Acquisitions by Non-EU Buyers of German Targets May Require Special Regulatory Review or Approval
Regulatory filing and pre clearance requirements under merger control laws are well understood and, except where the merger parties have significant business overlap, rarely impede closing. However, another German regulatory requirement applying to non-EU buyers of German based companies, which remains fairly unknown, is the approval or the clearance declaration, which must or should be obtained under the German Foreign Trade Law (Aussenwirtschaftsgesetz – AWG) and the German Foreign Trade Regulation (Aussenwirtschaftsverordnung – AWV). In certain circumstances, the need for clearance and the complexity to obtain clearance may surprise non-EU buyers and could potentially be an unforeseen roadblock to a timely and successful closing.
This article will give a short summary of the existing legal framework and required processes in Germany for non-EU buyers. It will also provide some guidance on the circumstances where the regulatory clearance under the German Foreign Trade Law might not be only a formality but might entail a thorough investigation by the German authorities.
Legal Framework and Process
Each transaction in which a non-EU buyer directly or indirectly acquires at least 25% of the voting rights in a German company is subject to a review procedure by the German Federal Ministry of Economics and Energy (Bundesministerium für Wirtschaft und Energie – “BMWi”). This also includes transactions which occur outside of Germany. For example, if a U.S. buyer acquires a U.S. target company, which directly or indirectly will hold at least 25% of the voting rights in a German company, such transaction will be subject to the review procedure. This means that a transaction by a U.S. buyer of a U.S. target, that has a second or even third tier German subsidiary, could be subject to the review procedure.
The review by the BMWi cannot be circumvented by clever deal structuring by, for example, using an EU acquisition vehicle, which is wholly owned by a U.S. parent company. The BMWi will still consider such acquisition vehicle as “non –EU”.
The review procedure was introduced into German law in 2009 in order to safeguard German security interests where necessary. Two main cases need to be differentiated:
(i) Sector specific review
A sector specific review by the BMWi is triggered if the German target company is operating in certain special sectors, i.e., in the production or the development of (i) defense weapons or (ii) gearings for tanks or similar military track vehicles or (iii) information technology products, which were approved by the German Federal Office for Security of Information Technology (Bundesamt für Sicherheit in der Informationstechnik) and were used for processing classified information. In these cases, the review procedure by the BMWi is mandatory and the transaction is null and void unless the BMWi explicitly permits it or does not undertake certain actions within one month after the notification by the buyer that a transaction has occurred or will occur.
The direct legal buyer is obligated to notify the BMWi about the execution of the transaction. Once the notification is received, the BMWi determines if the sale of the German company to a non-EU buyer might have an impact on material security interests of Germany. If so, the transaction will be prohibited or might be partially approved under certain conditions; for example, a carve-out of the relevant sector assets prior to closing or within a certain time frame after closing. If the BMWi does not open an official investigation within one month after the notification of the transaction by the buyer, the transaction is deemed to be approved.
(ii) Sector unspecific review
A sector unspecific review is triggered if the German target company is operating outside the special sectors mentioned above. In this situation, the transaction could in theory validly close without regulatory approval but remains subject to the condition subsequent that until the expiration of three months after the signing of the deal, the BMWi does not open an official investigation based on the fact that the sale to a non-EU buyer might endanger German law and order and security interests. In other words: the deal is valid but in a worst case scenario it can be upset, if the BMWi determines to investigate it within a three month period after signing. In case of a public takeover, such period starts with the publication of the decision of the bidder to make a tender offer or the publication of the bidder that it has gained control over the target, i.e. controls more than 30% of its voting rights. For transactions outside the special sectors, the buyer is not legally obligated to notify the BMWi about the signing of a transaction, although if antitrust clearance is required, the German cartel office will inform the BMWi about the transaction and the BMWi will therefore know that a deal has occurred.
In order to have legal certainty it is best practice that the non- EU buyer applies for a clearance certificate (Unbedenklichkeitsbescheinigung) from the BMWi before the transaction is completed. If the transaction includes a deferred closing mechanism, for example, because antitrust approvals need to be obtained, it is customary to request that the issuance of the clearance certificate is a separate closing condition. Contrary to a merger clearance process, which is published on the webpage of the German cartel office, the procedure to obtain the clearance certificate is confidential, which means that the transaction or any of its details will not be disclosed to the public after the filing of the application with the BMWi.
Once the BMWi receives the application for issuance of a clearance certificate, it has one month to decide whether or not to initiate an official examination procedure. After the expiration of the one month-period without answer from the BMWi, the clearance is deemed to be issued. If the BMWi decides to examine the transaction within the one month-period, the buyer (with the support of the seller) is obligated to submit complete documentation regarding the acquisition. The formal examination can take a few months. At the end of the formal examination the BMWi either issues the requested clearance certificate, prohibits the transaction or issues formal directives to the extent necessary to secure German public law and order and security interests.
As a consequence, when structuring and planning a M&A deal involving a direct or indirect change of more than 25% of voting rights in a German company, a non-EU buyer and its advisors have to determine, if a regulatory clearance is required and the timing to obtain it, and they should discuss the possibility of prohibition or alteration of the transaction with the other parties. It also is essential to have lawyers retained with standing relationships to the regulatory authorities in order to address potential material issues early in the process.
Set out below are a few items to consider during the diligence phase and the drafting of the sale and purchase agreement:
- Due diligence phase:
- assess if the buyer qualifies as a non-EU buyer;
- ensure that all diligence teams are sensitive to the applicable regulatory requirements and that they report any relevant findings that the German target company is active in certain areas to the deal leader;
- in case of doubt, further data and confirmation from the management of the target should be requested;
- all contracts with German public authorities which are dealing with classified information should be “red flagged”, for example contracts with certain Federal Offices, the German police etc.
- Sale and purchase agreement (“SPA”) negotiation phase:
- if the target operates in specific sectors, which require the approval of the BMWi for the transaction, the BMWi should be contacted early enough before signing to ensure that potential issues can be addressed;
- depending on the deal structure, regulatory clearance should be addressed in the SPA as a closing condition and potential consequences should be taken into consideration, i.e. an unwinding mechanism; dealing with governmental instructions regarding carve outs etc., impact on valuation and purchase price calculation;
- SPA should contain undertakings of the seller to provide all relevant information and to co-operate with the buyer and the German authorities;
- any filings should be cleared by buy and sell side counsel.