Contributed By Hengeler Mueller
Germany is a traditional civil law jurisdiction with codified sets of rules applicable to contracts, corporate law and other commercial law matters. Regulation applicable to businesses operating in Germany is set at EU, national, state and local level with the most relevant cornerstones of the legal framework for foreign direct investments coming from the EU and national level.
Germany has a sophisticated court system with specialised courts for tax, social security matters, employment and public law, and the Federal Constitutional Court is the eminent court for matters of constitutional law. In addition, courts established at the EU level, in particular the European High Court of Justice, have jurisdiction over certain matters concerning questions of EU law.
Germany introduced a foreign direct investment (FDI) screening regime in 2009, and in military and defence matters, already in 2004. The German Federal Ministry for Economic Affairs and Energy (MoE) carries out the FDI screenings and involves other ministries and authorities. A sector-specific screening applies for the defence and IT encryption sector (for IT products used for classified information). The cross-sectoral screening applies to all other sectors.
Generally, the MoE can screen any FDI in the scope of the FDI screening, either upon FDI filing or on its own initiative (ex officio). The MoE may restrict or prohibit a transaction if it is likely to affect public order or security, and it may unwind completed transactions. If no filing is made, the possibility of an ex officio screening, and thereby transaction insecurity, generally lasts for up to five years.
The FDI screening rules are regulated in the Foreign Trade Act, the Foreign Trade Ordinance and laws on critical infrastructure. Certain aspects are further specified in the general rulings and regulatory guidelines of the MoE.
Reviewable Foreign Investments
In the defence and IT encryption sector (producing, or having produced, authority-approved IT products for processing of classified information), the MoE can screen any direct or indirect investment of a non-German investor in a German company above a screening threshold of 10% of the voting shares.
With respect to German target companies in any other sector, the MoE can screen any investment by a non-European (ie, non-EU/EFTA) investor above applicable screening thresholds. A 10% screening threshold applies to certain particularly security-relevant transactions, including investments in target companies holding listed critical infrastructure in the energy, water, nutrition, IT and telecommunications, finance and insurance, health, transport and traffic sectors, and other particularly sensitive businesses. In other areas, the screening threshold is 25% of the voting shares.
The acquisition of a German company, or a specific business line of such company, by way of an asset deal is also within the scope of the German FDI screening.
FDI Filing and Clearance Requirement
Since mid-2020, an FDI filing and clearance requirement applies to any (particularly sensitive) transactions subject to the 10% screening threshold. Such acquisitions only become fully effective upon FDI clearance of the transaction. The statutory filing and clearance requirement is complemented by criminally sanctioned gun-jumping prohibitions, including on transfer of shares in the target company and information-sharing of particularly sensitive data of the target.
In 2020, Germany tightened its FDI screening regime. Since October 2020, the EU FDI Screening Regulation (EU) 2019/452 (EUFIS Regulation) and its co-operation mechanism with other EU member states and the European Commission have been fully applicable.
Furthermore, in light of the COVID-19 pandemic, Germany has adopted several other (legislative) measures.
2020 Tightening of the German FDI Screening
In May 2020, the German government adopted tighter rules on the screening of health sector deals in light of the COVID-19 pandemic. This reform intensified the FDI screening of health sector transactions by qualifying further health service providers as critical targets. The extended list now also captures developers and producers of medical devices, personal protective equipment and diagnostics for highly contagious diseases. Furthermore, the marketing authorisation holder for essential medicinal products, including their starting materials and active substances, as well as those who manufacture, develop or market such medicinal products or substances, are also covered.
The FDI screening was further tightened, in particular by a broadened FDI filing and clearance requirement for critical infrastructure and targets. The MoE also projects a further tightening of the German FDI screening for early 2021 as regards the protection of critical technologies such as semiconductors, robotics, artificial intelligence and bio and quantum technologies. Furthermore, according to a draft bill of December 2020, the FDI clearance requirement should also cover 5G infrastructure (critical components) in the future.
The number of MoE formal FDI screening procedures has risen steeply in recent years (about 40 in 2016, 65 in 2017, 80 in 2018, and 105 in 2019). In 2020, two potential Chinese investments in the German satellite and 5G technology company IMST and the metals trader PPM Pure Metals failed due to security concerns in the FDI screening.
Co-operation Mechanism under the EU FDI Screening Regulation
The EUFIS Regulation, which came into force in April 2019 and has been fully applicable since October 2020, introduced a co-operation mechanism on FDI screenings among EU member states and the European Commission. It does not establish a centralised EU screening procedure, but rather leaves it up to the member states to decide whether they screen FDIs or not.
