Since 2009, the German Federal Ministry for Economic Affairs and Energy (BMWi) may review acquisitions of or participations in German companies by foreign, non-European investors, irrespective of the industry of both the target and the investor. The BMWi may prohibit such transactions only if they endanger public policy or security. The BMWi was already entitled to review acquisitions of or participations in entities in the field of military technology by any foreign, non-German investor since 2004. Both forms of reviews are governed by the German Foreign Trade Act (AWG) and Regulation (AWV). The relevant provisions are Section 4(1) No. 4 and Section 5(2) of the AWG as well as Sections 55 to 62 of the AWV. The BMWi also provides some regulatory guidance.2
Initial concerns that the German mergers and acquisitions market would be significantly impeded or delayed by the review of foreign investments have proven wrong. Foreign investment in Germany continues in various sectors. Examples include:
- a the acquisition of RWE DEA AG, an upstream oil and gas company, by the investment vehicle L1E Acquisitions GmbH – which is owned by the Luxembourg-based LetterOne Holdings SA established by, among others, the Russian investor Mikhail Fridman – in 2014 (transaction value approximately US$7.1 billion);3
- b the acquisition of the defence electronics business of Airbus Group SE, a European manufacturer of aircrafts, by companies held by funds of Kohlberg Kravis Roberts & Co LP, an American private equity firm, in 2016 (transaction value approximately US$1.2 billion);4
- c the acquisition of the BCP Meerwind Luxembourg Sàrl., which holds an 80 per cent share in WindMW GmbH, and its 288MW German operational offshore windfarm Meerwind, by the China Three Gorges Corp, the largest Chinese clean energy group (transaction value approximately US$1.8 billion);5 and
- d the sale of LEDVANCE GmbH, a lighting products and networked light applications company, to the Chinese investor Harmony Mingxin (Yiwu) by OSRAM Licht AG in 2016/17.6
In 2016, the acquisition of KUKA AG, a company engaged especially in the manufacture of industrial robots, by MECCA International (BVI) Ltd, a British Virgin Islands’ subsidiary of the Chinese electrical appliance manufacturer Midea Group Co Ltd,7 has been subject to public debate.8 Also in 2016, the envisaged acquisition of the German technology company AIXTRON SE by Chinese Fujian Grand Chip Investment Fund was called off, after the clearance certificate initially issued by the BMWi was repealed9 and the president of the United States blocked the takeover of the company’s US subsidiary.10 The most recent amendment to the AWV of 201711 has widely been conceived as a reaction to these and further, in particular Chinese, acquisitions. The amended AWV generally shows a more restrictive approach to foreign investment review in Germany. The changes especially include the introduction of a notification requirement for further sectors, an indication on potential security concerns related to critical infrastructure, telecommunications surveillance, cloud computing, telematics infrastructure and certain sector-specific software, as well as longer review periods.
Foreign investment review continues to be an important issue in international transactions both in terms of contractual provisions and timing. So far no foreign investment has been disallowed under the AWG and AWV provisions. However, in particular in light of the 2017 amendment, there is an increased awareness and investors should consider potential negotiations on security-related aspects, particularly in relation to the newly emphasised business areas of potential concern.
ii FOREIGN INVESTMENT REGIME
Foreign investment in Germany may be subject to review by the BMWi if a non-European person or entity acquires a German company or a direct or indirect shareholding in the company and, after the acquisition, holds at least 25 per cent of the voting rights in the target, irrespective of the target’s or investor’s industry, the target’s size and economic importance or the transaction value (cross-sectoral review). As of 2017, a notification to the BMWi is required for certain foreign investments in German companies that are deemed to be particularly relevant to the maintenance of German public policy and security. This concerns in particular the operation of critical infrastructure (e.g., energy, transport or healthcare facilities services, if the facilities concerned are vital to the functioning of the community),12 certain software products for the operation of critical infrastructure, the entrustment with or operation of telecommunications surveillance measures and certain cloud computing services, as well as telematics infrastructure components and services.
Further, a sector-specific review framework exists, applicable especially to companies involved in the development or manufacture of military weapons or goods or products with certain IT security functions. This sector-specific review is excluded from the scope of this chapter.13
i Foreign investor under review
The general foreign investment regime focuses on non-European investors only (i.e., investors that are incorporated in, or are managed from, outside the EU and the European Free Trade Association (EFTA), irrespective of whether they have branches and operation sites in the EU or the EFTA).14 The regime applies to all types of investors, whether they are state-owned or private investors. Investments of EU-incorporated investors are generally not reviewable.15 They benefit from the free movement of capital within the EU Member States under Article 63 of the Treaty on the Functioning of the European Union (TFEU) and the freedom of establishment under Article 49 of the TFEU.
The BMWi considers investors incorporated in the Channel Islands as non-European investors in this sense. Although the Channel Islands are part of the customs territory of the EU,16 they are outside the geographical application of the TFEU.17 The free movement of capital does not apply.18 Against this background, investors from the Channel Islands are treated like other non-European investors, in particular as local company law and anti-money laundering legislation do not provide for the same standards as in the EU.
In exceptional cases, acquisitions by EU or EFTA-incorporated investors may also be subject to review if the BMWi believes that the structure has been chosen to circumvent the control regime, namely if the acquiring European vehicle has no substantial business on its own or no permanent presence in form of offices, personnel or equipment in the EU or the EFTA.19
ii Foreign investment under review
Only acquisitions of an existing business are reviewable. Generally, all types of share deals may be subject to review if they lead to an acquisition of 25 per cent or more of the voting rights, including any acquisition of shares, capital increases and debt-equity swaps. In contrast, acquisitions of non-voting shares, put or call rights, or pre-emptive rights are, as such, not subject to review.20 Acquisitions may take place in special situations, including the target’s financial distress or insolvency. Such circumstances do not trigger or modify the review process.
