In Depth

The robot manufacturer Kuka, the semiconductor manufacturer Aixtron, and the lamp division of Osram, have all been examined or are currently being examined by the German Federal Ministry of Economics (the Ministry) in connection with the prohibition against acquisitions of German companies by foreign investors, in these cases, Chinese investors. The intended acquisition of Aixtron was recently suspended until further notice.

On the basis of the Foreign Trade and Payments Act (Außenwirtschaftsgesetz) and the German Foreign Trade Ordinance (Außenwirtschaftsverordnung), both as amended in 2013,  the Ministry is authorised to examine and, under specific circumstances prohibit, the acquisition of German companies.

Acquisition of a German Company

A transaction qualifies as an “acquisition” if the investor, following the acquisition, holds 25 per cent or more of the voting rights in the German target, either directly or indirectly. The fact that the law applies to both direct and indirect acquisitions, e.g., an acquisition of a foreign company holding more than 25 per cent of the voting rights in a domestic company,  can lead to certain transactions being examined by the Ministry, even though, at first glance, they appear not to fall within the scope of the examination procedures.

It should be noted that neither the size of the company, the type of acquisition (share deal or asset deal) nor the choice of a law other than German law for the transaction, are relevant to the applicability of the examination procedures.

There are two types of examination procedures that relate to acquisitions of domestic companies by foreign investors: the cross-sectoral examination and the sector-specific examination.

Cross-Sectoral Examination

Every acquisition of a German company by an investor with its seat outside the European Union or the scope of the European Free Trade Agreement falls within the scope of the cross-sectoral examination, irrespective of the field of activity of the target company.

There is no obligation on the parties to register the transaction nor obtain authorisation. It is solely up to the Ministry (supported by the Federal Cartel Office and/or the Federal Financial Supervisory Authority) to find out about a relevant transaction and, where appropriate, to initiate examination procedures within a period of three months after the signing of the transaction. The foreign investor then has to provide extensive documentation, following which, a two-month period starts to run, during which the Ministry has to decide on the case.

If the investment endangers public policy or the security of the Federal Republic of Germany, the Ministry can prohibit the acquisition or impose orders. Under the applicable European laws, the danger must be a genuine and sufficiently serious threat that affects the fundamental interests of society. Even though there are particularly sensitive sectors, such as those relating to energy supply in crisis situations, or strategic sectors, such as financial services, there is no restriction of the examination procedures to certain sectors. Any threat has to be assessed on a case-by-case basis.

If a transaction is eventually prohibited, the approval of the federal government must be obtained, which demonstrates the exceptional nature of a prohibition.

Until the two-month review period expires, or the transaction is either authorised or prohibited, the contractual agreement underlying the proposed acquisition must be regarded as only “temporarily” valid. It becomes void only if the transaction is prohibited. The parties may complete the transaction at their own risk; other than under cartel law, there is no prohibition on completion until clearance.

Investors that seek transaction security at an early stage and want to avoid a post-signing examination procedure can apply for a clearance certificate prior to the execution of the transaction. This certificate confirms that the proposed transaction will not cause a threat to public policy or the security of the Federal Republic of Germany. The application has to be made in writing and must be addressed to the German Federal Ministry of Economics. The application should be lodged as soon as the acquirer is in the position to describe the main features of the planned transaction, the business segment in which it is operating in, and provide details about itself. After receiving the application letter, the Ministry has one month to initiate examination procedures or issue a clearance certificate. If no examination procedures are initiated within this period, clearance shall be deemed to have been granted.

Sector-Specific Examination

Sector specific examinations apply to acquisitions of companies in particularly security-sensitive areas, such as manufacturers and developers of military weapons, other armaments or products with IT-security functions.

The legal test is whether or not the proposed acquisition (taking into consideration applicable EU laws) substantially endangers the security interests of the Federal Republic of Germany. A prohibition or order may be imposed if, as a result of the takeover, the security policy interests of, or the supply of military goods to, the Federal Republic of Germany is endangered.

In contrast with the cross-sectoral examination procedure, the foreign investor is obliged to notify the Ministry of the proposed acquisition. Upon receipt of all necessary material, the Ministry has one month to decide on the case. Again in contrast with the cross-sectoral examination, the agreement underlying the proposed acquisition is deemed “temporarily” invalid until the Ministry has explicitly cleared the acquisition, or the acquisition is deemed cleared at the expiry of the one-month period. 

Possible orders are being issued in cooperation with the Foreign Office, the Federal Ministry of Defence or the Federal Ministry of Interior

Comment

The German Federal Ministry of Economics can examine and, where appropriate, prohibit the proposed takeover of a German company, not only in industries that are security sensitive, but also in a variety of international transactions.

The investor can, of course, take legal action against any negative decision by the Ministry and, where appropriate, seek damages. If possible, however, the parties should discuss at an early stage how best to proceed, e.g., make a voluntary application for clearance if appropriate, and should agree on appropriate closing conditions, cooperation duties, and covenants, plus remedies in the event of the transaction being prohibited by the Ministry.