If member states carry out FDI screening, they must comply with the procedural rules and certain minimum standards of the EUFIS Regulation, such as transparency of rules and procedures, non-discrimination among foreign investors, confidentiality of exchanged information, recourse against decisions, and measures identifying and preventing circumvention. Member states have the last word on whether a specific investment within the scope of their respective screening regime should be cleared or vetoed. Where a foreign investment in a member state does not undergo FDI screening, other member states and the Commission may provide an opinion/comment within 15 months after completion of the foreign investment.
Measures in Response to the COVID-19 Pandemic
Germany has adopted various other (legislative) measures in light of the COVID-19 pandemic. These include, among others, a broad suspension of the obligation to file for insolvency in connection with COVID-19, a far-reaching privileged treatment of new loans under avoidance rules on the granting of loans to companies in need of restructuring, more flexible rules for the conduct of general meetings, eased tax rules on deferral of the due date for tax payments, waiver of enforcement measures, and the establishment of a German Economic Stabilisation Fund and other liquidity assistance programmes.
As in most other jurisdictions, M&A transactions can be structured as share deals or asset deals.
In the case of large transactions, the share deal is the more frequently chosen transaction structure because the transfer of the target business is easier to implement since it does not entail an item-by-item transfer of all assets, contracts and liabilities pertaining to the business. Furthermore, the tax rate applicable on the seller’s profit from the transaction is often considerably lower than in an asset deal. Conversely, an asset deal can provide the purchaser with a rather simple option to select the assets, contracts and liabilities that shall be acquired, while leaving other parts of the target business with the seller. In addition, an asset deal often results in a step-up of tax book values, creating a future tax shield for the buyer.
As an alternative to an acquisition of businesses by way of share deal or asset deal, a business combination can be implemented through a statutory merger or other measures pursuant to the German Transformation Act. At least in the event that minority shareholders are involved on both sides of a transaction, parties often avoid mergers or other measures pursuant to the German Transformation Act because they can be challenged by minority shareholders in court and, as a result, they do not provide the required transaction security and may result in protracted appraisal proceedings. For this reason, almost all public M&A deals are structured as tender offers, for cash or stock consideration, rather than as statutory mergers.
Measures pursuant to the German Transformation Act, such as demergers or spin-offs are, however, frequently used as intercompany measures to implement corporate carve-outs in preparation for an M&A transaction that is implemented as a share deal.
In addition to FDI clearance, pursuant to the German Foreign Trade and Payments Act (AWG), the most relevant regulatory approval that may be required for the consummation of a domestic M&A transaction is merger clearance (see 6 Antitrust/Competition). In addition, special clearances may be required for companies active in the financial services or insurance industry (see 8.1 Other Regimes).
For public M&A transactions, the German Securities Acquisition and Takeover Act provides a specific regulatory framework for tender offers. The most prominent cornerstones are:
Publicly listed entities in Germany typically have the legal form of a German stock corporation or a European stock corporation (SE) with a seat in Germany or a German partnership limited by shares.
A German stock corporation has a two-tier board with a management and a supervisory board. Members of the management board are appointed by the supervisory board and members of the supervisory board are elected by the shareholders. If the company or, subject to certain requirements, its subsidiaries, employ more than 500 employees in Germany on a regular basis, one third of the members of the supervisory board are elected by employees (or one half, if there are more than 2,000 employees).
An SE with a seat in Germany can either have a one-tier or a two-tier board. The rules on co-determination of employees are subject to negotiations between representatives of the employees and management. If no co-determination rules apply at the time of the formation of the SE, it is, as a practical matter, often possible to preserve the status quo without co-determination for the future in an SE structure.
A German partnership limited by shares has a very different governance structure, with a general partner who manages the company through its management body. This governance allows for a separation of ownership and control and is therefore sometimes chosen by listed family businesses.
The most frequent legal form of private companies in Germany is a German limited liability company. The governance set-up is simpler and more flexible than a German stock corporation and therefore lends itself better to being used as a subsidiary in a corporate group or acquisition structure, in particular for a foreign investor who is less experienced in German corporate law.
German companies can also be organised as partnerships, including as limited partnerships with a German limited liability company as general partner. Partnerships are sometimes used by foreign investors for tax reasons and are typically treated as transparent for income tax purposes.
The rights of minority investors depend on the legal form of the company.
In the case of a German stock corporation, the rights are mainly limited to asking questions, voting in general meetings and challenging shareholder resolutions in the case of (alleged) violations of applicable corporate law. Certain corporate decisions, such as the amendment of the by-laws, or the approval of the sale of all or substantially all assets of the company, require a qualified majority of 75% of the capital present at the general meeting. Hence, a veto position to block major corporate transactions requires a participation of at least 25%. A squeeze-out is only available if a shareholder holds 95% or, subject to certain requirements, 90% of the capital.
In the case of a German limited liability company, material additional minority protection rights apply, most notably, a comprehensive right to require the managing directors to answer questions and inspect the corporate records of a company.
