Alert August 03, 2017

Amendment of German Foreign Trade Law – Stricter Regulations for Non-EU Investors?

Summary

On 12 July 2017, an amendment to the German Foreign Trade Ordinance was resolved, and is expected to come into effect shortly. It is currently being debated in the German and international press whether this can be seen as a move in the direction of further protectionism restricting foreign investments in Germany. In our view, this is not the case. That said, the amendment does give the German authorities a higher degree of control with respect to acquisitions by foreign investors (e.g., in the areas of tech and infrastructure) by introducing filing obligations and prolonged review periods.

Purpose of the German Foreign Trade Ordinance

The German Foreign Trade Ordinance allows German authorities to investigate (as well as prohibit) acquisitions of German companies and assets by non-EU investors if they endanger public order and security. The same applies to acquisitions by German or EU investors if there are indications that such acquisitions are structured in an abusive way or deemed to circumvent the requirement to obtain clearance by the German authorities.

New Filing Obligation / Extension of Review Periods

One of the main purposes of the amendment to the German Foreign Trade Ordinance is the introduction of a set of indicative categories of industries where the potential impact of foreign investments on public order and security is refutably presumed and which imposes an obligation on the parties involved to file for clearance with the German authorities. Such categories include:

  • the operation of critical infrastructures (e.g., energy, information technology and telecommunication, transport and traffic, health, water, food, finance and insurance),
  • the development of industry-specific software for the operation of critical infrastructure (e.g., for payment and securities transaction systems or data storage and processing), and
  • the supply of cloud computing services.

However, this does not mean that the German state intends to prohibit foreign investment in Germany in the relevant areas to a greater extent. Rather, the power of the authorities to ban any such transactions if public order and security are at risk has not been broadened compared to the situation before the amendment to the German Foreign Trade Ordinance. Most of the changes are rather process related and allow the German state a more “hands on” approach in terms of investigation and, if necessary, intervention.

The new filing requirement goes hand in hand with an extension of the applicable review periods during which the German authorities may investigate and veto transactions by foreign investors:

  • public authorities may now start an investigation on a transaction within three months of becoming aware of it (i.e., usually after notification by the parties), however, at the latest, within five years from signing; and
  • an investigation, if any, needs to be finalized within four months (disregarding any periods of negotiation to avoid the transaction being vetoed); so far this period has been only two months.

Consequences for the M&A Practice in Germany

Transactions falling into one of the indicative categories set out in the amended German Foreign Trade Ordinance (or which otherwise could affect public security and order) need to be filed and cleared as otherwise there is a risk that they will be cancelled / reversed, or fines could be imposed on the involved parties. The applicable review periods need to be observed and reflected in the M&A processes, which may cause delays or even lead to uncertainties regarding whether transactions can be completed with a foreign purchaser.

Those delays and uncertainties might be limited, however, by applying for binding clearance from the appropriate authorities (Unbedenklichkeitsbescheinigung) at a rather early stage of the transaction. As such clearance is deemed granted if a formal assessment has not commenced within two months from the filing of the application, and as such review period can be started before signing a transaction, a time delay until closing might be substantially reduced.

Conclusion

The impact of the amended German Foreign Trade Ordinance can be summarized as follows:

  • Acquisitions by foreign investors in certain areas can be slowed down or become more uncertain by the newly introduced filing requirements and the prolonged review periods.
  • On the other hand, we have no indication that substantially more transactions will be prohibited by the German authorities or even that the amendment to the German Foreign Trade Ordinance can be seen as an instrument to keep foreign investors out of Germany; rather, the applicable European law sets the boundaries for the German Foreign Trade Ordinance so that the discretion of the German government is insofar limited.
  • Depending on the circumstances, delays or uncertainties with respect to closing might be limited or even eliminated by obtaining clearance from the German authorities at a rather early stage in M&A processes.