On 8 April 2020, the German Federal Government approved an Act (“Amendment Act”) to amend the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz, “AWG”). The Amendment Act still needs to be approved by both the Bundestag and the Bundesrat. It will be followed by an amendment of the German Foreign Trade and Payments Act (Außenwirtschaftsverordnung, “AWV”), which provides for the details of German Foreign Investment Control.
The Amendment Act to the AWG tightens the competence of the German Federal Government even more after the foreign investment control provisions of the AWV had been amended several times already in the past years. The most important changes introduced by new Amendment Act are the following:
- The German Ministry of Economics and Energy (“BMWi”) will be entitled to enter into an in-depth review of a foreign investment into a German company already when it is “likely” that the transaction “poses a threat to the public order or security of the Federal Republic of Germany or another member state of the European Union.” This means that the likelihood of a threat is now sufficient and a threat to an EU member state other than Germany is sufficient.
- Legal acts performed in relation to the closing of transactions, which are subject to the right of the BMWi to perform an in-depth review, are now invalid until they are cleared by the BMWi or the relevant deadlines for entering into an in-depth review (two months after notification of the transaction) or for prohibiting a transaction (four months after having received all relevant information) have expired. In the currently applicable AWG, this only applied to certain – mostly defense-related – transactions.
- It is now prohibited prior to the clearance or deemed clearance of a relevant transaction by the BMWi to (i) permit the exercise of voting rights in the target company by the acquirer or enter into vote-pooling or similar agreements, (ii) grant the acquirer profit distribution claims or economically equivalent rights or (iii) provide or disclose information to the acquirer if such information relates to such parts of the business that have triggered the in-depth review by the BMWi with respect to material security interests of the Federal Republic of Germany or that need to be specifically taken into account in the review of a threat to the public order or security of the Federal Republic of Germany.
The above mentioned three most important changes are analyzed in more depth in the following:
- Conditions for an In-Depth Review
In the current version of the AWV, the BMWi can only prohibit or restrict the acquisition of more than 25 % (10 % in certain critical industries) of the voting shares in a German company by a non-EU-acquirer if such acquisition “poses a threat to the public order or security of the Federal Republic of Germany”.
With the planned amendment it is sufficient that it is “likely” that the transaction “poses a threat to the public order or security of the Federal Republic of Germany or another member state of the European Union.” Therefore, the threshold for prohibiting an acquisition has been lowered from the proof of a threat to the proof of the likelihood of a threat. Furthermore, it will be sufficient that the threat to the public order or security relates to another member state of the European Union other than Germany.
Finally, following the EU-Screening-Regulation (Regulation (EU) 2019/452 dated 19 March 2019), the BMWi is entitled to prohibit an acquisition if such acquisition poses a threat to the public order or security in relation to projects or programs in the interest of the European Union according to Article 8 of the EU-Screening-Regulation. Such projects or programs are for example the Galileo and EGNOS satellite programs or the Horizon 2020 program regarding key technologies such as artificial intelligence, robotics, semiconductors and cyber security.
Practical Note: the threshold for entering into an in-depth review of an acquisition and for prohibiting an acquisition of a 25 % stake (or 10 % stake in certain critical sectors) in a German company by a non-EU-acquirer has been lowered significantly and has become even more uncertain than before. A new way of risk assessment will have to be established. Before, the risk of a prohibition of a transaction was largely focusing on critical infrastructures and defense related transactions. Now, all high technology sectors will likely have to be viewed as critical as well.
Any regulatory due diligence in acquisitions of German companies by non-EU-acquirers will have to comprise the review of the requirements of a certificate of non-objection by the BMWi and the participation of the target company in EU projects and programs listed in the Annex to Article 8 of the EU-Screening-Regulation.
- Invalidity of Closing Acts
Currently, save for certain sector specific acquisitions (e.g. defense-related acquisitions), acquisitions of stakes in German companies by non-EU-acquirers are valid until they are prohibited by the BMWi with the consent of the entire German Federal government. This means that it is possible for the transaction parties to close a transaction, notify the acquisition to the BMWi and risk that the BMWi enters into an in-depth review or prohibits a transaction.