The review is triggered by the acquirer’s holding of 25 per cent of the voting rights after the transaction. If an investor acquires a shareholding of less than 25 per cent, but reaches 25 per cent of the voting rights through a further acquisition, this further acquisition triggers the investment review.21
In contrast, it is controversially discussed whether a further acquisition may be reviewed if an investor already holds 25 per cent or more of the voting rights as a result of a previous acquisition and increases its participation (e.g., from 30 per cent to 45 per cent). From the wording of the relevant provision (both the previous and the new versions), it is not entirely clear whether the review applies only to those acquisitions that cause the threshold of 25 per cent to be passed or also to further acquisitions.
Some authors argue that an acquisition may only be reviewed if it triggers passing the threshold.22 They refer in particular to the materials of the draft bill,23 according to which the review mainly aims at prevention of potential blocking minorities, and that, once the 25 per cent threshold has been passed, any further transaction does not trigger a potential blocking minority.24
Others hold that further acquisitions are reviewable, arguing that the law does not require such causation and that the further acquisition of a higher percentage or majority of voting rights justifies a further review because the investor may have gained a different level of influence.25
According to Section 56(1) of the AWV, it is only necessary that after the acquisition the direct or indirect share of voting rights of the acquirer reaches or exceeds 25 per cent of the voting rights, indicating a rather broader scope of reviewable transactions.
In light of the lack of comprehensively clear wording and the legal controversy, depending on the circumstances of the transaction, the parties may consider filing for a clearance certificate, if the case is upholding their position on (non-)reviewability of the transaction.
Voting rights in the German target held by a third party are attributed to the investor if the investor holds at least 25 per cent of the voting rights in the third party, or if the third party and the investor have entered into an agreement on the joint exercising of voting rights in the German target (acting in concert).
The acquisition of an indirect shareholding becomes subject to review if the acquirer (indirect shareholder) acquires 25 per cent of the voting rights in the target; and further, if the acquirer holds 25 per cent of the voting rights in the direct shareholder and the direct shareholder in turn holds 25 per cent of the voting rights in the target. Before the 2013 amendment to the AWV, it was unclear under which conditions indirect acquisitions of German targets were subject to review by the BMWi.26 Since 2013, the wording of Section 56(3) of the AVW has clearly suggested that in cases of indirect shareholding it is sufficient that the (indirect) acquirer holds 25 per cent of the voting rights in the relevant intermediate shareholder (e.g., acquisition vehicle) directly acquiring at least 25 per cent of the German target’s shares.27 In cases of multiple intermediate shareholders, each needs to hold at least 25 per cent of the voting rights in the relevant subsidiary.
In addition, the acquisition of a company’s business by way of an asset deal may be subject to review. This had been the prevailing opinion in legal literature in the past.28 However, the matter was controversially discussed, as the wording of the relevant provision of AWV was not completely clear.29 Under the previous version, the BMWi’s review was triggered by the acquisition of 25 per cent of the voting rights only, and the BMWi’s period of review started from signature of the agreement on the acquisition of the voting rights.
The 2013 amendments to the AWV, however, have clarified that the acquisition of a company is reviewable.30 This clarification confirms that asset deals are reviewable, provided that they relate to a company (i.e., a group of assets that form an undertaking and that are jointly used for a commercial purpose) rather than to single assets.31 The review period starts from the signing of the agreement on the asset acquisition.32
The establishment of a new business and the creation of a joint venture in Germany are not restricted under the foreign investment regime.33 They will, obviously, have to meet any other applicable regulatory requirements for such a business or operation under German law.
iii Scope of investment review
The BMWi reviews whether the investment endangers the public policy or security of Germany.34 The endangerment has to be actual and sufficiently important and affect fundamental public interests.35 General economic-political goals do not justify a restriction or prohibition of a transaction. The regulation does not provide for a routine control of each and any foreign investment.36 The term ‘public policy or security’ refers to Articles 36, 52(1) and 65(1) of the TFEU and has to be understood in accordance with EU law.37 Under these provisions, grounds of public policy and security may justify restrictions of the free movement of goods, capital and payments, and of the freedom of establishment.
The European Court of Justice (ECJ) discusses these terms in the context of claims against EU Member State restrictions of the free movement of goods, capital and payments, and of the freedom of establishment, and takes a rather restrictive approach. The ECJ accepted – in decisions on ‘golden shares’ – restrictions of the free movement of capital only to guarantee the general public’s minimum supply with petrochemical products,38 electricity and telecommunication services, or other public services of strategic interest.39 In the ECJ’s opinion, other industries such as the manufacture of tobacco and corporate banks did not qualify as providing such public services of strategic interest.40 Abstract concerns about certain investments in undertakings in strategic sectors (e.g., by sovereign wealth funds) do not constitute a valid justification based on public security.41 The acquisition of a 10 per cent share of a public service company of strategic interest cannot, as a general rule, be regarded as a real and serious threat that warrants restrictions of the four freedoms.42 The ECJ also found that an authorisation scheme for the acquisition of voting rights representing 20 per cent or more of the share capital in certain ‘strategic public limited companies’ is in breach of the freedom of establishment if the authorisation is of a discretionary nature.43
While the investment review is clearly not limited per se to any particular sectors or industries, some industries appear to be more crucial or sensitive. Acquisitions deemed to be of particular relevance to the maintenance of public policy and security are, inter alia, those in the fields of critical infrastructure (e.g., energy, transport or healthcare facilities services, if the facilities concerned are vital to the functioning of the community),44 certain software products for the operation of critical infrastructure, companies entrusted with the operation of telecommunications surveillance measures and certain cloud computing services, as well as telematics infrastructure components and services.
