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 investment (FDI) 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 an FDI screening regime in 2009, having already introduced one in defence matters in 2004. The German Federal Ministry for Economic Affairs and Climate Action (MoE) carries out the FDI screenings and involves other ministries and authorities. A sector-specific screening applies for the defence (including items on the export control list) 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 and the Foreign Trade Ordinance, as well as in certain specific laws such as those on critical infrastructures. Certain aspects are further specified in a general ruling and the regulatory guidelines of the MoE.
Reviewable Foreign Investments
In the defence (including items on the export control list) 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 reaching or exceeding 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 reaching or exceeding applicable screening thresholds. A 10% or 20% (depending on the target’s activities) 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, media and other particularly sensitive businesses, such as listed critical technologies in the areas of aerospace, artificial intelligence, quantum mechanics, robotics, and semiconductors. 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 German FDI screening.
Follow-up investments by existing investors above the applicable 10/20/25% entry threshold are reviewable if the cumulated post-closing voting rights share reaches or exceeds subsequent thresholds of (20%, 25%), 40%, 50% or 75%.
FDI Filing and Clearance Requirement
An FDI filing and clearance requirement applies to any (particularly sensitive) transactions subject to the lower 10% or 20% entry screening thresholds. 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 the exercise of voting rights in the target company and information-sharing of particularly sensitive data of the target.
In recent years, Germany tightened its FDI screening regime. Currently, a further tightening of the FDI regime is being discussed.
Furthermore, in light of the COVID-19 pandemic, Germany adopted several other (legislative) measures in recent years.
2021 Tightening of German FDI Screening
In May 2021, new categories of critical targets with mandatory filing and clearance requirements and a 20% entry review threshold were introduced. These categories are mainly based on critical technologies and inputs listed in the EU Foreign Investment Screening Regulation as relevant screening factors. From this, the MoE has identified specific activities and products of German targets as triggers of filing and clearance requirements. The new sensitive categories include developing or manufacturing of certain AI-based technologies for cyber-attacks or cybersurveillance, certain industrial robots including software and technology, a range of semiconductors, certain dual-use goods, goods for 3D printing, and certain critical components for 5G infrastructure.
The number of MoE FDI screening procedures has risen steeply in recent years (from approximately 40 in 2016, 65 in 2017, 80 in 2018, 105 in 2019, 160 in 2020, to more than 300 in 2021). In 2022, the German authorities intervened in several cases under the FDI regime, including several Chinese investments in the semiconductor and infrastructure sectors, and with respect to a German subsidiary of Gazprom group that operates critical gas infrastructure.
Measures in Response to the COVID-19 Pandemic
Germany adopted various (legislative) measures in light of the COVID-19 pandemic in recent years. These include 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, which granted stabilisation support until mid-2022, 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 will 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.
Statutory Mergers and Tender Offers
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.
Demergers and Spin-Offs
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) and as of presumably Q4 2023 a foreign subsidies clearance for major concentrations. 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.
German stock corporation
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 must be elected by employees (or one half, if there are more than 2,000 employees).
European stock corporation
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.
German partnership limited by shares
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.
German limited liability company
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 a 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 result from securities law requirements (see 5.2 Securities Regulation) and regulations of financial services or insurance companies (see 8. Other Reviews/Approvals).
Traditionally, bank financing constituted the main financing source for German businesses, especially 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.
In 2022, the capital markets were heavily affected by the Russian invasion of Ukraine and the ongoing Russia–Ukraine war and the related impact on the energy markets as well as other geopolitical tensions and unfavourable economic conditions. While the bond market remained open for issuer, following a relatively short slowdown upon the outbreak of the Russia–Ukraine war, this led to a sharp decline of activity in the equity markets. The very successful Porsche IPO in the third quarter of 2022 was a very remarkable exception but could not break the ice either.
However, the pipeline for 2023 and beyond is very promising. Many IPO candidates postponed but did not cancel their IPO plans entirely. An additional push may result from sponsors seeking an IPO exit for their portfolio companies. Also, for many SPACs, the period during which they are permitted to complete a business combination is set to expire in 2023. Consequently, 2023 could see more de-SPAC transactions, some of which are already in the pipeline. Furthermore, the high investment and financing demand associated with the energy transformation coupled with investors’ appetite and support from politics may fuel the capital markets in the coming years.