Certain foreign investors are required to submit an FDI filing to the MoE for investments in a German company under the German FDI screening regime (see 1.2 Regulatory Framework for FDI).
The FDI filing is typically submitted by the direct acquirer (often a special purpose vehicle for the acquisition) shortly after signing. The filing needs to contain information on the planned acquisition, the acquirer, the German target and their respective business areas.
When disposing of a German investment, this transaction may trigger a mandatory FDI filing for the acquirer (see 7.2 Criteria for Review).
Further disclosure obligations may, inter alia, result from securities law requirements (see 5.2 Securities Regulation) and regulations of financial services or insurance companies (see 8 Other Review/Approvals).
Traditionally, bank financing constituted the main financing source for German businesses, in particular in the SME sector, which plays an important role in the German economy. Banks are expected to remain important financing partners. However, the role of alternative financing sources has grown and is expected to grow further, resulting in a healthy diversification of external financing sources.
The bond market is particularly strong in Germany. In the first six months of 2020, in particular, German corporate issuers placed a record high volume in bonds, indicating the continuous access to debt capital markets.
IPOs, capital increases and equity-linked instruments are expected to catch up in the German market. Investors’ appetite for companies focusing on one industry or product (pure play) continues to be an important driver for sizeable equity capital market transactions, which was prominently underlined by the recent EUR16 billion spin-off of Siemens Energy in September 2020. This ongoing trend will presumably further increase due to shareholder activists pushing for the breaking up of conglomerates. A further push may result in an increased number of rights offerings and convertible bonds in connection with the implementation of restructurings and the refinancing transactions of German businesses due to the COVID-19 pandemic.
Primary Markets Regulation
Primary markets legislation in Germany includes the German Stock Exchange Act, the German Stock Exchange Admissions Regulation, the Prospectus Regulation and the German Securities Prospectus Act.
Secondary Markets Regulation
Secondary markets legislation includes the German Securities Trading Act (GSTA), the EU's Market Abuse Regulation (MAR) and post-admission obligations imposed by the securities exchanges.
Major holdings' notification obligations
Under the GSTA, holders of shares trading on a regulated market must notify the relevant issuer when reaching, exceeding or falling below certain voting rights thresholds. In addition to direct and indirect holdings of voting rights, financial instruments which allow the holder to access voting rights or combinations of such holdings are taken into consideration.
Failure to comply with these notification requirements may result in the loss of rights attached to the (underlying) shares, in particular voting and dividend rights, for the period during which the requirements are not met and (under certain circumstances) even for an additional period of six months.
In addition, issuers may request information from intermediaries to determine the ultimate holders of shares pursuant to the German Stock Corporation Act.
As mentioned in 3.2 Regulation of Domestic M&A Transactions, the German Securities Acquisition and Takeover Act regulates acquisitions or takeovers which reach or exceed the 30% threshold in the target's voting rights.
The German FDI screening regime applies to foreign investors structured as investment funds and to limited partners investing in investment funds (see 1.2 Regulatory Framework for FDI). Indirect shareholding is typically attributed to the fund's foreign top holding company, and in some cases, even to the fund's limited partners (investors). Limited partners who indirectly hold an investment in a German company can only avoid FDI screening if their voting rights fall below the FDI screening thresholds – 10% for critical targets and 25% otherwise (see 7.1 Applicable Regulator and Process Overview).
The German merger control regime is contained in Sections 35–43 Gesetz gegen Wettbewerbsbeschränkungen (Act against Restraints of Competition or ARC). FDI – like any other investment – must be notified to the Bundeskartellamt (Federal Cartel Office or FCO) prior to being implemented if the following jurisdictional requirements are met. On 19 January 2021, the 10th amendment to the ARC entered into force, which also provides for a few – but quite important – changes to merger control provisions.
Firstly, the transaction must amount to a "concentration", which may be triggered by various events:
Notably, in contrast to many other jurisdictions, German merger control captures the acquisition of a non-controlling minority shareholding if the threshold of 25% is reached, or even below 25% if the acquirer will have a material competitive influence over the target post-merger.
Secondly, at least one of the following two thresholds must be met.
The 10th amendment to the ACR substantially increased the domestic turnover thresholds (from EUR25 million/EUR5 million to EUR50 million/EUR17.5 million). This is intended to reduce the number of merger control notifications relating to cases which are unlikely to raise competitive concerns.
Thirdly, the concentration must not meet the jurisdictional requirements of the European merger control regulation. In this case, the transaction only requires notification to the European Commission (“one-stop shop”).
Fourthly, the concentration must have sufficient effect within Germany, which may require a more detailed analysis in the case of foreign-to-foreign mergers.
