Corporate Investments in Germany

Full article available via the following link (page 3):  http://www2.china.ahk.de/download/pub/hk/hk_GCcomm201002_03special.pdf

The global financial and economic crisis has lead to decreased share prices and enterprise values of many companies. Therefore takeovers of distressed or undervalued targets become more important – also in Germany where many board members negotiate with foreign investors about entering as new shareholders. In this environment the new German Foreign Economy Law (FEL / “Aussenwirtschaftsrecht”) is of importance since it enables the German Federal Ministry of Economy to prohibit purchases of German enterprises by investors from outside the European Union (EU).

Investors from all over the world have repeatedly been involved in M&A transactions in German enterprises. Porsche, Daimler, Opel, Monier and Escada are some well-known examples in this context. And there is likelihood for more acquisitions of enterprises in several German industries given that many economists foresee only a slight upward of the economy in 2010. However, the FEL has brought new hurdles for acquisitions in German enterprises. The Federal Ministry of Economy is now entitled to assess and restrict acquisitions if a domestic target is being purchased directly or indirectly by an investor from outside the EU or EFTA or by a domestic investor being owned by a non-EU shareholder with a stake of at least 25 percent.

The new law is applicable to every German enterprise – irrespective of its legal form, size or capital market access. Furthermore the target need not belong to any certain industry which is one of the most important changes. The former FEL had also contained restrictions for foreign investors on purchases of German enterprises but was limited on German defence technology industries. Because of this narrow scope the former law was hardly of practical importance. Meanwhile, the new law contains no industry-related limitations and could therefore be relevant for many M&A transactions.

External investors are qualified as such if they are located neither in the EU nor in a member state of the EFTA (i.e. Iceland, Norway, Liechtenstein, Switzerland). The Channel Islands (e.g. Jersey, Guernsey) also belong to the territory of the community. In contrast, investors from the Cayman Islands, Bermuda and other islands situated overseas qualify as external. Moreover, the purchase must be based on a certain legal act and lead to a stake of at least 25 percent (blocking minority) after closing for the external investor. Stakes below this threshold cannot be subject to any assessments by the Ministry.

Furthermore, a factual and serious threat to the public order or to public safety has to result from the purchase. The government intended that the new limitations should meet high standards and prohibitions should be exceptional cases. Thus, the threat must affect a basic interest of the German community (e.g. supply of electricity and services of general interest such as telecommunications, postal services). Hence, there is a risk for prohibitions with regard to corporate transactions within industries of strategic relevance for the public supply: huge pharmaceutical or chemical companies, railway networks, harbour services or companies providing the public with energy are sensitive. But this also depends on the size of the enterprise and on its relevance to the supply with strategically relevant goods and services.

External investors striving for acquisitions in Germany could apply for a document of compliance by the German Federal Ministry of Economy beforehand but are not obliged to do so. If they desist from an announcement they should bear in mind that the Federal Financial Supervisory Authority (“BaFin”) or the Federal Cartel Office (“Bundeskartellamt”) could inform the Ministry, thereby triggering an assessment. In case of a prohibition the Ministry is entitled to enforce its decision by forbidding or limiting the voting rights of the external investor. Furthermore the Ministry could also appoint a trustee that unwinds the purchase. Therefore external investors should consider an application for a document of compliance at an early stage, ideally in combination with passing on the complete transaction files to the Ministry. Only in this way is a high level of transaction safety achieved.