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Tighter Regulations for M&A Transactions involving non-EU Investors

Ninth Amendment to the Foreign Trade and Payments Regulation

August 2017

On 18th July 2017 the Ninth Amendment to the Foreign Trade and Payments Regulation (AWV) came into force. The Amendment focuses on the cross-sectorial investigation by the Federal Ministry of Economics and Energy (BMWi) of company acquisitions by investors from countries outside the EU.

Previous Foreign Investment Review Regime

Under the previous regime the acquisition of a domestic company through an asset deal or by acquisition of at least 25% of the voting rights by an investor whose registered office was outside an EU or European Free Trade Association (EFTA) member state could be reviewed by the BMWi to decide whether the acquisition endangers public order or the security of the Federal Republic of Germany.

What has changed?

1. The Regulation provides for 5 key examples in which future investments may be prohibited or restricted on grounds of protecting public order or the security of the Federal Republic of Germany.

The cross-sectoral examination will be especially relevant to the following acquisition of domestic companies:

  • if the target undertaking operates critical infrastructure in the energy, water, food, information and telecommunication sector as well as health care, finance, insurance and transport
  • software companies are included if critical infrastructure is affected or is likely to be affected
  • companies which monitor government telecommunications
  • providers of Cloud Computing services if their services extend to a certain size or data volume
  • companies which have a licence for telematics infrastructure.

Regarding investments in German undertakings active in the civil sector with security relevance, the BMWi will be particularly careful in their review and in deciding whether the acquisition constitutes a risk to public safety and security.

2. The Amendment extends the timeframe in which the BMWi must make the review of the proposed investments from 2 months to 4 months. This deadline is suspended if the BMWi enters into negotiations with the parties involved in the acquisition. 
A particularly controversial point is that the investment review used to begin when the acquisition agreement had been signed or the official takeover bid had been delivered. Now, however, it will begin when the BMWi obtains knowledge of the acquisition. This has the effect that the government can still ban an acquisition of which it was not aware even though the acquisition has already been completed. The time period for stopping or restricting an investment will expire only 5 years after the signing of the acquisition.

3. There is now a duty to report transactions which fall within the categories mentioned above. This should be borne in mind during the planning stages of a new acquisition.

4. In order to ensure that the acquisition will not be delayed by a review of the BMWi the acquirer can apply for a certificate of non-objection for the transaction from the BMWi. Instead of one month, the government now has two months to review the applications for certificates of non-objection. 

Practical tip: the new extended deadline should be borne in mind during the planning stages of the acquisition. Certificates of non-objection could be obtained prior to signing to avoid that the acquisition will be reviewed by the BMWi after signing and, in worst case scenario, will be restricted or stopped.

Impact on M&A Transactions

Changes to the Final Trade and Payments Regulation will have a major impact on M&A transactions. During the due diligence stage of the transaction it should be checked whether the target company falls within one of the sectors in which an investment review is likely. The new extended review periods will also mean that more time has to be allowed between signing and closing for the review procedure of the BMWi to take place. Another factor to consider is the potential buyer and whether this buyer is deemed to be domiciled in the EU or not.

Practical tip: the closing conditions in the acquisition agreement should include the provision of a clearance certificate or a warranty that no review proceedings are being carried out. Also, rescission rights should be agreed in the event that the closing condition is not satisfied by a particular date. This is important if the buyer is an EU company but the controlling shareholder is domiciled outside the EU. The buyer should seek assurances that the acquiring EU company satisfies the conditions required for a company domiciled within the EU.

If you have any questions on the ninth amendment to the foreign trade and payments regulations and how it might affect your investments CMS will be pleased to assist.

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Tighter regulations for M&A transactions involving non-EU investors
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