Informal pre-notification consultation with the FCO is not mandatory, but may be advisable in complex cases. After formal notification, the FCO has a “Phase I” review period of up to one month to determine whether it either unconditionally clears the transaction or opens “Phase II” proceedings due to competition concerns based on the substantive criteria set out in 6.2 Criteria for Review. Taking into account the increasing complexity of merger control proceedings, the 10th amendment to the ARC increased the Phase 2 period by one month. Pursuant to the new law, Phase 2 extends the Phase 1 review period to four additional months, ie, five months from the date of filing. This period may be extended by an additional month if the parties offer commitments, and by any further period with the parties’ consent.
The FCO is empowered to prohibit a concentration if it would significantly impede effective competition, in particular as a result of the creation or strengthening of a dominant position.
The competitive analysis normally begins with the market shares of the merging parties and their competitors. Notably, the ACR provides for a rebuttable presumption of single dominance where one undertaking has a market share of at least 40%, and collective dominance where three or fewer undertakings have an aggregated market share of at least 50%, or five or fewer undertakings have an aggregated market share of at least 66.6%. These thresholds indicate a market share level where the FCO would typically carry out a thorough investigation, as opposed to a rather straightforward clearance based merely on the parties’ low-to-moderate market shares.
Besides market shares, additional factors may be relevant for the competitive assessment, including factors such as barriers to entry and potential competition, the parties’ financial strength, and the countervailing buyer power of customers, among others.
In the context of FDIs, the FCO has, in its recent clearance decision regarding the acquisition of German-based Vossloh Locomotives GmbH by Chinese state-owned manufacturer CRRC Zhuzhou Locomotives Co Ltd, pointed out that certain particularities need to be taken into account when assessing the market position of state-owned companies originating from centrally planned economies. In particular, the FCO considered that companies ultimately controlled by the Chinese state form a large corporate group, which benefits from economies of scale and a high level of vertical integration along the supply chain. Furthermore, Chinese state-owned companies are more likely to be able and willing to engage in a low-price strategy that is not based on comparable cost advantages and may therefore damage competitive structures in the long run. In this regard, the FCO also took into account that Chinese state-owned companies have access to financial resources through subsidies from the Chinese state and loans from state banks.
In the vast majority of cases, the FCO grants an unconditional clearance within Phase I. The parties may offer commitments to address competition concerns raised by the FCO during a Phase II investigation. Various types of remedies may – depending on the specific circumstances in the individual case – provide a feasible solution from the FCO’s perspective, eg, the divestiture of a “standalone” business to a suitable purchaser, removal of links with competitors, or other remedies, such as commitments to grant access to the infrastructure, networks or key technologies. The FCO has a clear preference for divestments, leading to a direct change in the market structure as opposed to remedies regarding the future market behaviour of the merging parties.
If the FCO is able to demonstrate a significant impediment of effective competition, it can block a transaction or subject its clearance to commitments.
At the parties’ request, the Federal Minister for Economic Affairs and Energy may overrule the FCO’s prohibition decision if the anti-competitive effects of the transaction are outweighed by overriding public interest. In practice, there have very rarely been cases where the parties applied for such ministerial authorisation.
Furthermore, decisions of the FCO are subject to judicial review by the Higher Regional Court in Düsseldorf. Decisions of the Higher Regional Court in Düsseldorf can be appealed to the Federal Court of Justice.
Completion of a transaction before approval has been granted (“gun-jumping”) may lead to severe sanctions, in particular: measures implementing the transaction are provisionally invalid until the FCO or court grants the approval; the FCO may order the dissolution of the transaction or any other remedy considered necessary to restore effective competition, and it may impose fines on the undertakings (maximum 10% of an undertaking’s worldwide group turnover) and/or individuals (maximum: EUR1 million) involved.
As mentioned in 1.2 Regulatory Framework for FDI, Germany has an FDI screening regime that includes share deals above the applicable screening thresholds (10% of the voting shares for critical targets, and otherwise 25%) and asset deals.
Critical Targets (10% FDI Screening Threshold)
A 10% screening threshold and the mandatory FDI filing and clearance requirement triggered by it apply to any foreign acquisition of a German defence company and certain IT encryption companies, as well as to the acquisition of critical targets in other sectors by non-European investors (cross-sectoral screening). Such further critical targets include companies:
Furthermore, follow-up investments and attribution of voting rights raise typical transaction issues on the scope of the FDI screening.
If, in a first step, an investor acquires voting shares below 10% in a particularly security-relevant company, but subsequently exceeds the screening threshold by means of a second acquisition, the second acquisition is in the scope of the FDI screening. Furthermore, in the MoE's view, a follow-up investment leading to an increase in the shareholding of a German company above the screening threshold is reviewable in the FDI screening even if the screening threshold was already exceeded by the first investment.
Attribution of Voting Rights
In certain circumstances, voting rights held by a third party are attributed to the foreign investor. This is, in particular, the case if the investor holds at least the required 10% or 25% of the voting rights in the third party or if the investor and the third party have agreed to jointly exercise the voting rights in the German target company (voting rights agreement). The term "voting rights agreement" is likely to be interpreted rather broadly.
