Foreign investment control. Contents
Draft 13th Amendment to the FTA 1
What exactly does the bill propose?
Despite strong objections by almost every German business association, the German government recently tabled a draft bill to amend the German Foreign Trade Act (Außenwirtschaftsgesetz, hereinafter FTA) and the German Foreign Trade Regulation (Außenwirtschaftsverordnung). The bill proposes to significantly expand the control of acquisitions of German companies under the Act in a manner that would have substantial effects on the practice – for the purpose, among others, of preventing unwanted investments by sovereign wealth funds. The Federal Ministry of Economics and Technology (Bundesministerium für Wirtschaft und Technologie) would control all acquisitions in which an investor, who does not reside in a member-state of the EU or the EFTA, directly or indirectly acquires 25% or more of the voting rights in a German business. In the present summary, we will review the proposed amendments, their effects on the practice as well as the draft bill’s current status and scheduled progression through the legislative process.
What would these changes involve for the practice? 4 Current legislative status of the bill and prognosis 6
What exactly does the bill propose?
Control and veto rights
The current draft of the 13th amendment to the FTA and the Foreign Trade Regulation provides the Ministry of Economics and Technology with the right to control and veto transactions or to impose conditions thereon, if – a business, the seat of which is not in a member state of the EU or the EFTA (Iceland, Lichtenstein, Norway, Switzerland) (“non-Community resident”/“non-Community acquirer”), or a resident business in which a non-Community resident holds at least 25% of the voting rights, acquires a German business or directly or indirectly acquires a share in a German business, and – public policy or security, as defined by Articles 46 and 58 para. 1 of the EC Treaty, is threatened. These control and veto rights do not apply if the non-Community acquirer’s direct or indirect share of the voting rights in the respective company would not reach 25% upon acquisition of the share. In order to prevent transactions from circumventing these provisions, when calculating the non-Community acquirer’s percentage of voting rights, the voting rights of other companies holding shares in the target company would be attributed to the non-Community acquirer if (i) the acquirer holds 25% or more of the voting rights in such other company or (ii) the non-Community acquirer has concluded an agreement on the joint exercise of voting rights with such other company. Also, if the non-Community acquirer maintains branches and permanent offices within the EU or the EFTA, they would not be considered as Community residents. The existence of a real and sufficiently grave risk affecting a fundamental interest of society is a prerequisite to a veto or an imposition of conditions based on a threat to public policy and security. This formulation, newly introduced in the latest draft, is based on European Court of Justice (ECJ) case law. To date, the ECJ has accepted a threat to the security of supply in the telecommunications and electricity sectors, for example, or the endangerment of strategically important services, as constituting such threats to public security.
Within three months of the conclusion of the purchase agreement, the publication of the decision to make a public takeover offer, or the publication of the acquisition of control (and consequent mandatory offer), the Ministry of Economics and Technology would have the right to decide whether to examine the acquisition. If so, the acquirer would be informed of this decision by the administration and be asked to submit complete documentation. It remains unclear at this point exactly what documentation would be required in such a case, but the documents to be submitted would be made known publicly via a general decree from the Ministry published in the Federal Gazette (Bundesanzeiger). Within two months of receipt of the complete documentation, the Ministry would then have the right to veto the acquisition or impose conditions. For such a decision, the Federal Government’s consent would also be required. Certificate of lack of concerns; examination on request The bill does not provide for an obligation to register all transactions that generally fall under the scope of the FTA due to their foreign content. The Ministry of Economics and Technology can, however, certify to the acquirer upon application that the acquisition poses no concerns with regard to public policy and security (the so-called Certificate of lack of concerns, Unbedenklichkeitsbescheinigung, hereinafter the Certificate). Such an application may be filed already before the conclusion of the share purchase agreement. The bill does not, however, create any right to such Certificate even in unproblematic cases, but rather places the decision to issue at the Ministry’s discretion. Besides applying for the Certificate, the acquirer would generally also not be prevented from voluntarily submitting the complete documentation to the Ministry and prompting an examination. One cannot, however, conclusively infer that the shorter two-month period would thereby commence running, due to the systematic relationship in the bill between the obligation to submit the documentation and the deadline.
Foreign investment control.
