On 8 April 2020 the German cabinet resolved a draft law to amend the German Foreign Trade Act. The draft law generally tracks the Ministerial Draft presented by the German Federal Ministry of Economics and Energy (“BMWi”) in February with special regard to foreign investments. The prohibition on implementing notifiable transactions has been made significantly more stringent, with relevance for M&A practice (including due diligence).
The draft law is expected to be introduced into parliamentary proceedings in the very near future. In addition, investment review is to be further tightened through amendments to the German Foreign Trade Ordinance.
According to Federal Minister of Economics Altmaier, the reform will create the legal preconditions to enable carrying out more comprehensive and proactive reviews of foreign investments, in particular into companies providing critical infrastructure. Altmaier has noted that the current situation makes clear that Germany and Europe require their own competencies and technologies in certain fields, which can now be better protected.
- Prohibition on implementing transactions before BMWi clearance for notifiable buyers
- Prohibitions on allowing, prior to clearance, (i) disclosure of relevant information to the buyer, (ii) the exercise of voting rights by the buyer, or (iii) granting profit distribution rights to the buyer
- Criminal sanctions for violations of these prohibitions
- Lowering of the prohibition criteria
Prohibition on implementing transactions before clearance for all notifiable transactions
In the future, all notifiable transactions are to be subject to a prohibition on implementation. A notifiable investment in a German company will be provisionally invalid. The legal transaction effecting the realization of an investment will only become (retroactively) effective once the BMWi clears the acquisition or does not timely block the transaction or the clearance is deemed granted.
Further prohibitions flanking the prohibition on implementation
Various grounds for prohibition are to be introduced to help prevent de facto implementation of a transaction that would undermine the intent and purpose of investment review. These prohibitions apply from the time at which a contract regarding an acquisition is entered into until the conclusion of investment review proceedings.
In particular, the acquirer may not have target company information disclosed to it that are relevant for the review of potential risks or the non-disclosure of which has been ordered by the BMWi. According to the justification statement of the draft law, such information includes in particular information the sharing of which was to be prevented through the mechanisms of investment review. This restriction on disclosure of information must be taken into consideration when carrying out due diligence in the future.
An acquirer is also to be prohibited from exercising voting rights, whether directly or indirectly. This includes accepting voting instructions. It is furthermore prohibited to allow an acquirer profit distribution rights accompanying an acquisition or an economic equivalent thereof.
Violations of these prohibitions can be punished with up to five years in prison or with fines.
Lowering of the prohibition criteria
Until now, the BMWi has only been permitted to prohibit acquisitions or issue orders when an investment endangers public order or security in the Federal Republic of Germany. In the future, a lower level of risk will suffice. An “anticipated impairment of public order or security” is to be sufficient in the future.
The BMWi is also to review in the future whether an acquisition could impair public order or security in another member state of the European Union or programs of Union interest.
A “National Contact Point” for the new EU-wide cooperation mechanism is to be established within the BMWi. Among the responsibilities of this new Contact Point will be to inform all member states and the European Commission of in-depth investment reviews initiated in Germany and to accommodate information requests and position statements. The result should be to improve cooperation between EU member states in the field of investment review.
In addition, the BMWi is to receive additional competencies regarding monitoring compliance with obligations based on government orders and public-law contracts as well as additional sanction powers.
The scope of application for sector-specific investment review is to be expanded. Previously, this scope included investments into German companies producing or developing certain weapons, munitions and military equipment, components of military vehicles, or products with IT security functions for processing government classified documents as well as essential components of the same. Going forward, the scope is to be expanded to include companies that modify or use such products or that have produced, developed, modified or used such products in the past and still have know-how regarding, or other access to, relevant technologies.
Amendments to the German Foreign Trade Ordinance
The BMWi will submit proposals in the near future to amend the German Foreign Trade Ordinance to supplement the provisions of the German Foreign Trade Act.
A strategy paper suggests that a particular focus will be planned expansions of the notification requirements for investments into the areas of artificial intelligence, robotics, semiconductors, biotechnology and quantum technology. In the future, direct and indirect acquisitions by investors from outside the EU and EFTA of 10% or more of the voting rights in German companies active in these areas are to be subject to a notification requirement.
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