FDI Exemption for Greenfield Investments
On the other hand, the creation of a new German company (a so-called greenfield investment) is not subject to any restrictions under the German FDI regime. By contrast, however, the contribution of existing German businesses to a new joint venture (entity) is in the scope of the FDI screening, if the foreign investor holds voting shares above the applicable screening threshold.
FDI Filing: Clearance and Certificate of Non-objection
An FDI filing by the direct acquirer of the German target company (acquisition entity) is mandatory in the case of a critical target (10% screening threshold applies). For other acquisitions, the acquirer may voluntarily submit an application for a so-called certificate of non-objection. Such a certificate confirms that the transaction endangers neither security nor public order. In both cases, the FDI submission to the MoE must contain information on the planned acquisition, the acquirer and the German target company, as well as their respective business areas.
The FDI filing is typically submitted promptly after the conclusion of the acquisition, but can also be submitted prior to signing if the transaction parameter is sufficiently concrete.
The deadline for the MoE's initial FDI review (Phase I) is two months. The FDI certificate is deemed to have been issued after the expiry of the two-month period if the MoE does not open an investigation procedure. However, it is MoE practice to actively issue the FDI certificate or to open the in-depth screening within this period.
The deadline for the in-depth screening (Phase II) is four months from submission of the information requested by the MoE at the opening of Phase II. The MoE opens Phase II if the authorities involved have security-related concerns or require further information to assess security aspects.
The MoE may extend the four-month period by three months in the case of special factual or legal difficulties. The period may be extended by another month if the Federal Ministry of Defence claims that the transaction specifically affects German defence interests. The periods are suspended in the case of an information request by the MoE or negotiations of a mitigation agreement. All deadlines are extendable with the acquirer's and seller's consent.
Under the FDI screening standard as tightened in 2020, a ban of the acquisition or security-related orders by the MoE require that the acquisition is likely to affect public order or security in Germany, or in another EU member state, or in relation to certain EU projects or programmes. This standard is in line with the EUFIS Regulation. Under former German FDI laws, there had to be a current threat to essential German public interests.
General economic policy objectives (eg, protection against the effects of competition or strengthening German companies) do not justify a restriction or prohibition of an acquisition.
Vulnerabilities and Threats
When reviewing security and public order issues, the MoE takes into account German vulnerabilities (eg, defence projects, critical infrastructure, security of supply, digital or technological sovereignty aspects, and protection of classified information) as well as foreign threats at issue. Such foreign threats include, among other things, the control of the acquirer by a foreign government (eg, due to state funding "beyond a marginal extent"), the "serious risk" of criminal or administrative offences by the acquirer, or known spy and data security issues.
Relevance of Control
In contrast to merger control procedures, the reviewability of FDI does not depend on a notion of control. Thus, non-controlling minority investments above the FDI screening threshold can be screened by the MoE. The MoE may consider control matters on a case-by-case basis when assessing whether the screened FDI affects security or public order.
The reviewability of FDI does not generally depend on the legal form or structure of the German target company. Thus, German companies structured as partnerships or joint ventures are generally in the scope of the German FDI screening. In an FDI screening, the MoE may, for instance, consider whether the involvement of a German company in a joint venture might mitigate security risks to some extent.
If the foreign investment at issue is likely to endanger security or public order, the MoE may request remedies and/or commitments to address these concerns. The MoE has broad discretion when requesting such measures in co-ordination with the other involved authorities. The MoE's leeway regarding suitable remedies is not limited by a list of measures. The request is typically addressed to both the acquirer(s) and the German target, and in some cases, also to the sell-side.
The MoE typically tailors the request to the vulnerabilities and threats at issue. Typical requested remedies include, among others:
If the MoE or any of the other involved ministries or authorities have security concerns, they typically aim for the conclusion of a so-called mitigation agreement. In some cases, the MoE may also request unilateral commitments of the buy-side and/or the target.
The initial draft of a mitigation agreement is normally provided by the MoE. In many cases, there is a certain amount of room for negotiation on contractual commitments. The MoE typically insists that it may enforce key commitments against the involved parties and that non-compliance with these commitments will trigger contractual penalties.
The MoE has broad discretion when deciding on enforcement measures under the FDI screening regime and typically requests security-related remedies under a mitigation agreement in the first step. As a last resort where there are security or public order concerns, the German government may fully or partially block FDI by way of a prohibition decision (see the paragraph below on involved ministries). So far, the German government has only prohibited a few transactions in its screening practice, but it has also discouraged some transactions prior to a decision. In 2020, two Chinese investments in the German satellite and 5G technology company IMST and the metals trader PPM Pure Metals failed due to security concerns in the FDI screening process.