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% or 20% 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. 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.
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. Phase II extends the Phase I review period by four additional months, ie, a total of 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. The ARC 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 aggregate market share of at least 50%, or five or fewer undertakings have an aggregate 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 closeness of competition between the merging parties, 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 pointed out in its clearance decision (04/2020), regarding the acquisition of German-based Vossloh Locomotives GmbH by Chinese state-owned manufacturer CRRC Zhuzhou Locomotives Co Ltd, 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 advantages to the economy as a whole resulting from the concentration or 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:
As mentioned in 1.2 Regulatory Framework for FDI, Germany has an FDI screening regime that includes share deals at or above the applicable screening thresholds (10% or 20% of the voting shares for critical targets, otherwise 25%) and equivalent asset deals.
Critical Targets (10% or 20% 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 (including items on the export control list) 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 with a 10% screening threshold include companies:
In addition, a new 20% screening threshold and the mandatory FDI filing and clearance requirement triggered by it apply to the following critical targets, among others:
Furthermore, follow-up investments and attribution of voting rights raise typical transaction issues on the scope of the FDI screening.
Follow-up investment leading to an increase in the shareholding of a German company at or above the applicable entry screening threshold (10%, 20% or 25%) is reviewable in the FDI screening if the cumulated post-closing voting rights share meets or exceeds subsequent thresholds of (20%, 25%), 40%, 50% or 75%.
Clearance Exemption for Public Acquisitions
Acquisitions of publicly listed critical targets via a stock exchange must be notified like other acquisitions, but may be closed prior to FDI clearance. However, the parties must observe the gun-jumping prohibitions until FDI clearance has been issued (see 7.4 Enforcement).
Attribution of Voting Rights and Atypical Acquisitions
In certain circumstances, voting rights held by a third party are attributed to a foreign investor. This is, in particular, the case if the investor holds at least the required 10%, 20% 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 and includes agreements concluded post-closing.
In addition, the FDI regime extends to transactions in which the investor obtains other forms of effective participation in the target’s management, ie, if the purchaser (i) acquires voting rights; (ii) this is accompanied by special rights (eg, additional board seats/majorities or veto rights for strategic decisions); and (iii) this provides a level of control comparable to that provided by the respective applicable threshold of voting rights.
FDI Exemption for Greenfield Investments
On the other hand, the creation of a new German company (a so-called greenfield investment) is not (yet) subject to any restrictions under the German FDI regime. Potential extensions of the FDI regime are under discussion. 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% or 20% 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 parameters are 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 the negotiation of a mitigation agreement. All deadlines are extendable with the acquirer’s and seller’s consent.
Under the FDI screening standard, 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 EU Foreign Investment Screening 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 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 likely 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:
If the MoE or any of the other involved ministries or authorities have security concerns, they tended to aim for the conclusion of a so-called mitigation agreement. In some cases, the MoE may also request unilateral commitments on the part of the buy-side and/or the target. More recently, the MoE rather implemented such remedies in an administrative order.
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. In case of an administrative order, the MoE typically provides an opportunity for comments based on a draft of the remedies.
The MoE has broad discretion when deciding on enforcement measures under the FDI screening regime and often requests security-related remedies under a mitigation agreement or an administrative order 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 the Government’s Decision Process), which may require unwinding an already closed transaction. 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 2022, the application of the FDI screening rules by the German authorities tightened. For example, two Chinese investments in the semiconductor sector 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 the chancellor and ministers), and security-related orders require the approval of the Federal Foreign Office, the Federal Ministry of the Interior and the Federal Ministry of Defence, and consultation with the Federal Ministry of Finance. In case of doubt, the federal government usually involves the full cabinet for precautionary reasons.
Investor’s Appeal Against the 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. An injunction proceeding aiming for timely FDI clearance in relation to a proposed Chinese semiconductor investment was unsuccessful in front of the Berlin courts in early 2022. Further FDI-related litigation is pending in court. So far, however, there has been no case law on issued FDI-blocking decisions.