Owing to the broad scope of the terms ‘public policy’ and ‘security’, the BMWi has considerable discretion in its review. From 2008 until November 2016, the BMWi issued a total of 338 clearance certificates, of which 299 concerned the cross-sectoral review.45 Until at least October 2016, the BMWi has not disallowed any foreign investment.46 However, in an unprecedented decision the BMWi repealed a clearance certificate for the envisaged acquisition of the German technology company AIXTRON SE by China’s Fujian Grand Chip Investment Fund in 2016.47 Further, in several transactions, the BMWi (or other federal ministries) has negotiated with the investors security agreements containing certain security-related conditions or commitments related to the transaction.
III TYPICAL TRANSACTIONAL STRUCTURES
Generally, the transactional structures applied to a foreign acquisition of a German company depend on various considerations, but in any event on whether the target is a private or public company. Public companies are companies whose shares are traded publicly, in particular if they are listed on an organised market, whereas shares of private companies are not traded publicly. There is no residency requirement for a foreign acquirer, but it should be noted that the acquisition of business assets located in Germany generally results in the factual establishment of a branch, which must be registered with the commercial register.
As in most jurisdictions, the acquisition of a German private company is generally effected in one of two ways: as an asset deal (i.e., the purchase of the assets and the assumption of the liabilities of the business run by the company) or as a share deal (i.e., the purchase of the shares of the corporation or the purchase of the interests in the partnership running the business).
The asset deal structure allows the purchaser to choose certain assets or liabilities, or, to the contrary, exclude certain assets or liabilities, from the transaction. However, under German civil law, the acquisition of assets and liabilities in an asset deal requires in general a precise definition and determination of the assets and liabilities to be acquired or excluded. This may cause problems in the context of acquiring a complex business. Contrary thereto, the share deal generally involves the acquisition of the entire business. Legally, no determination of the assets and liabilities pertaining to the business is required. It suffices to determine the specific shares (or partnership interests) that form part of the transaction. With the sale of the shares (or interests), the corporation or partnership is transferred, as well as the entire business. Even in a share deal, however, certain assets or liabilities, or both, can be left behind by way of a carveout implemented prior to or in close connection with the transaction.
The purchaser of a business in an asset deal should be aware of the fact that it may acquire, together with the assets acquired, certain liabilities by virtue of statutory law. This applies in particular to employment relationships related to the business or a business unit forming part of the transaction. However, this may also apply to certain tax liabilities and other liabilities, depending on the specific circumstances.
There are also differences in tax treatment between asset and share deals. While the purchase of assets may generally lead to tax benefits from depreciating the assets over their lifetime, this is generally not possible for the purchase of shares. On the other hand, the seller of shares may benefit from preferential tax treatment under capital gains rules. Companies that have considerable tax loss carry-forwards may look attractive to potential purchasers, but it should be noted that the use of such tax loss carry-forwards is considerably restricted under statutory law. In particular, in the case of an acquisition of the majority of the shares, the loss carry-forwards generally fall away.
Depending on the circumstances, sale processes of private companies are very frequently organised as auctions. In general, these auction processes do not differ greatly from those in many other jurisdictions and internationally as to the various process steps, the relevant players involved and the relevant documents.
The acquisition of assets and liabilities by way of an asset deal from a public company does not differ, in general, from an asset deal transaction with a private company. However, under the Stock Corporation Act, the executive board of the selling stock corporation may not only need the approval of the supervisory board, but under certain (limited) circumstances also of the shareholders’ meeting. This applies under statutory law if the stock corporation sells essentially all its assets or if, by selling the assets, the stock corporation loses essentially the ability to run a business as defined to be the purpose of the stock corporation in the corporation’s articles of association. In addition, the management board may voluntarily seek the approval by a shareholders’ meeting.
Contrary to a transaction related to a private company, where a sale and purchase agreement may be negotiated and entered into with one or a limited number of sellers, the acquisition of a public company requires necessarily the approach of numerous potential sellers. For shares listed on an organised market, specific rules on mandatory and public tender offers are set forth in the Securities Acquisition and Takeover Act (WpÜG) and connected regulations.
If there is one seller or a limited number of sellers holding jointly a major stake in the public company (block trade), the foreign acquirer should be aware of the fact that if the acquisition of shares in a public company that is listed on an organised market reaches or exceeds 30 per cent of the voting stock of the company (including shares acquired by certain related parties), the WpÜG provides for a mandatory tender offer, meaning that the purchaser has to launch a public offer for the acquisition of all (remaining) shares in the target company at a statutory minimum price.
The minimum price for the mandatory tender offer is generally derived from the weighted average of the stock prices of the shares in the target company over the three months prior to the announcement that the acquirer has acquired 30 per cent or more of the voting rights in the target company, but must not fall short of the purchase price that the offeror or related parties have paid for shares of the target company over the six months prior to the announcement.
If the acquirer intends to avoid a mandatory tender offer, it can limit the acquisition to less than 30 per cent of the voting rights in the target company. This can be done in the form of a block trade or in the form of a public tender offer to all shareholders, or in the form of a combination of both. If the acquirer aims to acquire less than 30 per cent of the voting rights, the public tender offer must necessarily be limited to the number of shares that, together with shares that the offeror may already hold or acquire in parallel, add up to less than 30 per cent of the voting rights.
If, on the other hand, the acquirer intends to acquire a high number of voting rights in the target company (in particular a majority of the voting rights or even a qualified majority of the voting rights), it must launch a public tender offer on all the outstanding shares of the target company. The acquirer is not allowed to limit the offer to any number of voting shares equal to or in excess of 30 per cent. If the target company has different classes of shares (e.g., non-voting preference shares in addition to voting ordinary shares), the acquirer has to extend the offer to all (classes of) shares. Only under certain limited circumstances may the offeror, with the consent of the German Federal Financial Supervisory Authority (BaFin), exclude from the offer shares held by shareholders resident or domiciled in other jurisdictions. The voluntary public tender offer dispenses the offeror, following the acquisition of 30 per cent or more of the voting rights, from a subsequent mandatory tender offer, if the voluntary tender offer is made at least at a price equal to the minimum price for the mandatory tender offer.
