M&A: Tightened rules for cross-sectoral transactions involving foreign direct investments
Amendments cause increasing transactional uncertainty
The planned amendments to the Foreign Trade and Payments legislation, which are likely to be approved by Parliament in May or June will not only bring along a tightening of screening measures, but also an expansion of the number of transactions to be filed, due to a 10% voting right threshold, the concept of ‘provisional ineffectiveness’ to cross sector investment screenings and the introduction of a severely sanctioned ban on execution.
In order to avoid security risks, the Federal Ministry of Economics and Energy (BMWi) may review the acquisition of domestic companies by foreign buyers. The basis for such reviews are the Foreign Trade and Payments Act (AWG) and the Foreign Trade and Payments Ordinance (AWV). The acquisition of 10% or 25 % of the voting rights of a company by foreign investors can until now be prohibited if German public order or security policy interests are actually threatened. This may also apply in case of German buyers, in case foreigners hold direct or indirect voting rights in such a buyer.
With the Draft Bill of 31 March, as well as a redraft of the ordinance dated May 20, 2020, the German federal government has brought further amendments to the Foreign Trade and Payments Act under way. The new rules are expected to enter into effect in June 2020. The Draft Bill inter alia provides for a tightening of screening measures, an expansion of ‘provisional ineffectiveness’ to cross sector investment screenings and, finally the introduction of a ban on execution including severe penalties.
The changes had been planned before the outbreak of the COVID-19 Pandemic. The background was in particular the experience gained from the Kuka transaction and the planned investment of a Chinese group in a German infrastructure company.
1. Extension of the scope
In future, the German Federal Ministry of Economics and Energy (BMWi) will be able to intervene not only in a restrictive manner to ensure the order or security of the Federal Republic of Germany, but also those of other EU member states. The same applies to ensuring order or security with regard to projects or programs of Union interest.
In future, it will also be sufficient if order and security are likely to be impaired. This means that the central threshold for taking action has been significantly lowered and is now difficult to assess for the parties. In addition, the terms "order and security" are to be expressly interpreted generously.
In addition, there will be an extension of the catalogue of sectors/transactions that are subject to reporting under the Foreign Trade and Payments Ordinance (AWV). A 10% voting right threshold will apply. In a first step, the sectors services for communication infrastructure, certain medical products, essential pharmaceutics and protective equipment (health care) will be listed. There are plans to extend this further to areas such as artificial intelligence, robotics, semiconductors, biotechnology and quantum technology.
2. Provisional Ineffectiveness
So far, the provisional ineffectiveness of an affected legal transaction has only applied for sector-specific investment screenings. However, it will in future also partially applicable for cross sector investment control. In case of legal transactions which must be reported under the AWV, execution in the sense of the transaction in rem (closing) is provisionally ineffective and no longer has a condition subsequent (resolutory condition). In the future, all reportable transactions can only become effective after the BMWi examination procedure has been completed.
The extension of the period between signing and closing can cause far-reaching uncertainties and difficulties in the completion of the transaction process and the related purchase price mechanisms and SPA clauses.
3. Sanctioning of unauthorized execution
In addition, in the future sanctions are likely to be imposed in the event of unauthorized closing of reportable transactions. Intentional acts will be punishable as a criminal offence with a prison sentence of up to five years. The relevant persons are such individuals, who allow the execution/closing to come about. Negligent conduct will be considered as an administrative offence in this respect (penalty up to 500.000 EUR).
The law already considers access by the acquirer to sensitive company information as an element of enforcement, which makes transaction release a mandatory requirement. Since a de facto enforcement effect is also to be prevented by a flow of information from the target company to the potential acquirer, this can in general also impair the exchange of data within the scope of due diligence. Accordingly, a targeted use of Red Data Room agreements is recommended with regard to the exchange of highly sensitive company information.
It should also be considered that the above-mentioned tightening of sanctions measures also applies here.
4. Practical Implications
Against the background of these impending legal consequences and increased transaction uncertainty, early consideration of the provisions of the Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance is unavoidable in potentially notifiable transactions. This also applies to German buyers with foreign shareholders. If the prerequisites are met, the necessary notifications should be initiated at an early stage, possibly by applying for an up front certificate of non objection. Finally, the stricter rules and the associated uncertainties must also be taken into account in the negotiations and the drafting of the necessary agreements. Here, if necessary, experience gained from dealing with antitrust law requirements, regulations and enforcement prohibitions can be drawn upon - also with regard to rights to rescind or withdraw. Last but not least, the new rules must also be taken into account in the context of strategic considerations on sell-side and buy-side and can thus have a significant influence on investment and disinvestment behavior.