New Regulatory Framework for Non-European Investments in Germany
Corporate & Finance Alert
July 7, 2009
On February 13, 2009, the German parliament (Bundestag) passed highly controversial amendments (the “Amendments”) to the Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG) and the Foreign Trade and Payments Regulation (Außenwirtschaftsverordnung – AWV), which Amendments came into effect on April 24, 2009. The Amendments provide for the monitoring and potential proscription of foreign investment in Germany. Specifically, investors from countries outside the European Community (EC) and the European Free Trade Association (EFTA) may be prohibited from acquiring, directly or indirectly, more than 25% of the voting rights in a German entity if the acquisition poses a “danger to public policy or security of the Federal Republic of Germany.”
While the previous law solely covered transactions involving arms and encryption technology, the Amendments expand the AWG and AWV to encompass foreign investments in general, a policy that follows similar regimes to regulate foreign investments already in effect in other countries, such as the United States.
Background – Protection of Sensitive Business Sectors v. Legal Certainty and Open Markets
The Amendments are considered a reaction to increasing investments by Chinese, Russian and Middle Eastern state-controlled funds in Germany and the fear of a sell-out of strategically important industries. Since foreign state-controlled funds may be used for other than financial purposes (e.g., to influence German politics via investments in key German enterprises or industries), the Amendments seek to protect sensitive German industry sectors, such as the energy, telecommunications and military sectors, and aim to prevent indirect takeovers of German companies by foreign states.
The Amendments have been the subject of considerable political and legal debate. During the drafting process, the Amendments attracted much criticism, especially from German industry, legal and market professionals, which have taken a rather skeptical view of their regulations. The Amendments often have been cited as being an overly cautious response, as it has been agreed that there is little need to worry about a potential mass sale of German companies to non-European investors. Moreover, the Amendments are viewed as unreasonable because they not only restrict investments from foreign countries, state-owned funds and state-controlled corporations, but also from foreign investors in general, which could damage the general investment climate in Germany. In this context, critics mainly cite the legal uncertainty the Amendments create for foreign investors. The vague legal terminology “danger to the public order or safety of the Federal Republic of Germany” contained in the Amendments and the right of the German Ministry to investigate for a period of three months following the closing of a transaction may hinder potential investment plans due to a lack of deal certainty.
Doubt also exists as to whether the Amendments comply with European Union (EU) law. In particular, the Amendments may infringe on the provisions of the Treaty establishing the European Community (EC Treaty) concerning the free movement of capital within the European Union. Article 56 of the EC Treaty prohibits any restrictions on the movement of capital between member states, as well as vis-à-vis third-party countries, unless the content and application of such regulations is foreseeable and precise. If the term “endangerment of public safety or public order” is challenged as not meeting these standards, it may be rejected by the European Court of Justice. In the past, the Court has rejected similar provisions in France. The new regulations also raises concerns with the respect to public international law, specifically Germany’s obligations under certain bilateral investment protection treaties which contain bans on discrimination.
Against all this skepticism, the German Federal Ministry of Economics and Technology (Bundesministerium für Wirtschaft und Technologie – BMWi) has estimated that the Amendments would affect only approximately ten (10) transactions per year. Restriction or prohibition of a transaction only would be permitted in the case of a serious threat against public policy or security of the Federal Republic of Germany, making them applicable only in rare and exceptional circumstances.
Key Issues – Scope of Application, Rights of Examination and Refusal, Procedure
In accordance with new Sec. 28 par. 2 AWG, the control of foreign investment activities will be substantially expanded by the right of the BMWi to examine transactions in which a non-resident investor (investors that are not residents of the territory of the EC or EFTA) acquires a German entity or, directly or indirectly, acquires at least 25% of the voting interests in a German entity. Such investment may be restricted or prohibited by the BMWi, subject to the consent of the federal government, if it poses a threat to the public policy or security (within the meaning of Articles 46 and 58 par. 1 of the EC Treaty) of the Federal Republic of Germany.
