April 17, 2009
In the next weeks, an important amendment to the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG) will enter into force. This change of law results from an intensive public debate in the summer of 2008 regarding investments by foreign sovereign wealth funds and other foreign investors in Germany. The new legislation will allow the German Federal Ministry of Economics and Technology, or the MET, to prohibit investors from outside Europe from buying German enterprises or voting stakes of 25% or more in German companies if such acquisitions constitute a threat to the security or public policy of the Federal Republic of Germany. While most acquisitions will likely not be adversely affected, the scope of the new law is potentially broad and investors from outside Europe should be careful to take the appropriate steps when structuring acquisitions in Germany. While comparable restrictions existed already for enterprises producing certain weapons or cryptographic systems, the new rules are not limited to specific industries.
Scope of Application
The new restrictions apply to the acquisition of German enterprises or the acquisition of a direct or indirect participation in such enterprises, unless the voting share of the investor following the transaction is less than 25%. Voting rights held by other entities are added to the investor’s votes if the investor holds 25% or more of the vote in such other entities or if there is an arrangement regarding the exercise of voting rights. In summary, the requirement will apply to share deals, but also other transaction structures that result in a foreign investor obtaining — whether directly or indirectly and whether individually or acting in concert — 25% or more of the voting rights in a German company. Likewise, asset deals will also fall within the ambit of the new law.
The new rules apply only to acquisitions by a foreign investor (whether an individual or entity and regardless of whether it is a sovereign fund or not) from outside the European Union (EU) and the European Free Trade Association (EFTA). The same applies to investments made by entities from within the EU or EFTA if a shareholder from a third country holds 25% or more of the voting rights of such entities and if there are indications that an abusive arrangement or circumvention transaction has taken place in order to avoid an examination by the MET.
While this last requirement seems to indicate that investments into Germany through a European entity are exempt if there is no indication of a circumvention transaction (e.g. because a Luxembourg entity would have been chosen anyway for tax reasons), it is prudent to assume (at least initially) that such investments may still be subject to the new law. The wording of the law explicitly refers to voting rights held by entities owned directly or indirectly by the foreign investor. Also, any such limitation would otherwise exclude from the law a significant portion of the transactions that are potentially relevant.
Like in the case of the German or European antitrust regulations, the new rules could potentially also apply to transactions regarding non-German targets that have subsidiaries or assets in Germany.
Threat to Security or Public Policy
An acquisition is only subject to the new rules if it threatens the public policy or the security of the Federal Republic of Germany. In the law-making process, the legislature explicitly referred to Articles 46 and 58 of the Treaty Establishing the European Community (EC Treaty), where similar terms are used as exceptions to the freedom to provide services or form an establishment in another member state.
Since the European Court of Justice (ECJ) interprets these terms narrowly, this reference confirms that the new rules will only prohibit transactions in exceptional circumstances. The law further specifies that there must be a genuine and sufficiently serious threat affecting one of the fundamental interests of society. For example, the ECJ has expressly recognized that public security is affected when it comes to securing the provision of telecommunication or electricity services in the event of a crisis. This may become particularly relevant in the case of certain infrastructure deals or investments in security-related industries that are not covered by the narrow scope of the industry-specific rules that already exist.
The buyer and the seller are under no obligation to make any filings and they are entitled to proceed with the transaction without clearance (e.g. there is no stand-still obligation). In such a case, however, they bear the risk that the MET would decide to examine (and potentially prohibit) the transaction. If it examines the transaction and concludes that there is a serious threat to the public policy or security, then it may – upon prior approval of the Federal Government – prohibit the transaction or issue specific orders in this respect. Any purchase agreement signed without clearance is valid, but will become automatically ineffective if the transaction is prohibited.
The MET can decide to initiate an examination of the transaction within three months of the signature of the purchase agreement. While there is no general notification obligation of the parties, in public takeovers and in all transactions that require antitrust approval, the MET will automatically be informed by the Federal Financial Supervision Authority (BaFin) or the Federal Cartel Office, respectively. In case it does decide to examine the case, the acquirer is ordered by administrative act to provide all necessary documents for the examination. It is not clear what documents will usually be required for the examination, as the MET has yet to announce the necessary documents in the Federal Gazette. It is expected that the examination will require roughly the same documents as are already required in case of the acquisition of a producer of weapons or cryptographic systems.
After the MET receives all documentation, it has two months to determine whether to prohibit the acquisition or issue other orders to safeguard the public policy or security. If the MET does not issue any prohibition or other order within those two months, the acquisition can no longer be restricted.
In addition, the purchaser may, even prior to signing, apply for a certificate of non-objection with the MET if the purchaser believes that neither the security nor public policy are affected by the proposed acquisition. The seller is not entitled to apply for the certificate, but it may require the purchaser contractually to do it or it can obtain a power of attorney from the purchaser in order to make the filing on its behalf. The application must describe the planned transaction, the purchaser and the purchaser’s field of business. Upon receipt, the MET has one month to issue the certificate or open examination proceedings. If the MET does neither within the one-month period, the certificate is deemed to have been issued. Once the certificate is issued or deemed issued, the MET can no longer prohibit or restrict the acquisition. Note that the certificate should only be sought when the relevant terms of the transaction are sufficiently clear in order to avoid that subsequently, the relevant circumstances change to a degree that could put the effect of the certificate in doubt (e.g. when instead of 25%, the purchaser decides to acquire 50% of the voting stock).
Effects on M&A Transactions
In practice, most acquisitions will not be subject to examinations by the MET under the new rules. However, the law potentially has a very broad scope and it is not yet certain when a transaction will pose a threat to public policy or security. Foreign investors will need to keep this in mind and should — at least until the MET has developed a consistent approach — consider applying for a certificate of non-objection sufficiently in advance. The certificate is a good method of obtaining certainty within a short period of time without the obligation (at least initially) to provide extensive information or documentation to the MET.
If a foreign investor believes that a transaction may adversely impact the public policy or security of Germany (e.g. as with certain infrastructure transactions), the foreign investor might not just apply for a certificate (which may be denied in such cases) but might also decide to obtain certainty by voluntarily providing all necessary information for an examination proceeding to the MET and thereby triggering the two-month examination period. Such a step can help to accelerate the proceedings in situations where there is a risk that the certificate would be denied.
As it is typically unpractical to unwind a transaction after closing has occurred, the parties may further decide to delay closing until certainty has been obtained, e.g. by inserting an appropriate condition precedent and covenants requiring co-operation during the procedure outlined above.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, Philip Martinius (+49 89 189 33-121, [email protected]) or Jan Querfurth (+49 89 189 33-121, [email protected]) from our Munich office, or Jeffrey M. Trinklein (212-351-2344, [email protected]) from our New York office.
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