructures and sector-specific investment control are not concerned, the legal situation will not change due to the Ordinance Amendment. The BMWi can only examine whether such investments endanger the public order or safety of the Federal Republic of Germany if they involve the acquisition of at least 25% of the voting rights.
Additional changes to the Foreign Trade and Payments Ordinance regarding the boycott prohibition
The Ordinance Amendment also provides, among other things, that the German boycott prohibition is to be restricted. Until now, under German law, companies and private persons have not been able to issue a statement to the effect that they are participating in a boycott against another state. The Ordinance Amendment now stipulates that this boycott prohibition will not apply if the United Nations Security Council, the Council of the European Union or the Federal Republic of Germany has also imposed economic sanctions on the state in question. The intention is to make it easier for companies to manage different worldwide sanctions. However, whether or not this will succeed seems to be unclear since, in light of the US’s sanctions against Iran, the scope of the EU’s blocking statute, Regulation (EC) No 2271/96, was recently broadened.
Gleiss Lutz commentary
The rules on foreign investment control in Germany were already significantly tightened in July 2017. At that time, procedural questions were at the forefront of the statutory reform. In particular, the examination periods for the BMWi were considerably extended and reporting obligations were introduced for transactions relating to critical infrastructures. The current Ordinance Amendment is in line with this trend of tightening German foreign investment control. Foreign investments in the area of critical infrastructures and in sectors that are particularly relevant for security will already be subject to control by the BMWi once shares with voting rights of 10% are acquired. Even though the conditions under which the BMWi is able to prohibit or restrict a transaction remain unchanged, this reform will entail additional constraints for international M&A, because considerably more transactions will be subject to the review powers of the BMWi.
The industry definition of “companies in the media industry” in the Ordinance Amendment is conceivably open and, with several unspecific legal terms, provides the BMWi with a broad discretion as to whether or not a critical infrastructure is concerned. The explanatory document for the Ordinance Amendment does not adequately address this aspect. The lack of specificity of this industry definition means that in future it may be uncertain whether a reporting obligation applies and whether the review powers of the BMWi are triggered if transactions in this area result in an acquisition of between 10% and 25% of the voting rights. This could have been avoided had the law been worded more clearly.