The Amendments also deal with potential circumventions of the new regulations. In calculating a non-resident investor’s voting percentage, other companies’ shares in the target company will under specific circumstances be attributed to the non-resident investor if the non-resident investor holds 25% or more of the voting rights in such other company. In addition, the voting shares held by third parties are added to the voting shares of the non-resident investor if the third parties’ voting shares are subject to a voting agreement intended to bring about the joint exercise of 25% or more of said voting shares. The Amendments also prohibit non-resident investors from merely creating an acquisition vehicle with its registered office in the territory of the EC or EFTA as a means of circumventing the Amendments’ provisions.
The BMWi may elect to exercise its right of examination within three months of the signing of an acquisition agreement, the publication of the decision to launch a takeover bid or the publication of the acquisition of control (“preliminary review period”). If the BMWi finds the investment requires examination, it will inform the acquirer (in accordance with Sec. 28 AWG via an administrative act (Verwaltungsakt)) of its decision to undertake an examination and will request complete acquisition documentation. If the BMWi finds that the acquisition endangers public policy or security in Germany, it can proscribe the acquisition. A decision to prohibit an acquisition can only be made within two months of the date on which the BMWi receives complete transaction documents from the non-resident investor (“review procedure period”), and such decision requires the consent of the federal government. After the expiration of the two-month period, the acquisition is deemed approved. In sum, the transaction becomes valid either three months after the date of publication of the takeover offer or signing of the purchase contract, if the BMWi has not decided to exercise its rights, or two months after receipt of the complete transaction documents if the BMWi has not prohibited or otherwise restricted the acquisition. Notwithstanding the foregoing, all decisions of the BMWi are subject to judicial review by the German administrative courts.
Foreign investors are under no obligation to notify the BMWi of their acquisitions. However, they may do so to obtain legal certainty as the validity of the contract is in doubt during the BMWi’s review period. In accordance with Sec. 53 par. 3 AWV, an investor may shorten this time period by applying for an attestation stating that the respective acquisition does not endanger public policy or security (Unbedenklichkeitsbescheinigung). The attestation is legally binding and will be deemed issued if the BMWi does not initiate the examination procedure within one month of said attestation request. Furthermore, there is no retroactive application of the Amendments, thus only acquisitions subsequent to the effective date of the Amendments can be reviewed.
In Conclusion – Who is Affected by the Amendments and What are the Practical Implications?
The Amendments affect investors from countries that do not belong to the EC or EFTA (EC plus Switzerland, Norway, Iceland and Liechtenstein) who acquire shares representing 25 % or more of the voting stock of a German company. As previously noted, the BMWi forecasts that only ten (10) transactions per year will be affected because the new regulations allow for examination only in rare and exceptional circumstances. This prognosis appears to be realistic. Even if government supervision of acquisitions by foreigners is no longer limited to specific sectors, it likely will concentrate on investments in infrastructure or services of public interest or strategic importance (e.g., aviation and airports, roads and railways, ports and shipping, post and logistics, water and waste, defense and public health and social infrastructure). However, telecommunications and energy networks are the sectors which have been in focus since the beginning of legislative process. One reason for this focus may be the fact that the Amendments refer explicitly to the EC Treaty and the case law of the European Court of Justice. In prior rulings, the Court has expressly recognized that public security is affected when it comes to the provision of services in the event of a crisis in the fields of telecommunications, electricity or strategic services.
It is not yet clear if and how the new regulations will influence the investment climate and practice in Germany. Recent developments have led to fear that after several decades of deregulation policy in Organisation for Economic Co-operation and Development (OECD) countries, new regimes of state regulation will emerge. Accordingly, Germany may be only one example of this trend.
Germany is one of the most open markets in the world and likely will not lose this position due to the adoption of the Amendments. However, in practice the Amendments must be taken into consideration when undertaking any covered transaction involving a non-European investor. The primary result of the Amendments will be temporary legal uncertainty for foreign investors. Since the actual application of the Amendments is not yet clear, it is likely that a request for a clearance attestation will be utilized to obtain deal certainty. Due to the tight timeframe for legally binding decisions, the risk of delay is rather low. In addition, acquisition agreements may include provisions that allow for the termination of the transaction in the event that the investment is prohibited by the BMWi (similar to those used in agreements where the acquisition is subject to the approval of competition authorities).
The authors would like to thank Söntje Julia Hilberg, a Referendar with Gibbons P.C. (while in the process of taking the German Bar Examination) at the time this article was authored, for her assistance with preparing this article.