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, it is prohibited to exercise voting rights or to disclose certain 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 the 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 an 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, this prevents cash flow from illegal activities into the financial sector (prevention of money laundering and terrorist financing). On the other hand, this ensures the stability and soundness of financial institutions in order to protect the clients and creditors of such institutions (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 of ensuring 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 a direct or indirect holding in the regulated entity which represents 10% or more of the capital or of the voting rights, or which enables the holder to exercise 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 of the corporate decision-making process being completed and of all board resolutions having 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 completed filing, including all supporting documentation. Due to additional information requests by the authority, the entire assessment period can take 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 make 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 rate of 15% (plus 5.5% solidarity surcharge) with a preferential regime for dividends/capital gains (95% tax exempt).
Corporations with German permanent establishments are also subject to trade tax. The 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% to approximately 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 rate 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 the 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. All refunds are, however, subject to strict German anti-treaty/directive-shopping limitations, and relief will only be possible to the extent that one of the following conditions is met:
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:
German tax-resident 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.
Since 2022, Germany allows certain partnerships to be treated “as” a corporation for corporate income tax purposes based on a “check the box” system.
Capital gains received by foreign corporations from:
Capital gains received by foreign individuals from:
Transactions in which real estate is transferred are subject to real estate transfer tax (RETT). RETT also applies if 90% 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 or corporations can also become subject to RETT if 90% or more of the interest in such partnership or the shares in such corporation are transferred within ten years to new partners/shareholders (turnover provision), whereby the turnover provision for corporations provides for an exemption for stock exchange transactions in shares of listed companies within the EU/EEA. RETT rates range from 3.5% to 6.5% (depending on the 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 a 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 includes 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) 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 more difficult. Each employee has an employment contract, ie, employment at will does not exist in Germany. There is a distinction between employees and freelancers, however – the latter 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.
The compensation received by employees must fulfil the prerequisites of the German Minimum Wage Act, whereby the minimum wage currently amounts to EUR12.00 per hour.
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 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 the 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 the 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. Recent amendments have added mandatory FDI filing and clearance requirements for hi-tech areas, including semiconductors, robotics, artificial intelligence, and quantum technologies (see 7.1 Applicable Regulator and Process Overview). The German government has also been increasingly applying Germany’s and Europe’s digital and technological sovereignty as substantive screening consideration.
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 been strengthened through a dedicated law. Trade secret protection and trade secret licensing have increasingly become a focal point of legal reviews in the context of investments. While the new law provides for additional legal protection, the identification of relevant trade secrets remains a crucial practical precondition for effective trade secret protection and for an appropriate assessment of trade-secret-related risks in M&A transactions.
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.
There are no significant issues not covered elsewhere in this chapter.
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Tightening of the German FDI Screening
Uncertainties and valuation volatilities triggered by Russia’s invasion of Ukraine as well as the geopolitical tensions continued to impact the M&A market throughout 2022 and underlined foreign direct investment (FDI) screening as a hot topic in Germany, the EU and globally.
Increased scrutiny of FDI
Fundamental changes in geopolitical circumstances and global trade have not only materialised in trade conflicts, tariffs, sanctions and failed negotiations of trade agreements – the EU and Germany have also recalibrated their perception of threats from state-supported investments and industrial strategies, as well as the vulnerability of certain sectors considering European digital and technological sovereignty. These developments have led to increased attention being paid to FDI and related security and public policy risks.
The earlier COVID-19 pandemic and Russia’s invasion of Ukraine and the market fluctuations triggered, accelerated this trend. FDI screening remains a major issue in many transactions, including in Germany, as a result of which the German government extended and tightened the FDI screening regime several times in recent years.
Germany’s FDI screening
Germany introduced an FDI screening regime more than a decade ago, and even longer ago with regard to defence deals. Under current FDI laws, the German FDI screening applies across all sectors and to direct and indirect acquisitions of 10%, 20% or 25% of voting rights depending on the sector (no dilution up the acquisition chain) by non-EU/EFTA acquirers, or any non-German acquirer in the defence sector and certain related areas (eg, IT encryption of classified information). A 10% screening threshold applies to certain particularly security-relevant transactions, including defence and critical infrastructure deals. Follow-up investments by already invested investors above the applicable entry threshold (10%, 20% or 25%) are reviewable if the cumulated post-closing voting rights share meets or exceeds subsequent thresholds. For example, in the case of the entry threshold 10%, the further thresholds are 20%, 25%, 40%, 50% and 75%.