Government Decision Process
In the sector-specific screening (defence and certain IT encryption companies), the MoE may issue a transaction ban or security-related orders in agreement with the Federal Foreign Office, the Federal Ministry of the Interior and the Federal Ministry of Defence. For all other sectors, the prohibition of a transaction requires the consent of the Federal Government (full cabinet including chancellor and ministers), and security-related orders require the approval of the Federal Foreign Office, the Federal Ministry of the Interior, the Federal Ministry of Defence and the Federal Ministry of Finance. In case of doubt, the Federal Government usually involves the full cabinet for precautionary reasons.
Investor's Appeal against MoE's FDI Decisions
The foreign investor and other affected transaction parties may generally challenge any binding decision of the MoE in the FDI screening proceedings in court. So far, however, there has been no case law on FDI screening matters. Such litigation would typically take several years, which presumably is not an attractive option for most investors.
Foreign investors may sign acquisition agreements for German target companies prior to obtaining FDI approval. However, acquisitions subject to the mandatory FDI filing requirement may not be completed prior to the MoE's FDI clearance. As long as no FDI clearance has been obtained, the seller is not allowed to grant voting rights or profit entitlements, nor disclose sensitive information about the target company to the acquirer. A breach of these requirements (so-called "gun-jumping") may trigger criminal sanctions and administrative fines, including for the foreign investors and their investment entities involved.
The acquisition of companies active in certain industry sectors may be subject to an additional regulatory review or approval process. Specifically, the acquisition of a company in the financial industry is subject to a prudential assessment by the competent regulatory authority, which may object to the transaction within a certain period after the purchaser has filed a notification with the authorities.
Anyone who intends to acquire a qualifying holding in certain regulated entities has to notify such intention to the competent regulatory authority in Germany (shareholder control procedure). The types of entities that may trigger a shareholder control procedure include:
Similar provisions apply to entities operating a stock exchange, central counterparties (CCPs) and central securities depositories (CSDs).
This prudential assessment procedure may also be triggered by acquisitions of companies outside the financial sector that hold participations in regulated entities. These transactions may qualify as indirect acquisition of a qualifying holding in such regulated entity. Many German corporate groups have in fact established licensed entities, such as captive insurers, pension funds or group-internal leasing or factoring companies. It is part of the due diligence process to identify such regulated subsidiaries and participations of the target company in order to initiate the prudential review procedure in due time before closing.
Objective of the Prudential Assessment
The purpose of the notification requirement is to ensure that the competent authority has adequate information about changes in the direct and indirect shareholdings of entities that are subject to financial regulation. On the one hand, it is to prevent cash flows from illegal activities into the financial sector (prevention of money laundering and terrorist financing). On the other hand, it is to ensure the stability and soundness of financial institutions in order to protect the clients and creditors of such institution (eg, depositors or policyholders), as well as the stability of the financial system as a whole.
The notification by the purchaser allows the competent authorities to assess the suitability and the financial soundness of the purchaser. If the competent authority concludes, for example, that the prospective shareholder does not comply with fit-and-proper requirements or is otherwise not capable to ensure the sound and prudent management of the regulated entity, the competent authority may object to the acquisition. The same applies if, specifically in a third country context, there is reason to believe that the transaction may result in a structure that makes it impossible to exercise effective supervision and to effectively exchange information between regulatory authorities.
A qualifying holding is the direct or indirect holding in the regulated entity which represents 10% or more of the capital or of the voting rights, or which enables it to exercise a significant influence over the management of the regulated entity. An indirect qualifying holding can result from the "control criterion" (holding the majority of the voting rights or otherwise controlling the holder of the qualifying holding) or the "multiplication criterion" (multiplied shareholding down the corporate chain of 10% or more). In a corporate group, all entities having direct or indirect control are subject to prudential assessment.
Notification Requirements and Assessment Procedure
The following transactions relating to changes in the shareholder structure trigger the notification requirement:
The notification requirement is triggered by the specific intention to conduct one of the three transactions listed directly above. In M&A transactions, it is common practice in Germany to file the notification within a few days after the corporate decision-making process is completed and all board resolutions have been passed. If not yet available at that time, supporting documentation has to be filed as soon as possible at a later stage.
The documentation to be filed with the competent authorities varies depending on the target stake in the regulated entity. Specifically in the case of an acquisition of a majority stake, but also in the other cases listed here, the documentation requirements are quite comprehensive. These include information on the purchaser, its management, the financing structure and the strategy followed by the acquisition. Certain exceptions and waivers may apply in specific circumstances.
The competent authority has 60 working days to review the notification. This 60 working-day period, which may be subject to an extension by the competent authority, starts as soon as the competent authority has received and confirmed the complete filing, including all supporting documentation. Due to additional information requests by the authority, the entire assessment period can be longer in practice (typically between three and 12 months). On the other hand, the competent authority may issue a "non-objection letter" if and when it is satisfied that no objection should be raised.
