Acquiring German high tech companies

Introduction

Under the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, hereinafter: “FTPO”), corporate transactions that could pose a threat to the public order or to the security of the Federal Republic of Germany are subject to an investment review procedure. Transactions being subject to the FTPO have to be notified to the Federal Ministry of Economics and Technology that is authorized to prohibit the transaction or issue orders with restrictions to the transaction. The cases publicly known under the previous legal regime were very rare. They were limited to transactions involving the German defense industry.

Given that other countries have recently introduced laws protecting certain sectors of their economy against foreign M&A, the German government recently modernized and adapted the respective German legal framework by amending and enhancing the FTPO. The revised rules now further clarify and enhance the previous provisions. They now explicitly provide the means to prohibit or restrict the sale of German businesses operating critical infrastructure and/or owning specific technology to foreign investors. The recent revisions to the FTPO will therefore have material practical consequences for transactions involving the acquisition of German tech companies.

The following remarks intend to provide a first quick overview on the revised investment review procedure under the FTPO and its consequences for transactions especially in the German TMT sector.

Overview of the investment review procedures

General vs sector specific investment review procedure

Generally, transactions meeting the following criteria can be subject to the general investment review procedure:

• The acquirer is located outside the territory of the EU or the EFTA region. It will not be sufficient to use an empty shell company located in the EU or the EFTA region or an EU/EFTA located entity without substance.
• The acquirer is (directly or indirectly) acquiring 25% or more of the voting rights of the target company. 
• The target company is resident in Germany.

If the target company is active in sensitive security areas (ie the defense and IT security business), the transaction is subject to a so called sector specific investment review no matter where the acquirer is located. This sector specific investment review therefore also covers acquirers located in the EU or the EFTA and applies, for example, to transactions involving the acquisition of 25% or more of the voting rights of a manufacturer of war weapons, ammunition, military equipment and products with IT security features that are used for processing classified government information.

Notification requirements for sector specific investment review

The acquirer is obliged to notify the contemplated acquisition of a German business by a “foreigner” to the Federal Ministry of Economics and Technology provided that the sector specific investment review was triggered. The acquisition by a “foreigner” includes any non-German buyer who is located outside the territory of the EU or the EFTA region.

If the Federal Ministry of Economics and Technology does not initiate the formal review procedure within three months following the notification, the contemplated transaction is deemed to have been approved. If the Federal Ministry of Economics and Technology opens a formal investigation, it will ask for the complete documentation and then has three months to impose restrictions starting from the date the complete documentation was provided.

Notification requirements for general investment review, certificate of non-objection

Transactions involving target companies which:

• operate critical infrastructures
• support operators of critical infrastructure with customized software
• manufacture certain telecom surveillance technologies or own respective know-how, or
• render certain not immaterial cloud computing services

have to be notified to the Federal Ministry of Economics and Technology.

The Federal Ministry of Economics and Technology can start an official investigation within a period of three months upon obtaining knowledge of the transaction. Obviously, obtaining knowledge is triggered by submission of the written notification.

If the Federal Ministry of Economics and Technology decides to start a formal review, it will ask for the submission of the complete documentation of the transaction. The Federal Ministry of Economics and Technology can only impose restrictions within four months following the submission of the documentation, but the backdoor is that the four-month-period only starts upon the submission of the complete documentation.

Possible restrictions are that the Federal Ministry of Economics and Technology is authorized to prohibit the transaction or impose restrictions.

If no notification is made, the Federal Ministry of Economics and Technology can investigate a transaction for up to five years following the entering of the contractual arrangements. This possibility creates a risk of legal uncertainty.

The FTPO therefore foresees an option to apply for a so-called Certificate of non-objection. With a respective notification, the applicant makes the Federal Ministry of Economics and Technology aware of a contemplated transaction and asks for an official declaration that the contemplated transaction is in compliance with the FTPO. If the Federal Ministry of Economics and Technology does not act within two months upon submission of the notification and application for the certificate of non-objection, this certificate is deemed to have been granted.

Possible restrictions

In its general investment review, the Federal Ministry of Economics and Technology will examine whether the contemplated transaction poses a threat to the public order or security of the Federal Republic of Germany. It is authorized to prohibit the contemplated transaction or impose restrictions in order to guarantee the public order or security of the Federal Republic of Germany. However, any prohibition or restriction requires the approval of the German government. The underlying transaction is valid but subject to the condition subsequent that the transaction is prohibited within the statutory periods. If the Federal Ministry of Economics and Technology prohibits the transaction, the transaction becomes legally invalid.

In case of the sector specific review, the Federal Ministry of Economics and Technology will only approve the contemplated transaction if there are no opposing (material) security interests of the Federal Republic of Germany. The Federal Ministry of Economics and Technology is authorized to prohibit the transaction or to impose restrictions to guarantee the public order or security of the Federal Republic of Germany up to three months after submission of the complete notification. The underlying transaction is invalid and becomes valid only upon approval by Federal Ministry of Economics and Technology.

Practical consequences for M&A-transactions involving German tech target companies

1. The revised provisions of the FTPO are clearly drafted to restrict the sale of German high-tech companies to non-German acquirers, respective acquirers outside the EU/EFTA-region, provided this could adversely affect the state’s interest in certain businesses and technologies. The scope of application of the German investment review procedures has clearly increased because the scope of application has been enhanced. It therefore needs to be carefully reviewed for any kind of transaction involving German target companies in the tech sector whether such a transaction should rather be notified to the Federal Ministry of Economics and Technology in order to establish legal security.
2. It is not recommended to refrain from notifying such a transaction that could potentially be subject to the investment review procedures under German law to the Federal Ministry of Economics and Technology. Legal security that such a transaction will not be prohibited or that no restrictions will be imposed will only be obtained after five years. It is highly unlikely that any party is willing to assume this transaction risk if it can be avoided by obtaining a certificate of non-objection.
3. The parties should therefore notify transactions to the Federal Ministry of Economics and Technology as early as reasonably possible. Depending on timing requirements, a certificate of non-objection could be applied for as early as in the run-up to the acquisition. in order to establish legal security.
4. The parties to a transaction will need to take into consideration the additional time required to conduct and complete the investment review procedure. Even if the Federal Ministry of Economics and Technology does not initiate a formal review, the waiting period for obtaining the certificate of non-objection lasts two months.
5. The parties to a transaction will also carefully need to consider which information they will want to make available to the Federal Ministry of Economics and Technology in connection with an investment review procedure. If the initial provision of information is not complete or, because of incompleteness, is potentially misleading, this may trigger the opening of a formal review because the Federal Ministry of Economics and Technology may feel that it needs to formally request additional information to avoid the consequences of automatically obtaining the certificate of non-objection. In such case, the delay of the M&A-process would be quite apparent.