The number of formal FDI screening procedures employed by the German Federal Ministry for Economic Affairs and Climate Action (MoE) has risen steeply in recent years, ie the number of procedures has increased more than sevenfold since 2016 to more than 300 in 2021. While the vast majority of notified transactions do not raise regulatory concerns or undergo in-depth scrutiny, and ex officio formal investigation procedures remain rare, the number of formal screening procedures continues to rise. The historically rather small team at the MoE, as well as other ministries and authorities dealing with FDI screening, has been expanded in recent years and is expected to grow further.
Tightening of the German FDI screening regime
In 2020 and 2021, Germany tightened its FDI screening regime several times. Firstly, the COVID-19 pandemic triggered tightening of the screening of health sector deals. Secondly, FDI screening was further tightened, in particular by an extended FDI clearance requirement for listed critical infrastructure, sensitive technologies and other strategic targets. A further tightening of German FDI screening is in discussion.
COVID-19 and wider screening of health sector investments
In light of the COVID-19 pandemic, the German government intensified the FDI screening of health sector transactions by listing further segments of health service providers as critical targets. The extended list now also captures developers and producers of medicinal products (and their starting materials and active substances), personal protective equipment, medical devices and diagnostics for highly contagious diseases.
With its new focus on health sector transactions, the German government followed the path paved by the European Commission. In its March 2020 Communication on COVID-19 and European FDI screening mechanisms, the European Commission called upon EU member states to use national FDI screening tools to the full extent and, if none presently exist in the respective EU member state, to establish such regimes in order to prevent a sell-off of strategic EU assets, in particular healthcare assets, technologies and infrastructure. The Communication emphasises, for example, that EU interests may dictate that in transactions in the healthcare sector, providers undertake supply commitments extending beyond the anticipated needs of the host member state.
Extended FDI clearance requirement and related updates
Following the health sector FDI tightening, Germany continued to tighten its FDI screening in 2020. The key pillar of this reform is a wider clearance requirement for strategic targets. FDI clearance is now required for non-EU/EFTA acquisitions of German companies in the area of critical infrastructures (energy, water, nutrition, IT/TC, finance and insurance, health, transport and traffic), certain sector-specific software, media companies with broad reach, critical services for public communications infrastructure, and the health sector targets set out above. The statutory filing and clearance requirement is complemented by criminally sanctioned gun-jumping prohibitions. As long as no FDI clearance has been obtained, the seller is neither allowed to exercise voting rights nor to disclose sensitive information on the target and its infrastructure to the acquirer. In 2021, the German government exempted certain stock exchange transactions from the requirement to obtain clearance prior to execution.
Although the cross-border M&A market is used to establish clean teams and other arrangements to protect competitively sensitive information, eg, in the merger law context, the FDI gun-jumping rules on the sharing of sensitive information pose a new challenge. Whereas the transaction parties are typically well versed in the assessment of sensitive commercial information, this might be less true as regards the sensitivity of information in view of public order and security considerations.
Moreover, the 2020 reform fixed the screening periods for the first time in a parliamentary act (the Foreign Trade Act). The screening periods are now set uniformly for the defence and other sectors. The deadline for the initial FDI review (Phase I) is two months. 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 involved authorities have security-related concerns or require further information to assess security aspects. Depending on the circumstances, the MoE may extend the Phase II screening by three or – in the defence sector – by four months. The periods are suspended in the case of an information request by the MoE or negotiation of a mitigation agreement. All deadlines are extendable with the buyer’s and seller’s consent.
Tightened scrutiny regarding critical technologies and technological sovereignty
A hot topic is whether and to what extent German FDI screening should also aim to protect Germany’s technological sovereignty. However, the legal test remains “security and public order”, not any industrial strategy or policy consideration.
