Under the German FDI regime, the competent ministry (BMWK) may review foreign investments in domestic target companies above certain thresholds. The legislator has extended the scope of notification obligations over the past few years, with the consequence that (i) acquirers must in an increasing number of cases notify the BMWK immediately after signing and (ii) clearance of the transaction then qualifies as a statutory closing condition. Notification obligations typically depend on the type of the domestic target business, more specifically if business activities of the target in Germany are considered sensitive from a public order and security standpoint (e.g. operation of critical infrastructures, development and manufacturing of semiconductor technology, AI-based solutions, robotics, IT security, weapons and armaments).
Since 2020, German law has prohibited the factual completion of transactions that are subject to a notification obligation before the BMWK grants clearance. Similar to the gun jumping concept established for merger control reviews across the globe, the parties are not allowed to take certain measures that could be considered as a premature closing of the transaction (the so-called standstill obligation). The antitrust authorities pursue a rather broad concept of what constitutes an infringement of the standstill obligation, so that the acquirer must avoid the possibility to determine the target’s business before closing. This includes scenarios such as extensive pre-closing planning discussions and preparations as well as excessive information exchange.
While gun jumping rules under German merger control have existed since the adoption of the national merger control in 1973, the legislator only rolled out a corresponding concept under the FDI regime during the COVID-19 pandemic. The purpose of the reform was to prevent the parties from creating irreversible circumstances, such as (i) a potential technology outflow from Germany to third-party countries and (ii) foreign investors gaining access to security-related information before clearance of the transaction.
In the absence of case law and official authority guidance, there is uncertainty in practice as to how the FDI gun jumping rules must be interpreted. Based on the wording of the applicable regulations, the FDI gun jumping rules appear to be much narrower in scope than their equivalent under merger control. They are essentially limited to two types of prohibited pre-closing measures:
No premature exercise of voting rights
It is prohibited for foreign investors to factually exercise control already before clearance of the acquisition. The acquirer shall not yet act like an owner of the German target company. Examples include the transfer of bearer securities, the endorsement of registered securities and agreements on the exercise of voting rights. The parties may, on the other hand, agree on a customary reserved matters catalogue which provides the acquirer with an adequate level of comfort that the seller maintains the business “as is” in the transition period until closing and, thus, also during FDI review proceedings. From a merger control perspective, such clauses are permissible in principle but should not be construed in a way that the acquirer prematurely gains control over the target. Therefore, it is recommended – on a case-by-case assessment – to strictly limit the reserved matters to what is necessary to ensure that the value of the target is maintained. There are strong reasons to argue that these principles likewise apply in the context of the FDI gun jumping rules.
No premature disclosure of sensitive information
The acquirer may not yet receive sensitive information about the target before clearance of the acquisition if such information affects public order and security interests. The scope of this prohibition extends only to those business activities that trigger a notification obligation, including technical know-how and insights. There are strong reasons to argue that it does not refer to purely commercial information typically exchanged in the context of the due diligence process. In the event that sensitive information must be exchanged between the parties, e.g., to respond to requests from the BMWK in the context of ongoing FDI proceedings, the gun jumping rules should be interpreted more liberally.
Unlike in merger control, which provides fines for companies only, gun jumping under the German FDI regime may qualify as a criminal offense with potentially severe legal and reputational consequences for the management and other persons involved.