German Corporate Alert
8 April 2009
Authors:
Daniela Bohn
daniela.bohn@klgates.com
+49.(0)69.945.196.265
Mathias Schulze-Steinen
mathias.schulze-steinen@klgates.com
+49.(0)69.945.196.260
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New German Legislation Introducing
Restrictions on Foreign Investments
On 13 February 2009, the German parliament passed much-anticipated restrictions
on foreign investments in German enterprises by amending the Foreign Trade Act
(Außenwirtschaftsgesetz) ("FTA"). The amendments provide the German
government with expanded powers to restrict or block the acquisition of stakes in
German companies under certain circumstances. Although the implications of the
amendments for potential investors are supposed to be rather limited, they will have
an effect on the structuring of acquisitions in Germany.
As the final hurdle in the legislative procedure, the law will have to pass the Federal
Council of Germany (upper house of the German parliament). It is assumed that the
Federal Council will adopt the law within the next months and it will come into
effect this summer.
Scope of Application
The amendments to the FTA effectively enable the Federal Ministry of Economics
and Technology (the "Ministry") to review certain direct or indirect investments in
businesses based in Germany and to impose restrictions or even prohibit such
investments if they threaten the public order or security. An investment is subject to
such review if
•
the investor is from outside the EU or 25 % or more of the voting rights in the
investor are owned by a shareholder from outside the EU; and
•
following the transaction, the investor directly or indirectly holds 25 % or more
of a German company's voting rights.
For the purpose of the FTA, investors from member states of the European Free
Trade Association, (i.e., Switzerland, Norway, Liechtenstein and Iceland), are treated
as investors from within the EU.
The legislation is not limited to specific sectors or enterprises of a certain size.
As stated in the explanatory memorandum to the new law, a restriction or prohibition
is only possible in rare and exceptional cases. In practice, the Ministry will more
likely impose restrictions on transactions rather than prohibiting them altogether,
except where critical and unique infrastructure assets are to be sold to an investor in
a country outside the EU (see below "Criteria for prohibiting a transaction").
Review Process
If a review right of the Ministry is triggered by an acquisition, the entire transaction
remains subject to the condition subsequent of the Ministry prohibiting the
transaction within the statutory review period.
German Corporate Alert
No formal registration or notice of a transaction is
required by the law. The Ministry assumes to obtain
information on foreign investments in German
companies on an ongoing basis through press
releases and cooperation with the German Cartel
Office and the Federal Financial Supervisory
Authority.
not delay the closing of the investment transaction,
because Phase I of EU merger clearance takes at
least 25 business days. Additionally, it is advisable
to provide for an additional condition precedent in
the transaction documents that such notification will
be made by the investor and that no formal review
will be initiated by the Ministry.
The Ministry may initiate a review of an investment
within three months from the signing of an
acquisition agreement or the announcement of a
takeover bid. If the Ministry does not take any action
within such three months period, the transaction is
deemed to be cleared and is not subject to further
review. Should the Ministry initiate a formal review
process, the investor must submit to the Ministry all
necessary information concerning the contemplated
transaction, including information about its
ownership structure and the transaction's strategic
intentions. The Ministry has further two months
from the receipt of the complete information to
prohibit the transaction or to impose restrictions or
conditions on the grounds of the public order or
safety.
Criteria for Prohibiting a Transaction
To avoid legal uncertainty, however, whether a
contemplated investment becomes subject to further
review by the Ministry and to shorten the review
period, the investor may request a legally binding
"certificate of non-objection" prior to the
transaction. To do so, the investor may proactively
notify the Ministry of the transaction, providing an
outline which describes itself, its business and the
contemplated transaction. In this case, the Ministry
has one month from the receipt of such notice to
initiate a formal review of the transaction, which is
otherwise deemed to be cleared.
Although parties are not required to notify the
Ministry of contemplated transactions, doing so
significantly reduces the period during which a
review may be initiated, and can provide certainty
that no subsequent review proceedings will be
undertaken by the Ministry. Such notification will
A transaction may only be restricted or prohibited if
it "threatens the public order or safety of the Federal
Republic of Germany." Despite its broadness, this
language is to be narrowly construed in accordance
with Articles 46 and 58 of the EC Treaty and the
interpretation of the European Court of Justice
("ECJ"). The public order and safety are the only
grounds upon which an EU member state may
restrict the free movement of capital within the EU.
The ECJ has upheld restrictions on the free
movement of capital only in very few cases and in
extremely limited circumstances. As regards foreign
investments in national companies, the ECJ has
upheld restrictions in only one case, where it
allowed Belgium to block the acquisition of the
(entire) national grid by foreign investors (Case
C-503/99 European Commission v Belgium [2002],
I-4809). Other attempts by EU member states to
prohibit transactions have consistently failed.
Legal consequences of restrictions
and prohibitions
If a transaction is restricted or prohibited, the
underlying sale and purchase agreement will be
deemed to be invalid under German civil law. If
shares have already been transferred to the investor,
the Ministry may limit or eliminate the voting rights
of the foreign investor in the German company or
appoint a trustee to unwind the transaction.
Any decision of the Ministry to restrict or prohibit a
transaction may be challenged before German
courts.
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April 8, 2009
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German Corporate Alert
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2009 K&L Gates LLP. All Rights Reserved.
April 8, 2009
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