Checks on Foreign Investment: Exploring the relevant German law

The direct or indirect acquisition of an interest in a German company by a non-EU company is sometimes considered to be a threat by the German government.

In such a case, the Federal Ministry of Economics and Energy (BMWi) may examine the acquisition under Section 55 of the Foreign Trade and Payments Ordinance (AWV).

Under the previous legal situation, the relevant thresholds that initiated an examination by the BMWi were reached if more than 25 per cent of the voting rights of a domestic company were acquired.

Since the 12th regulation amending the Foreign Trade and Payments Ordinance came into force on 28 December 2018, the critical threshold for certain companies is now only 10 per cent of the voting rights. After the relevant thresholds of 10 per cent or 25 per cent have been exceeded for the first time, a further increase in the share of voting rights may, under certain circumstances, also result in a renewed auditability if public security is endangered as a result.

The importance of the foreign trade investment audit for M&A transactions has thus increased significantly, particularly in the case of investments by non-European investors in German investment companies.

The threshold of 10 per cent is decisive if the domestic company is active with regard to a critical infrastructure pursuant to Section 55 I 2 No. 1 AWV, i.e. in particular in the areas of energy, water, nutrition, IT, health, finance and insurance or transport and traffic.

Other particularly security-relevant services within the meaning of Section 55 I 2 nos. 2 to 6 AWV include the development of software which serves the operation of critical infrastructures in a sector-specific manner, implementation of measures provided for by law for monitoring telecommunications, provision of cloud computing services and activities in the media industry.

In the case of the acquisition of an indirect interest in a domestic company, the addressee of the investigation procedure is the acquirer who acquires the shares which mediate the indirect interest in the domestic target company (so-called direct acquirer).

If the BMWi has indications that an investor from outside the EU has abused or circumvented the agreement in order to avoid the audit procedure, e.g. if the acquiring European special purpose entity does not conduct a significant independent business, the acquisition by EU residents may also be reviewed.

The benchmark is always whether the concrete acquisition endangers the public order or security of the Federal Republic of Germany. Purely economic interests are not sufficient for this.

The BMWi may only perform the examination pursuant to Section 55 AMV if it notifies the purchaser and the affected company of the audit procedure within three months of gaining knowledge of the conclusion of the acquisition (Section 55 III 1 AWV).

If the BMWi does not meet this deadline the transaction is deemed to have been cleared. The BMWi is then prevented from formally reviewing the acquisition, issuing orders or prohibiting the acquisition (Section 81 AWV).

Section 58 AWV opens up the possibility of applying to the BMWi for a clearance certificate in advance of signing.

The decision on the application for a clearance certificate takes a maximum of two months if the BMWi is actually of the opinion that it is harmless. During the verification period, the legal transaction on which the investment is based remains effective in the case of cross-sector investment verification. However, the acquisition is subject to the resolutory condition of prohibition (Section 15 II AWG).

The lowering of the participation thresholds to 10 per cent is of considerable importance, especially for venture capital (VC) transactions, since smaller minority shareholdings are often acquired here. In all cases, the following must now be observed when drafting the contract.

In transactions with investors outside the EU, it is generally recommended to include the clearance of the investment by the BMWi, as a condition precedent in the framework of M&A transactions.

As the purchaser is the addressee of the clearance certificate, it is generally agreed that the purchaser prepares and submits the application in cooperation with the vendor, similar to merger control requests.

Particularly in cases in which the BMWi’s concerns regarding the transaction cannot be excluded from the outset, adjustment clauses, cancellation rights, contractual penalties and comparable agreements should be laid out in the contract. The parties may also regulate which conditions, if any, the purchaser and the seller are required to fulfil under the BMWi.

The parties may prepare and submit their request prior to the signing of the contract. In most cases – in particular, if merger control or other closing conditions have to be met – filing an application after signing will be sufficient and will not delay the transaction.

This article is part of the IR Global Meet the Members Guide – Germany. To read the full publication, please click HERE