M&A foreign trade


Foreign Trade Law Puts Focus on M&A Deals

Germany aggravates the control of corporate acquisitions by foreign investors. What has changed, and what needs to be kept in mind?

I. Background

Recently, there has been a trend that German foreign trade law gains more and more importance as regards corporate acquisitions. This development has reached a new level with the 9th Amendment to the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, hereinafter referred to as FTPO): On 18 July 2017 the notification requirements for corporate acquisitions by foreign investors have been aggravated.

II. Summary of the Most Important Changes

German foreign trade law foresees two types of investment control procedures. The cross-sectoral examination (sec. 55 ff. FTPO) which applies irrespectively of the concerned line of business. And the sector-specific examination (sec. 60 ff. FTPO) which applies only if the target company is engaged in an especially sensitive line of business, e.g. weapons of war or other military goods.

The basic mechanism of investment control stays the same. Yet, the amendment does bring some noticeable change — or rather: a noticeable tightening?

1. What Has Changed Regarding Cross-Sectoral Control?

a.) Safeguarding the Ability to Control

Pursuant to the amendment, the acquisition of a company in scope of the cross-sectoral control has to be notified in writing to the Federal Ministry of Economics and Energy (sec. 55 para. 4 FTPO). According to the previous wording of sec. 55 FTPO, there was no such notification requirement. The intention of the legislator seems to be clear: In the future, the (potential) examination against the public order and security of the Federal Republic of Germany shall be safeguarded and practically expanded.

The authorities’ ability to run an examination has been further strengthened with a second important change: The German Federal Ministry of Economics and Energy can exercise its control right within three months after they have gained knowledge of the signing of the acquisition contract, and up to five years (sec. 55 para. 3 sentences 1 and 6 FTPO). Previously, the deadline began with the signing of the acquisition contract, irrespective of the authorities having any knowledge. Furthermore, all control periods have been extended. Presumably with the intention to grant the authorities sufficient time for the examination.

b.) Substantiation of the Term “Risk for Public Order and Security”

Furthermore, the term “risk for public order and security” has been specified by a non-exclusive enumeration of specific examples. On the one hand, this approach provides for more legal certainty, but on the other hand it does also mean that if the target company’s business activity is in scope of one of these examples, the corporate acquisition must be notified. The acquisition’s “fate” then depends entirely upon the authorities and their course of action.

A risk for the public order and security (and thus a notification obligation) can exist in particular if the domestic target company is active in one of the business areas as exemplified in sec. 55 para. 1 sentence 2 no. 1 to 5 FTPO:

  • Operator of so-called “critical infrastructure” (cf. sec. 2 para. 10 German Act on the Federal Office for Information Security),
  • Developer of software for the operation of such „critical infrastructure“,
  • Companies active in the field of telecommunication surveillance
  • Provider of certain cloud computing services, or 
  • Companies that are active in the field of IT security and secure communication methods in the health care sector (telematics infrastructure).

In addition to these examples, some more business activities could trigger a cross-sectoral examination – albeit such cases will presumably be much more difficult to justify by the authorities.

2. Changes Regarding Sector-Specific Control

a.) Expanded Scope of Application

The sector specific control’s scope of application was expanded; as of 18 July 2017 it does also include specific positions from Part I Section A of the German Export List, e.g. production or development of specific equipment for electronic offense and defense protective measures, target-, simulation- and surveillance technology.

b.) Anti-Circumvention Provision

Further, the 9th Amendment to the FTPO introduced a sector-specific anti-circumvention provison (sec. 60 para. 1 sentence 2 FTPO). Such a provision did until today only apply to the cross-sectoral control. As a consequence, corporate acquisitions by domestic investors, too, could be subject to investment control if there are indications that the parties agreed on a fraudulent arrangement or applied a circumvention practice in order to thwart an examination. Indications of such an circumvention practice are in particular if the acquiring company does — apart from the acquisition — not have any other reasonable business interests whatsoever, or if the acquiring company is not established in Germany with the appearance of permanency like e.g. with an office, own labour force or business equipment.

III. Practical Implications

In practice, it all boils down to one question: How can a corporate acquisition be brought to legal certainty in the fastest possible way in order to avert the risk that the transaction would be prohibited on foreign trade law grounds and would therefore need to be rescinded?

With the 9th Amendment to the FTPO, simply closing one’s eyes as to (the cross-sectoral) investment control will not be a viable option anymore—otherwise the resulting legal uncertainty would hang like a Sword of Damocles over the whole transaction for a period of five years (cf. sec. 55 para. 3 sentence 6 FTPO). As regards the sector-specific control, this period of uncertainty would be even longer as a limitation period is not foreseen in the law at all.

Regarding the cross-sectoral control, the usually most efficient way to achieve legal certainty for the envisaged transaction as fast as possible will be to request a written certificate of non-objection (sec. 58 para. 1 FTPO). Because if the German Federal Ministry of Economics and Energy will not initiate the examination procedure within two months after receiving the application pursuant to sec. 55 FTPO, the certificate of non-objection would be legally deemed to be issued (sec. 58 para. 2 FTPO). Whereas the mere notification of an M&A transaction to the German Federal Ministry would trigger a period of three months to initiate an examination (sec. 55 para. 3 sentence 1 FTPO).

There are no indications in the wording of the statute or in the legislative documents accompanying the 9th Amendment as to whether the law aims — beyond the changes described above - to tighten the authorities’ right to exercise discretion on the prohibition or permission subject to conditions of corporate acquisitions. However, there is room for speculation because the recitals of the 9th Amendment to the FTPO read explicitly that the changes were made inter alia “in the light of the recent development of foreign direct investments in German companies.”

Relevant Laws

Sec. 55 ff. German Foreign Trade and Payments Ordinance
Sec. 60 ff. German Foreign Trade and Payments Ordinance


Bundesanzeiger Amtlicher Teil vom 17.07.2017

Did you find this useful?