Competent Regulatory Authority and Completion of Prudential Assessment
In most cases, the competent authority for the shareholder control procedure is the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin). For certain regulated entities, the notification must also be filed with the German Central Bank (Deutsche Bundesbank). Since the introduction of the Single Supervisory Mechanism, the European Central Bank (ECB) is the competent authority for credit institutions regulated under the EU Capital Requirements Regulation (Regulation (EU) 575/2013). While the notification must also be filed with BaFin in this case, the prudential assessment of the acquisition is completed by a formal decision of the ECB.
The purchaser may not close the transaction before the 60 working-day assessment period for the prudential assessment has lapsed or the competent authority has provided the purchaser with a non-objection letter (regulatory clearance). Therefore, regulatory clearance is a closing condition in the transaction documentation (sale and purchase agreement). That closing condition is typically supported by an undertaking by the purchaser to perform certain actions, or to enter into commitments to the competent regulatory authority to ensure that regulatory clearance will be granted.
German tax-resident corporations are subject to German taxation in terms of their worldwide income. Foreign tax-resident corporations are subject to German taxation if and to the extent income can be attributed to German permanent establishments/representatives or with other German-source income (subject to limitations by double-tax treaties).
German corporate income tax is levied at a tax rate of 15% (plus 5.5% solidarity surcharge) with a preferential regime for dividends/capital gains (95% tax exempt).
Corporations with business activities in Germany are also subject to trade tax. Basis is the net income plus/minus certain additions/deductions. The tax rate depends on the multiplier of the local municipalities at the place of business. Effective rates range from 7–17%.
(Deemed) trading partnerships' profits are subject to (corporate) income tax at the level of the partners. For partners subject to corporate income tax, see above. For individuals, the income tax rate is up to 47.475%, plus church tax, if any; there is a preferential regime for dividends/capital gains (26.375% flat or 40% tax exempt).
Profits of (deemed) trading partnerships are also subject to trade tax at the level of the partnership if and to the extent that business activities are performed in Germany. Trade tax can be credited against the income tax of individuals (but not corporations) up to a maximum trade tax rate of 14%.
Dividends distributed (including hidden profit distribution) are subject to withholding tax at a rate of 26.375%.
Interest payments are generally not subject to withholding tax except for interest paid by banks/financial institutions and on certain instruments such as convertibles or profit participation rights and in crowd-lending situations. If interest payments lead to limited tax liability of foreign investors in Germany (eg, if capital assets are secured by domestic real estate), tax offices can additionally order a withholding.
German tax-resident investors can credit withholding tax against their final tax liability within their tax assessment. Foreign tax-resident corporations can request a refund of two fifths of the taxes withheld at the Federal Central Tax Office (Bundeszentralamt für Steuern). Furthermore, foreign tax-residents may be entitled to a full or partial refund under an applicable double-taxation treaty or the EU Parent-Subsidiary Directive. Refunds are, however, excluded under the strict German anti-treaty/directive-shopping limitations, which are currently under discussion and likely to be amended based on the ECJ's decisions considering these limitations to be in violation of EU law.
Usual tax-planning strategies for high-tax jurisdictions such as Germany, eg, utilising tax deductions for interest and/or royalty payments or loss-carryforwards, are subject to various limitations, in particular:
Parents and subsidiaries can consolidate their profits and losses for corporate income and trade tax purposes by forming a tax group (Organschaft). The controlled subsidiary must enter into a profit-and-loss transfer agreement (PLTA) with a controlling parent. Such PLTA must be entered into for a minimum duration of five years and must actually be performed (profits transferred to and losses compensated by the controlling parent) throughout this period.
Capital gains received by foreign corporations from:
Capital gains received by foreign individuals from:
Transactions in which real estate is transferred are subject to German real estate transfer tax (RETT). RETT also applies if 95% or more in a corporation or a partnership with German real estate are directly or indirectly transferred to/unified in the hand of one acquirer. Real estate of partnerships can also become subject to RETT if 95% or more of the interest in such partnership is transferred within five years to new partners (turnover provision). There are ongoing discussions to reduce the relevant threshold to 90%, to increase the relevant period to ten years and to apply the turnover provision also to corporations. RETT rates range from 3.5–6.5% (depending on the German state in which the real estate is located). Share deals are in general exempt from VAT, but the seller has the right to opt for VAT. Asset deals are generally subject to VAT unless they qualify as a transfer of going concern (Geschäftsveräußerung im Ganzen) in which case, the transfer is not subject to VAT at all. There are no stamp taxes in Germany.
German tax law contains various anti-avoidance rules, in particular:
German employment law is strongly regulated and based on a variety of sources, including statutory law as well as collective bargaining agreements and agreements with works councils.