Resolutory condition The legal transaction upon which the acquisition is based would remain under the resolutory condition of a veto for the duration of the entire review process – i.e. during the three-month “selection” period and, if the Ministry decides to undertake an examination, also for two months thereafter. This means that transactions falling under the FTA’s broad scope of application could continue to be concluded, and even executed, without the Ministry of Economics and Technology’s permission. Execution would not be prohibited, contrary to the case under fusion control, for example. If the Ministry later issued a veto, however, the legal transactions would become retroactively invalid and have to be rescinded (causing substantial difficulties in practice).
What would these changes involve for the practice?
If the bill becomes law, it could potentially have significant effects on Germany as an investment centre and on German M&A practice. One must of course assume that, due to the strict criteria for a refusal, the Ministry of Economics and Technology would rarely consider it necessary even to undertake an examination, and would only actually exercise its veto or impose conditions in exceptional cases. Nevertheless, a large number of transactions would be subject to the provision and thus theoretically run the risk of being vetoed. Indeed, the possibility of a veto is not restricted to certain (key) industries or particularly important transactions; the bill does not even apply the thresholds for merger control, which constitute statutory indicators of the economic importance of a given acquisition. On the contrary, the provisions are to apply to every acquisition of a German company in which the non-Community investor would directly or even only indirectly hold at least 25% of the voting rights.
The time factor
In order to exclude the risk of a later refusal and ensuing necessity to rescind the transaction, it could become advisable not to execute such transactions before a Certificate is issued or the FTA deadlines have expired. For this reason, the corresponding share purchase agreements or public takeover bids would have to include the issuance of a Certificate, or the nonoccurrence of the review and veto under the FTA, as conditions precedent to the execution of the transaction – in addition to the often necessary condition of clearance under merger control law. This would constitute a substantial delay of three – or, if the Ministry decides to examine, more than five – months. In practice, the rights to review and veto could therefore become the practical equivalent of a prohibition to execute.
It remains unclear whether and to what extent the proposed Certificate, which could be applied for even before the share purchase agreement is signed, would speed up the process. Indeed, the bill does not grant any legal claim to the issuance of such a Certificate; on the contrary, the decision to issue would remain at the discretion of the Ministry of Economics and Technology. The bill also does not provide any deadlines, either for the Ministry to issue the Certificate or after which the Certificate would be considered as issued. The voluntary submission of complete documentation and prompting of formal examination proceedings would also not ensure legal certitude to a satisfactory degree, since it is unclear whether the proposed examination period would also commence if the documents are provided in this way, or only if the submission is ordered as stipulated in the draft. And even if the period would indeed commence, the proposed period lasts two months, while merger control, for example, can regularly be completed within one month in simple cases.
Competitive disadvantages in auctions
Investors who fall under the scope of the FTA would be particularly disadvantaged especially during competitive divestiture proceedings (i.e. auctions). Such auctions have, in the meantime, become the typical method for buying and selling businesses. In such competitive auctions, any uncertainty about a possible refusal, over a longer period, can constitute a significant disadvantage for a particular bidder vis-à-vis other bidders, even if an actual refusal is unlikely. This is due to the fact that, besides achieving a high purchase price and otherwise reasonable terms, sellers are mainly interested in the certainty of a given transaction being swiftly closed. Sellers would be, in some cases, faced with the decision of either accepting an offer that is commercially promising yet uncertain or only executable later, or one that is commercially less attractive but which could be finalised without such uncertainty or delay. Moreover, it could be disadvantageous for a seller if certain bidders chose not to participate in the auction at all, due to not being prepared to accept the disadvantages vis-à-vis other bidders that the proposal would cause.
Foreign investment control.
Current legislative status of the bill and prognosis
The bill is currently scheduled to be adopted as law by the German legislature (Bundestag) in autumn and would come into force at the beginning of next year. The exact wording of the bill to be adopted has currently not yet been finalised. During a hearing at the Ministry of Economics and Technology in early August, German business associations sharply criticised the entire concept of the bill as well as specific provisions thereof, which could potentially lead to certain of those provisions being changed. It is, however, unlikely that the government will abandon its proposal entirely. The European Commission may also suggest further amendments to the German legislator. Indeed, shortly after the Act was passed by the cabinet, the Commission indicated its intention to examine it.
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