A public tender offer has to be made in cash (euro) or liquid shares that are listed on an organised market. The offer has to be made in cash if the offeror itself (or jointly with certain related parties) has acquired at least 5 per cent of the shares or voting rights in the target company for cash in the six-month period preceding the announcement of its intention to launch the public tender offer or up to the expiration of the offer period. In addition, if the offeror itself or jointly with certain related parties acquires shares in the target company in parallel to the offer at a price that is higher than what is offered to other shareholders in the offer, the offer price is increased by virtue of law to the benefit of all shareholders. The same generally applies for any acquisition of shares in the target company within one year upon expiry of the offer, except for purchases on the stock exchange.
A public tender offer must not be made dependent on conditions that are solely controlled by the offeror or certain related parties. In addition, the offer must not be made subject to withdrawal or recession rights. In practice, it is customary that a public tender offer is conditioned upon a minimum acceptance level, so as to allow the offeror to exercise control over the target company upon closing of the offer. The offer may also be made conditional upon merger control or other regulatory approvals. Other typical conditions involve that certain relevant assets or contractual relationships are not ‘lost’ by the target company because of the offer or its consummation (change of control), or that no major adverse changes occur with regard to the target company or its business (MAC clause). As to the latter, in particular, it must not be used as a disguised recession right. Therefore, it is acceptable only if the events that result in the offer falling apart are precisely defined.
The offer period is between four and 10 weeks at the discretion of the offeror. It is extended by virtue of law if the offeror waives conditions or increases the consideration within the final two weeks of the offer period, if a shareholders’ meeting is convened at the target company or if a competing bid is launched prior to the expiration of the offer period, in which case the offer period runs in parallel to the offer period of the competing bid. If a public tender offer is successful, the shareholders who have not yet traded in their shares are allowed to do so within a further two-week period.
Any public tender offer, whether voluntary or mandatory, has to be accompanied by an offer document, the contents of which are determined by law, approved by the BaFin in a specific procedure and applying certain restricted time lines. No offer may be launched the financing of which is not guaranteed. In the case of an exchange offer, this requires at least the approval of the capital increase, if applicable, by the relevant bodies of the offeror (e.g., the shareholders’ meeting).
Following the publication of the offer document, both the executive board and the supervisory board of the target company are obliged to publish a document in which they appraise the offer. The boards are allowed, but not obliged, to make recommendations to the shareholders. As a general rule, the executive board of the target company is not allowed to take any measures that could potentially jeopardise the success of the offer. This does not apply, in particular, to any such measures that an orderly and diligently acting director would have taken despite the offer.
In addition to the typical transactional structures described above, German corporate and transformation law includes a variety of other means to transfer assets or businesses from one legal entity to another, or from one legal entity to the shareholders, such as mergers and spin-offs. However, they are rarely used in cross-border transactions because of the complexity of interlinking the legal rules of two jurisdictions. If at all, these specific transactional structures may be used within the EU.
In addition, there is a variety of other investment scenarios, including in particular joint ventures or limited investments in private companies. They generally follow shareholders’ agreements, which define in particular corporate governance issues (voting restrictions or rules, call and put rights, exit scenarios). Structural details very much depend on the case at hand. In any event, there are no rules in general that prohibit a foreign investor entering into any such structures.
IV REVIEW PROCEDURE
As of 2017, a notification requirement applies with regard to certain foreign investments in German companies deemed particularly relevant to public policy and security.48 Acquisitions falling within the scope of the notification requirement have to be notified to the BMWi in writing. Beyond the fact that the review period may not start running, there are no sanctions if an acquisition is not notified.49 In particular, the notification obligation does not qualify as a statutory closing condition. Further, there are no specific requirements as to the form and substance of the notification.
Foreign investments are reviewable by the BMWi within certain time frames, and the BMWi may prohibit an acquisition or impose certain restrictions, subject to the federal government’s consent, to maintain public policy or security. An approval of acquisitions by the BMWi is not required. However, the validity of an agreement on the acquisition of a German company or a shareholding in the company is subject to the condition subsequent that the BMWi prohibits the transaction within those time frames (Section 15(2) of the AWG). In the case of such a prohibition the agreement becomes invalid. Possible restrictions that the BMWi might impose on the acquirer include restrictions on an increase of the participation, obligations to acquire a lower participation only or to otherwise limit the investor’s influence, or minimum holding periods.
The BMWi may review foreign investments upon application or ex officio (i.e., on the BMWi’s own initiative). The ex officio cross-sectoral review has so far not been relevant: until November 2016 only one review ex officio had been conducted.50 This is in line with the federal government’s estimation that the BMWi would review only a small number of investments on its own initiative.51 The large majority of cross-sectoral reviews have been conducted upon application.
i Review upon application
Investors may apply for a clearance certificate to further accelerate the review procedure. A clearance certificate is a formal confirmation of the BMWi to the purchaser that the acquisition does not raise any concerns with respect to public policy or security. It provides legal certainty to the purchaser, the seller and the target.
The application is fairly straightforward. It must contain a description of the envisaged acquisition, the purchaser and the target, as well as the business activities of the purchaser and the target. The law provides no particular timing constraints or deadline for the application. The application can be submitted soon after or even before signing of an acquisition agreement, or at any other time.
The BMWi may open an in-depth review, and notify the purchaser thereof, within two months52 of receipt of the application.53 Unless the BMWi prohibits the transaction, imposes any restrictions or notifies the purchaser of an in-depth review, the transaction is deemed cleared upon expiry of the two-month period. The BMWi may also explicitly clear the transaction in advance and submit a clearance certificate. In our experience, if reasons of public policy or security do not withstand, the BMWi explicitly clears transactions within a short period from receipt of the application rather than letting the two-month period expire. In some cases, the investor may further support an accelerated procedure by discussing the acquisition with the BMWi in advance of the formal application.