Statutory law is highly dynamic and under constant revision by jurisdiction and legislation. It generally provides for strong protection of employees (eg, termination protection, protection during maternity and parental leave, continued compensation in case of an illness, minimum vacation, minimum compensation, etc) and has a tendency to be interpreted in an employee-friendly manner.
The trade unions and works councils exert a strong influence through collective bargaining and works council agreements. Consequently, the relationship with the unions and/or works councils can be crucial for business.
Principally, employing someone is simple; termination of employment is rather difficult. There is a distinction between employees and freelancers, however, the latter of which are not subject to employee protection laws and enjoy less legal protection.
Compensation for employees in Germany commonly consists of several elements, ie, fixed salary, variable compensation and additional compensation elements. Additional compensation components such as Christmas or vacation bonuses, non-cash compensation (eg, company car), capital-forming payments or other benefits, like a company pension scheme, are in principle discretionary.
In general, the compensation received by employees must fulfil the prerequisites of the German Minimum Wage Act.
As a general rule, the compensation of employees should not be affected by an M&A transaction. An acquirer would, however, typically consider whether existing compensation plans should be amended as part of the integration process, what the legal requirements for such amendments are and, furthermore, whether there are any employment-related liabilities pertaining to the period prior to acquisition (eg, accrued pension and similar liabilities), which would reduce the purchase price.
The legal consequences of an M&A transaction for the employees depend, inter alia, on the type of transaction (ie, in particular, whether it is a share or asset deal).
In a share transaction, the identity of the employer remains unchanged. A share deal will neither affect existing employment relationships nor any of the rights and duties under existing labour contracts. No specific employees' or employee representatives' co-determination rights (beyond information rights) exist. This generally also applies to other types of investment transactions.
By contrast, an asset deal will often trigger a so-called transfer of undertakings. As a consequence, all employment contracts allocated to the transferring (part of a) business would transfer automatically to the acquiring entity by operation of law, together with all rights and obligations under existing individual employment, collective bargaining and works council agreements. Each employee may object to the transfer of employment within one month, upon receipt of a letter describing in detail the transaction and its consequences for the employees. In this event, the contract of employment remains with the seller, but may in principle be terminated.
Transfer of Undertakings
While a transfer of undertakings as such is not subject to any co-determination rights of the works council (beyond information obligations), any operational change associated with the transfer of undertakings (eg, split of a business or other significant reorganisation), results in a right of the seller's works council to negotiate a compromise of interests and social plan, which may impact the timing and costs associated with the implementation of the operational change and thus the transaction.
Intellectual property (IP) held by the German target company is a relevant aspect in the FDI screening process (see 1.2 Regulatory Framework for FDI). Still, under current German black-letter FDI laws, IP rights and related critical technologies are not specifically addressed.
It is a hot topic whether and to what extent the German FDI screening should also aim to protect critical technologies and Germany's digital and technological sovereignty. As further specified in 2.1 Foreign Direct Investment in the Current Climate, the German government has already announced that further hi-tech areas, including semiconductors, robotics, artificial intelligence, and bio and quantum technologies, should be specifically protected by its FDI screening regime.
The protection of innovation and creative works has a strong tradition in Germany. German law covers all major internationally recognised types of intellectual property rights, in particular, patents, utility models, design rights, trade marks, copyrights, database rights, as well as rights in trade secrets and know-how. Germany’s judiciary is known for its efficiency in deciding IP disputes, with a number of courts having built up specific subject-matter expertise (eg, the courts in Düsseldorf, Mannheim and Munich for patent infringement actions).
Stronger Trade Secret Protection with New Requirements
Based on a unifying EU directive, Germany’s protection of trade secrets has recently been strengthened through a new dedicated law. Under the previous legal regime, trade secret protection in Germany only required the intent of the "trade secret owner" to keep the relevant piece of information secret. Now it is necessary that reasonable measures to protect the information are actually put in place and documented (eg, access controls, need-to-know principle, watermarks, non-disclosure agreements). In return, the new regime gives access to broader remedies similar to those available in patent and trade mark law. The courts can now also protect trade secrets better against disclosure in enforcement proceedings.
Participation of Inventors, Content Creators and Software Developers
With respect to inventors, content creators (such as journalists, designers or videographers) and software developers, German law provides differentiated rules.
The EU General Data Protection Regulation (GDPR) came into effect on 25 May 2018 and regulates data processing in Germany and other EU member states. Depending on the circumstances of the data processing, the GDPR can extend to data processing by foreign investors. Furthermore, there are various other German data protection laws, including sector-specific rules (eg, healthcare sector).
The German data protection authorities can issue substantial fines for data breaches. According to their fining guidelines, the base fine for companies with an annual turnover in the EUR100–200 million range is approximately EUR415,000, and this can be multiplied by one to 12 times, depending on the degree of severity of the data breach. An even higher multiplier can apply to very severe data breaches.
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