Such procedure, which is currently often pursued by transaction parties in seemingly uncritical sectors (such as e.g. retail, real estate, clothing, etc.), will be much more risky. After the amendment of the AWG, the closing of a transaction that is subject to foreign investment control will be invalid until the transaction is cleared by the BMWi or the deadlines for entering into an in-depth review (2 months from notification) or for prohibiting a transaction (4 months after receipt of all relevant information). In fact, the parties of a relevant transaction would then always have uncertainty whether the transaction is valid.
Practical Note: it is likely that the parties to a much larger number of transactions involving a German target company and a non-EU-acquirer will apply for a certificate of non-objection by the BMWi and will not close the transaction until the expiry of two months after notification of the transaction to the BMWi. The risk of closing a relevant transaction that may not be valid is too high. It may even become the standard procedure to not close a relevant transaction until expiry of two months after notification of the transaction to the BMWi regardless of whether the transaction involves a target company active in sectors viewed as critical by the BMWi.
- Prohibition of Information Exchange
The Amendment Act to the AWG introduces the following prohibitions for the time period between signing and closing of a transaction:
- To permit the exercise of voting rights in the target company by the acquirer or enter into vote-pooling or similar agreements,
- To grant the acquirer profit distribution claims or economically equivalent rights
- To provide or disclose information to the acquirer if such information relates to such parts of the business that have triggered the in-depth review by the BMWi with respect to material security interests of the Federal Republic of Germany or that need to be specifically taken into account in the review of a threat to the public order or security of the Federal Republic of Germany; and
- To provide or disclose information to the acquirer if such information was marked as important by order of the BMWi to the transaction parties.
Any violation of such “gun-jumping” acts is now a criminal offence subject to jail of up to five years or a fine.
These amendments have the goal of avoiding the irreversible “factual” closing of a transaction subject to a prohibition right of the BMWi. However, the Amendment Act goes way too far and is too unclear in our view.
First of all, it is unclear whether the prohibitions only apply after signing of a relevant transaction or already before signing. This question is relevant for the documents and information provided to a potential acquirer in the due diligence review of the target company. It is likely that the German government wants to apply the prohibitions only in the time between signing and closing of a transaction, but it would be desirable if the Amendment Act was worded more clearly.
Secondly, it is totally unclear, which documents and information may not be exchanged prior to closing of a transaction. One may guess that the German government wants to prohibit the exchange of e.g. technical drawings of weapons or source code of automation software for energy networks or water supply systems. But the Amendment Act is so unclear that clarification in the further enactment proceedings is not only desirable, but urgently needed.
Practical Note: Post signing covenants in share purchase agreements involving non-EU-acquirers should reflect the additional restrictions to be imposed by the amended AWG. Furthermore, particular care will have to be put onto the due diligence process in such transactions. Any critical due diligence items (such as e.g. software source code due diligence, technical due diligence) in critical sector transactions will likely have to be postponed to a point in time after clearance of the transaction by the BMWi with rescission rights in case of narrowly pre-defined due diligence findings. Another possibility could be to obtain clearance of the exchange of certain information by the BMWi before clearance of the entire transactions. But it remains to be seen whether the BMWi will be flexible enough to grant such clearance or answer questions.
The planned amendment of the AWG and the subsequent amendments of the AWV will make cross-border M&A transactions involving German target companies and non-EU-acquirers much more complicated, uncertain and time-consuming. In particular, it is to be expected that clearance of deemed clearance of such transactions by the BMWi will become a standard closing condition not only in transactions involving critical sector target companies, extending the standard waiting period between signing and closing from currently one month (due to German merger control) to at least two months.
As the Amendment Act is very uncertain in many critical points, a sharpening of the wording and clearer criteria for critical transactions and critical information that may not be exchanged prior to the closing of a transaction are strongly desirable.