In cases in which a potential danger for public policy or security requires a more thorough analysis, the investor may consider submitting a draft application, which does not trigger the start of the two-month period, to avoid the BMWi opening an in-depth review merely because it does not have sufficient time to review the case.
In cases where the BMWi has to be notified of an acquisition, the notification does not automatically qualify as an application for a clearance certificate. To benefit from the two-month review period applying in cases of review upon application, the investor should submit an application for a clearance certificate in addition to the notification.
ii Review ex officio
The BMWi may formally review a transaction only if it notifies the acquirer within three months of obtaining knowledge of the signing of the acquisition agreement.54 If the transaction involves a public offer under WpÜG, the three-month period starts with the BMWi’s knowledge of the publication of the bidder’s decision to make an offer or of the bidder’s acquisition of control. However, a review may not be conducted if more than five years have passed since the signing of the relevant acquisition agreement.
The BMWi is informed of transactions by the German Federal Cartel Office, which may deal with merger control issues, or the BaFin, if the transaction involves a public offer. The BMWi may also gather information on transactions from newspapers and other publicly available sources.
Once the three-month period for this initial review has expired without the BMWi having notified the purchaser, the transaction is deemed cleared, and the BMWi is precluded from reviewing or prohibiting the transaction.
iii In-depth review and suspension of negotiations
If the BMWi opens a review procedure within three months of obtaining knowledge or within two months of receipt of the clearance application, the purchaser must submit to the BMWi documents on the acquisition, including detailed information on the purchaser, the target, their businesses and operations, shareholdings, customers and market shares.55
The BMWi has four further months from receipt of the complete documents to complete its in-depth review. Unless the BMWi prohibits the transaction or imposes any restrictions, the transaction is deemed cleared upon expiry of the four-month period. The BMWi may also explicitly clear the transaction in advance. The expiry of the four-month period is suspended while the BMWi negotiates contractual clauses to ensure the maintenance of public policy and security with the parties of the relevant transaction.
In total, the review process may take up to seven months of initial and in-depth review by the BMWi, plus any time needed by the purchaser to collect and submit the requested information and documents to the BMWi, as well as any suspension period for negotiation. During this period, the purchaser, the seller and the target have no legal certainty on the admissibility and validity of the transaction, and closing is considerably delayed. This potential delay was a major concern and controversial during the legislative process.56 The federal government envisaged accelerating the review process where possible.57 In light of the clearance practice of the BMWi, investors should generally consider initiating a review procedure through an application for a clearance certificate.
iv Legal protection
Information and documents relating to the acquisition provided by the investor often contain trade and business secrets. The BMWi has to keep these confidential and may not disclose them to any unauthorised third party.58 If the BMWi decides to review the acquisition, it has to consult the competent federal ministries.59 Further, if the BMWi intends to prohibit a transaction, or impose restrictions, it has to involve the federal government, and the BMWi may only prohibit the transaction or impose restrictions with the federal government’s consent.
A review procedure is not public and does not comprise a public hearing or other form of public participation. Formal decisions on the clearance or the prohibition of an acquisition are not made public.
If the BMWi opens a review procedure, or prohibits an acquisition or imposes restrictions, investors60 and sellers61 may challenge the decision in court. The target is not entitled to make a claim in court based on its own rights. A third party (e.g., a competing bidder) may generally not challenge a clearance or deemed clearance in court. The foreign investment regime shall protect public policy or security rather than interests of third parties. There is no established case law on this foreign investment review, mainly because the BMWi has so far not disallowed any transaction.
V FOREIGN INVESTOR PROTECTION
Germany undertakes to protect foreign investments in various regional investment protection charters as well as bilateral investment treaties (BITs). A common feature of these charters and BITs is that Germany grants a level of investment protection to investors from the contracting countries not worse than the protection of its own national investors. In particular, Germany undertakes to generally grant free movement of capital and goods as well as property rights.
Although foreign investors are not parties to the treaties that are entered into by Germany and other sovereign states or regional organisations, they are generally entitled to directly claim the rights under the treaties. Germany commonly agrees to be subject to arbitration proceedings for all disputes that may arise under a treaty. In particular, investors may effectively claim adequate compensation for damages incurred by, inter alia, expropriation.
Thus, Germany seeks to promote foreign investment by mitigating foreign investors’ risks associated with investment and trade. The BITs serve to provide investors a high level of legal certainty and protection against discrimination and all forms of arbitrariness.
i Existing agreements
As of July 2017, Germany is party to 127 BITs (of differing strength) currently in force.62 As the first signatory of a BIT around 50 years ago with Pakistan, Germany is a pioneer in this respect, and is a signatory of probably the largest number of BITs worldwide. More recent agreements with Bahrain, Jordan, Libya, Oman, and Trinidad and Tobago, entered into force in 2010, and with Madagascar in 2015.
A BIT with Israel is already preliminarily applicable, even though it is not effective in official terms. In addition, Germany is one of the 55 countries and international organisations to have ratified the Energy Charter Treaty providing for particular investment protection related to the energy sector.63
ii German and EU agreements concluded or being negotiated
Germany is signatory to three BITs that have not yet entered into force, namely with Brazil, Iraq and Timor-Leste. Further BITs replacing the current treaties with Guinea, the Republic of Congo and Pakistan have also not yet entered into force.64
The EU has agreed free trade agreements with Canada (the Comprehensive Economic and Trade Agreement (CETA)),65 Singapore66 and Vietnam;67 ratification is pending for the agreements. This process has given rise to a fierce debate between the EU and its Member States over competence for the various legal aspects covered by the agreements.68 In its opinion on the free-trade agreement between the EU and Singapore, the ECJ has ruled that, inter alia, the provisions on investor–state dispute settlement fall within the competence shared between the EU and its Member States,69 thus potentially requiring the consent of all national parliaments in the course of the ratification process. The European Commission is currently negotiating on investment, including investment protection, as part of the free-trade and investment agreement talks with a number of states,70 including the United States71 (the Transatlantic Trade and Investment Partnership), China,72 Japan73 and India.74 Also, the Council adopted negotiating directives for a Deep and Comprehensive Free Trade Area with four Euromed countries (Tunisia, Morocco, Jordan and Egypt) in 2011.75
iii Effectiveness and enforcement issues
Amendments to the EU treaties by the Treaty of Lisbon of 200976 transferred competence for investment protection to the EU (Article 207(1) of the TFEU). The EU is now competent to a greater degree to negotiate and enter into investment protection agreements with other countries.77 According to the Grandfathering Regulation,78 the EU envisages replacing, step by step, the Member State BITs with EU agreements.
