The German Investment Clearance Procedure

Currently it is the semiconductor firm Aixtron and soon presumably the lamp division of Osram – after having concluded first prominent cases, the number of cases increase in which the German Federal Ministry of Economics reviews acquisitions of German companies by foreign – often Chinese – investors. The intended acquisition of Aixtron was recently suspended until further notice. How may such restrictions be reconciled with the principles of free foreign trade? On the basis of the Foreign Trade and Payments Act (Außenwirtschaftsgesetz) and the German Foreign Trade Ordinance (Außenwirtschaftsverordnung), both as amended in 2013, the Ministry is authorised to examine and, under specific circumstances prohibit, the acquisition of German companies. In the following, an overview of the most relevant provisions shall be provided.

There are two types of examination procedures in relation to takeovers of domestic companies by foreign investors which need to be distinguished: the cross-sectoral examination and the sector specific examination.

Acquisition of a German Company

Both types of examination procedures require an “acquisition” of a company or a participation in a company. The term “acquisition” is being construed in a broad way. A transaction qualifies as an “acquisition” if the investor, following the acquisition, holds 25 per cent or more of the voting rights in the German target, either directly or indirectly (by way of attribution). The fact that the law applies to both direct and indirect acquisitions, e.g., an acquisition of a foreign company holding more than 25 per cent of the voting rights in a domestic company, can lead to certain transactions being examined by the Ministry of Economics, even though, at first glance, they appear not to fall within the scope of the examination procedures. It should be noted that neither the size of the company, the type of acquisition (share deal or asset deal) nor the choice of a law other than German law for the transaction, are relevant to the applicability of the examination procedures.

Cross-Sectoral Examination

Basically every acquisition of a German company by an investor with its seat outside the European Union or the European Free Trade Association falls within the scope of the cross-sectoral examination, irrespective of the field of activity of the target company. There is no obligation on the parties to register the transaction nor obtain authorisation. It is solely up to the Ministry of Economics (supported by the Federal Cartel Office and/or the Federal Financial Supervisory Authority) to find out about a relevant transaction and, where appropriate, to initiate examination procedures within a period of three months after the signing of the transaction. Procedures being initiated, the foreign investor has to provide extensive documentation, following the provision of which, a two-month period starts to run, during which the Ministry of Economics has to decide on the case. If the investment endangers public policy or the security of the Federal Republic of Germany, the Ministry of Economics can prohibit the acquisition or impose orders. Under the applicable European laws, the danger must be a genuine and sufficiently serious threat that affects the fundamental interests of society. Even though there are particularly sensitive sectors, such as those relating to the supply of essential goods (e.g. energy) in crisis situations, or strategic services, such as financial services, there is no restriction of the examination procedures to certain sectors. Any threat has to be assessed on a case-by-case basis. If eventually a transaction shall be prohibited, the approval of the federal government must be obtained, which demonstrates the exceptional nature of a prohibition. Until the two-month review period expires, or the transaction is either authorised or prohibited, the contractual agreement underlying the proposed acquisition must be regarded as “temporarily” valid. It becomes void only if the transaction is prohibited. The parties may complete the transaction at their own risk; other than under cartel law, there is no prohibition on completion until clearance.

Investors that seek transaction security at an early stage and want to avoid a post-signing examination procedure can – pursuant to a contested, but in our view correct understanding of the applicable rules and regulations – apply for a clearance certificate voluntarily prior to the execution of the transaction. This certificate confirms that the proposed transaction will not cause a threat to public policy or the security of the Federal Republic of Germany. The application has to be made in writing and must be addressed to the Ministry of Economics. Filing should be deemed admissible as soon as the acquirer is in the position to describe the main features of the planned transaction, the business segment in which it is operating in, and provide details about itself. After receiving the application letter, the Ministry of Economics has one month to initiate examination procedures or issue a clearance certificate. If no examination procedures are initiated within this period, clearance shall be deemed to have been granted.

Sector-Specific Examination

Any acquisition of companies which are operating in particularly security sensitive areas is subject to the specific rules for sector specific examinations. This in particular concerns manufacturers and developers of military weapons, other armaments or products with IT-security functions. The legal test is whether or not the proposed acquisition (taking into consideration applicable EU laws) substantially endangers the security interests of the Federal Republic of Germany. A prohibition or order may be imposed in particular if, as a result of the takeover, the security policy interests or the safeguarding of military security of the Federal Republic of Germany is endangered. In contrast with the cross-sectoral examination procedure, the foreign investor is obliged to notify the Ministry of Economics of the proposed acquisition. Upon receipt of all necessary material, the Ministry of Economics has one month to decide on the case. Again in contrast with the cross-sectoral examination, the agreement underlying the proposed acquisition is deemed “temporarily” invalid until the Ministry of Economics has explicitly cleared the acquisition, or the acquisition is deemed cleared on implied terms due to expiry of the one-month period. Any orders that may be imposed are imposed in agreement with the Foreign Office, the Federal Ministry of Defence or the Federal Ministry of Interior.

Comment

The German Federal Ministry of Economics can examine and, where appropriate, prohibit the proposed takeover of a German company, not only in industries that are security sensitive, but also in a variety of international transactions. The investor can, of course, take legal action against any negative decision by the Ministry of Economics and, where appropriate, seek damages. If possible, however, the parties should discuss at an early stage how best to proceed, e.g., make a voluntary application for clearance if appropriate, and should, in relation to any sale and purchase agreement concerning the acquisition of the company, agree on appropriate closing conditions, cooperation duties and covenants as well as on applicable remedies in the event of the transaction being prohibited by the Ministry of Economics. It remains to be seen, if and to which extent recent considerations of the Ministry of Economics to expand the currently existing list of reasons to prohibit transactions will materialize.