Existing BITs between the Member States and non-EU states remain effective.79 In the case of an established incompatibility with EU law, the Member State would generally have to enter into negotiations with the relevant contracting state and seek to agree on modifications for the future.80 If the EU reaches the same level of foreign investment protection by entering into BITs with third countries, Germany would presumably amend or terminate the relevant domestic BITs in accordance with the provisions of the relevant BIT.
It is controversial whether BITs between two Member States (intra-EU BITs) may be upheld. The European Commission initiated infringement proceedings against five Member States (Austria, the Netherlands, Romania, Slovakia and Sweden) in June 2015 after they refused to terminate their respective intra-EU BITS.81 According to the Commission, Ireland and Italy already terminated all their intra-EU BITs in 2012 and 2013.82 A delegation of Austria, Finland, France, Germany and the Netherlands proposed a multilateral agreement among the Member States to replace existing intra-EU BITs, but also to ensure procedural protection for EU investors.83
The EU treaties and the Grandfathering Regulation do not specifically address the termination of intra-EU BITs, and the ECJ has not had to rule on this issue yet. In March 2016, the German Federal Supreme Court filed a case to the ECJ for a preliminary ruling pursuant to Article 267 of the TFEU, as to whether investor–state arbitration agreements under intra-EU BITs are compatible with Articles 344, 267 and 18 of the TFEU.84 The case is still pending and an ECJ ruling may be expected in 2017.
VI OTHER STRATEGIC CONSIDERATIONS
The BMWi has not disallowed any foreign investment under the AWG or AWV framework for cross-sectoral review. In most cases, the foreign investment review is mainly an issue of diligent organisation and timing, which the parties should generally also reflect in their agreements (e.g., closing conditions, cooperation provisions, deadlines and termination rights). In more critical cases, the parties should also provide for an adequate risk allocation. In particular, in light of the 2017 amendment, there is an increased awareness and investors should consider potential negotiations on security-related aspects, and particularly in relation to the newly emphasised business areas of potential concern. In addition, the parties will have to consider any other regulatory requirements – including notification and approval requirements – that apply to the transaction. The early involvement of regulatory advisers will generally ease the process in both respects.
i Identification of notification requirements and reviewable transactions
As for merger control requirements, the parties will seek a clear understanding of the notification requirements and potential review by authorities. German foreign investment law requires the notification of certain transactions to the BMWi (and distinct from the sector-specific review). The parties of a non-European investment in a German company will seek to identify whether the investment is reviewable (in particular because of the 25 per cent threshold and further criteria set out in Section IV).
In light of the clearance practice of the BMWi, reviewability primarily has, in most cases, an impact on the timing and organisation of the transaction rather than on its structure.
In most cases, an application for a clearance certificate will provide a higher degree of legal certainty (as is also the case if the parties are relatively certain that the transaction will not endanger public policy or security). Generally, the clearance process will not delay the transaction – in particular, if the transaction is also subject to merger control. Foreign investment review and merger control review are independent from each other. A foreign investment clearance will in most cases be finished more quickly than the merger control process.
ii Transaction terms and timing
It has become quite common in transactions with non-European investors to provide for a closing condition on foreign investment review (condition precedent), in addition to closing conditions on other (regulatory) matters, to avoid any unwinding of an acquisition in the event of a disallowance of the transaction.85 Such a closing condition may distinguish various scenarios; for example, in the case of an application for a clearance certificate, the closing condition may be deemed to be met if the BMWi:
- a clears the transaction;
- b has not initiated a review procedure within two months of receipt of an application for a clearance certificate; or
- c has, in the event of an in-depth review, within four months of receipt of the complete documentation of the transaction – plus any additional suspension period for negotiation of public order or security clauses – neither prohibited the transaction nor imposed any conditions (unless with the purchaser’s acceptance of these conditions).
The parties’ responsibilities in the foreign investment review should be clearly allocated. Generally, the purchaser undertakes to prepare and submit a clearance application in close cooperation with the seller.
The clearance application has to contain information on the envisaged transaction, the purchaser and the target, as well as the business activities of the purchaser and the target. Generally, the parties will agree on best efforts and cooperation in preparing the application. In many cases, the parties can refer to cooperation provisions in their agreement on other filings, in particular any merger control filings.
In more critical or sensitive cases, in particular, the parties may more specifically address whether, to what extent and under which conditions the purchaser, for example, has to accept potential conditions to a clearance.
The parties may prepare and submit the filing prior to signing the transaction agreement. In most cases – in particular if merger control or further closing conditions, or both, have to be met – a filing shortly after the signing will be sufficient and not delay the transaction. Collection of information and possibly preparation of the filing prior to the signing will generally accelerate the process.
Particularly in more critical or sensitive cases, the parties may more specifically allocate the risks (e.g., provide for adjustments, cancellation rights, break fees and further liabilities).
VII CURRENT DEVELOPMENTS
The 2017 amendment to the AWV has introduced several changes, generally making the control regime more restrictive. Further, also in 2017, the German federal government has commenced a joint initiative with France and Italy aiming at the introduction of a European investment control regime.86 This shift has been widely linked to a number of high-profile investments in German companies.87 The impact of the changes on future transactions will, to a large extent, depend on their application by the BMWi and the German federal government.
Meanwhile, applications for a clearance certificate for foreign investments are common. The BMWi has cleared a large number of non-European investments in German companies since 2009. No transactions have been disallowed so far.
Non-European investment is also likely to be reviewed in Germany in the coming years. The BMWi can be expected to continue clearing the large majority of transactions. Parties will have to consider the potential impact of foreign investment provisions, in particular on transaction timing and in more public-order and security-sensitive transactions, as well as on potential negotiations regarding these aspects with the German federal ministries. Careful planning and organisation of filings, in close contact with the BMWi, will ease the foreign investment process.
1 Jan Bonhage and Vera Jungkind are partners at Hengeler Mueller Partnerschaft von Rechtsanwälten mbB.
2 BMWi, Circular Order 5/2017 of 14 July 2017, BAnz AT 17 July 2017 B1; Circular Order 1/2014 of 20 January 2014, BAnz AT 27 January 2014 B1; Circular Order 7/2013 of 20 December 2013, BAnz AT 20 December 2013 B 2; Circular Order 5/2013 of 2 August 2013, BAnz AT 05 August 2013 B 1, p. 1; General Ruling of 2 September 2013 re required documentation under Section 57 of the AWV, BAnz AT 6 September 2013 B 1; General Ruling of 2 September 2013 re required documentation under Section 61 Sentence 3 of the AWV in conjunction with Section 57 of the AWV, BAnz AT 6 September 2013 B 2.
3 Thomson Reuters, 16 March 2014 (rank date).
4 Thomson Reuters, 18 March 2016 (rank date).
5 Thomson Reuters, 13 June 2016 (rank date).
6 Thomson Reuters, 26 July 2016 (rank date).
7 Thomson Reuters, 18 May 2016 (rank date).
8 Cf. FAZ, 17 August 2016.
9 FAZ, 8 December 2012; cf. Flaßhoff/Glasmacher, NZG 2017, 489.
10 The Washington Post, 2 December 2016.
11 BAnz AT 17 July 2017 V1.
12 For the definition of the term ‘critical infrastructure’, Section 55(1) of the AWV makes reference to the Act on the Federal Office for Information Security. Criticial infrastructure is defined in the Regulation on the Definition of Critical Infrastructure (BSI-KritisV).
13 Cf. BT-Drs. 15/2537, p. 7 et seq.; Hensel/Pohl, AG 2013, 849, 556.
14 Section 55(2) of the AWV; cf. also BT-Drs. 16/10730, p. 14.
15 In contrast, the sector-specific review of transactions in the field of military technology applies to any non-German investor.
16 Article 4(1) of the Union Customs Code.
17 Voland, GWR 2013, 264.
18 Protocol No. 3 of the Channel Islands and the Isle of Man.
19 Section 55(2) of the AWV; cf. BMWi, Circular Order 5/2017 of 14 July 2017, BAnz AT 17 July 2017 B1, Section B, Zu Nummer 1 Buchstabe b Doppelbuchstabe bb. with reference to the relevant ECJ case law: Case C-196/04 (Cadbury Schweppes).
20 Cf. Besen/Slobodenjuk, BB 2012, 2390; Hensel/Pohl, AG 2013, 849, 854 et seq.; Seibt/Wollenschläger, ZIP 2009, 833, 837.
21 Marquard/Pluskat, DStR 2009, 1314, 1316.
22 Pottmeyer, in: Wolffgang/Simonsen/Rogmann, AWR-Kommentar, Sections 55 to 59 of the AWV, para. 22; Hasselbrink, GmbHR 2010, 512, 515; Krause, BB 2009, 1082, 1083; Marquardt/Pluskat, DStR 2009, 1314, 1316; Seibt/Wollenschläger, ZIP 2009, 833, 834; Traugott/Strümpell, AG 2009, 186, 191.
23 BT-Drs. 16/10730, p. 13.
24 Krause, BB 2009, 1082, 1083; Traugott/Strümpell, AG 2009, 186, 191.
25 Besen/Slobodenjuk, BB 2012, 2390; Söhner, RIW 2011, 454, 459; Stork, EWS 2009, 454, 457.
26 Cf. Marquardt/Pluskat, DStR 2009, 1314, 1316.
27 Hensel/Pohl, AG 2013, 849, 853 et seq.
28 Hasselbrink, GmbHR 2010, 512, 514; Marquardt/Pluskat, DStR 2009, 1314, 1316; Schalast, M&A Review 2009, 107, 112; Seibt/Wollenschläger, ZIP 2009, 833, 836; Söhner, RIW 2011, 454, 460; Stork, EWS 2009, 454, 456; v. Rosenberg/Hilf/Kleppe, DB 2009, 831, 833.
29 Voland, EuZW 2009, 519, 521.
30 Section 55(3) of the AWV.
31 Seibt/Wollenschläger, ZIP 2009, 833, 836.
32 Section 55(3), Sentence 1 of the AWV.
33 The BMWi’s Questions and Answers to the Foreign Investment Review, No. 16.
34 However, in the sector-specific review of transactions in the field of military technology, the BMWi reviews whether the acquisition endangers fundamental security interests of the Federal Republic of Germany.
35 Bast, in: Hocke/Friedrich, Außenwirtschaftsrecht, Section 7 AWG, para. 10b; Lechler/Germelmann, Zugangsbeschränkungen für Investitionen, p. 34 et seq.
36 BT-Drs. 16/10730, p. 10.
38 ECJ, Case C-503/99 (Commission v. Belgium); Case C-463/00 (Commission v. France).
39 Case C-463/00 (Commission v. France).
41 Case C-212/09 (Commission v. Portugal), para. 84 et seq.
42 ECJ, Case C-244/11 (Commission v. Greece), para. 69 with further reference (for the energy sector).
43 Ibid., para. 73 et seq.
44 For the definition of the term ’critical infrastructure’, Section 55(1) of the AWV makes reference to the Act on the Federal Office for Information Security, which contains an exhaustive list.
45 BT-Drs. 18/10443, p. 4.
46 BT-Drs. 18/10202, p. 1.
47 Cf. Flaßhoff/Glasmacher, NZG 2017, 489.
48 Cf. Section II; previously, a notification requirement existed only within the sector-specific review framework excluded from the scope of this chapter.
49 If the BMWi does not acquire knowledge of the transaction in another way.
50 BT-Drs. 18/10443, p. 4.
51 BT-Drs. 16/10730, p. 11.
52 Until the 2017 amendment, the AWV provided for a one-month period.
53 An example of such an in-depth review was the review of the high-volume acquisition of RWE DEA AG by the LetterOne group, cf. BT-Drs. 18/3111, p. 3 et seq.
54 Before the 2017 amendment to the AWV, the three-month period started with the signing of the acquisition agreement, irrespective of any knowledge of the BMWi.
55 BMWi, Circular Order 5/2009 of 21 April 2009, BAnz AT 24 April 2009, p. 1514; Circular Order 5/2013 of 2 August 2013, BAnz AT 5 August 2013 B 1, p. 11; General Ruling of 2 September 2013 re required documentation under Section 57 of the AWV, BAnz AT 6 September 2013 B 1.
56 BT-Drs. 16/10730, p. 17.
57 Ibid., p. 18.
58 Cf. Sections 3 and 6 Federal Freedom of Information Act.
59 BT-Drs. 16/10730, p. 14.
60 The BMWi’s Questions and Answers to the Foreign Investment Review, No. 11.
61 Krause, BB 2009, 1082, 1087; Müller/Hempel, NJW 2009, 1638, 1641; Seibt/Wollenschläger, ZIP 2009, 833, 844; Voland, EuZW 2010, 132, 135.
=&titlePrefix=Alle&cl2Categories_Status_sort=inkraftvertrag&cl2Categories_Status_sort.GROUP=1&selectSort=&selectSort.GROUP=1#form-290120. A list of BITs, including links to the full text of the BITs, is also available at: http://investmentpolicyhub.unctad.org/IIA/CountryBits/78.
63 On 31 December 2014, Italy gave notice of its withdrawal from the Energy Charter Treaty. The withdrawal took effect on 1 January 2016.
64 Cf. www.bmwi.de/Navigation/DE/Service/Investitionsschutzvertraege/investitionsschutzvertraege.html.
65 http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154329.pdf; cf. Mayer/Ermes, ZRP 2014, 237; related to investor–state dispute settlement (ISDS), cf. Kerkemeyer, EuZW 2016, 10; Machning, DRiZ 2016, 326; Sandrock, RIW 2017, 245; Stöbener de Mora, EuZW 2016, 203.
66 http://trade.ec.europa.eu/doclib/press/index.cfm?id=961; cf. ECJ, Opinion C-2/15 (Free Trade Agreement between the European Union and the Republic of Singapore ).
68 e.g., the German Federal Constitutional Court (Case 2 BvR 1368/16, 2 BvE 3/16, 2 BvR 1823/16,
2 BvR 1482/16, 2 BvR 1444/16) dismissed applications for a preliminary order prohibiting the German government from agreeing to CETA in the European Council but at the same time questioned the EU’s exclusive competence for several aspects of the agreement.
69 ECJ, Opinion 2/15 (Free Trade Agreement between the European Union and the Republic of Singapore).
70 Cf. European Commission, Overview of FTA and other Trade Negotiations, most recent update June 2017, available at http://trade.ec.europa.eu/doclib/docs/2006/december/tradoc_118238.pdf.
71 Cf. www.ustr.gov/TTIP/; http://ec.europa.eu/trade/policy/countries-and-regions/countries/united-states/ and http://ec.europa.eu/trade/policy/in-focus/ttip/.
72 Cf. http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/.
73 Cf. http://ec.europa.eu/trade/policy/countries-and-regions/countries/japan/.
74 Cf. http://ec.europa.eu/trade/policy/countries-and-regions/countries/india/.
75 http://trade.ec.europa.eu/doclib/docs/2006/december/tradoc_118238.pdf, most recent update June 2016, p. 6 et seq.
76 Consolidated version, OJ 2012, C 326/01.
77 Cf. Lavranos, Transnational Dispute Management Vol. 10, Issue 2, 1 ; Reinisch, ICSID Review 28 (1), 179 ; however, competence for certain areas remains with the Member States (see Section V.ii).
78 Regulation 1219/2012/EU establishing transitional arrangements for bilateral investment agreements between Member States and third countries of 12 December 2012.
79 Cf. Articles 2 and 3 Grandfathering Regulation.
80 Recital 11 and 12 Grandfathering Regulation; see also ECJ, Case C-205/06 (Commission v. Austria); Case C-249/06 (Commission v. Sweden); Case C-118/07 (Commission v. Finland).
81 Cf. Memo/15/5162 of 18 June 2015, available at http://europa.eu/rapid/press-release_MEMO
-15-5162_en.htm, and the corresponding press release IP/15/5198 of 18 June 2015, available at
82 Cf. press release IP/15/5198 of 18 June 2015, available at
83 Intra-EU Investment treaties – ‘Non-paper’ from Austria, Finland, France, Germany and the
Netherlands, of 7 April 2016, available at
84 German Federal Supreme Court, BeckRS 2016, 08549.
85 German Federal Supreme Court, MDR 2013, 1362.
86 BMWi, 12 July 2017, https://www.bmwi.de/Redaktion/DE/Pressemitteilungen/2017/20170712-zypries
87 See Section I.