Digital sovereignty was a political leitmotif of the German government in recent years. For example, the MoE formulated a concept of technological sovereignty in its Industrial Strategy 2030. Technological sovereignty was enshrined in law as one of the purposes of the German Economic Stabilisation Fund set up in 2020, ie, in the context of state holdings in companies. Furthermore, the EU FDI Screening Regulation (Regulation (EU) 2019/452; EUFIS Regulation) refers to critical technologies as a relevant factor that can be taken into account in FDI screenings.
In this context, the German government extended the scope of mandatory notifications and clearance requirements in relation to hi-tech areas in 2021. The new, listed sensitive areas triggering a mandatory filing include, among other things, certain AI and quantum mechanics-based goods, autonomous motor/aerial vehicles, semiconductors, industrial robots, 5G-related goods and additive manufacturing technologies. Moreover, the German government expanded the scope of the sector-specific FDI regime. This regime now covers, among others, targets that develop, manufacture or modify any military or defence technologies and goods listed in Part I Chapter A of the German Export List, as well as further defence technologies subject to classified patents and utility models.
German FDI screening standard
In line with most other FDI screening regimes, the German screening standard of “security and public order” is rather generic and leaves some regulatory leeway for the MoE. The recent amendments of the standard have reinforced this regulatory trend. The screening criterion of a “likely effect” on security or public order has replaced the “actual and serious threat” that was previously required. Thus, the MoE’s margin of discretion has increased considerably.
Furthermore, the protected interest “public order or security” is no longer limited to the German perspective. The scope of the screening is extended to the security interests of other EU member states and certain EU projects and programmes. Under former FDI laws, there had to be a current threat to essential (German) public interests. General economic policy objectives, such as the mere strengthening of German companies, still do not justify the restriction or prohibition of an acquisition.
In any case, investments in security-sensitive sectors and businesses (eg, defence, critical infrastructure and security-cleared businesses) as well as certain types of investors (eg, state-financed investors following particular state industrial policy) tend to be scrutinised more intensely by the MoE. The MoE considers (German) vulnerabilities as well as (foreign) threats when screening FDI.
Vulnerabilities: critical infrastructure and sensitive targets
Although the German FDI screening is not limited to specific sectors or industries, it is not carried out across all sectors with the same regulatory intensity.
The defence sector has traditionally been at the core of (national) security considerations. In addition to this, Germany has extended the protection of its critical infrastructure in recent years. Current laws protect a broad range of infrastructures in many sectors, including energy, water, IT/TC, health, finance and insurance, as well as transport and traffic. For each critical sector, German laws on critical infrastructure define the installations and systems (or parts thereof) belonging to the critical infrastructure, and the relevant thresholds. Those thresholds are generally derived by assuming that infrastructures supplying at least 500,000 persons are to be considered critical.
Software providers creating or amending sector-specific software for the operation of critical infrastructure are also considered particularly critical. It is important to note that software is normally only covered if it has been specifically developed or modified for critical infrastructure use.
The German FDI screening regime historically had no specific indication of what acquirer-related factors were considered (potentially) critical. This changed in 2020. The German FDI laws now specify that the MoE may, in particular, consider whether the acquirer is controlled by a foreign government (eg, due to state funding “beyond a marginal extent”) as well as the “serious risk” of criminal or administrative offences by the acquirer. Such factors have also been emphasised by the EU Foreign Investment Screening Regulation. The German authorities may also use specific guidance for investors from certain countries on a case-by-case basis. For example, the German government is currently working on its so-called China strategy, which is envisaged to include considerations in relation to Chinese investments.
The MoE has considerable leeway when assessing acquirer-related risks for security or public order; however, the mere fact that a foreign state is involved in a certain FDI (eg, via a state fund) does not mean that the MoE will necessarily intervene.
German FDI interventions in recent years
The publicly known MoE interventions in the past five years underline that interventions typically occur in scenarios where both a German vulnerability and a perceived foreign threat are involved. This may be illustrated by a brief analysis of recent interventions related to Chinese investment.
In summer 2018, there were considerable political objections against the takeover of the Leifeld Metal Spinning AG by the Chinese Yantai Taihai group. Leifeld Metal Spinning AG develops and manufactures machine tools for non-cutting, chipless metal forming, including for the nuclear sector. The transaction parties abandoned the transaction before the MoE formally prohibited the acquisition. The German government had already taken a decision to this effect.
Shortly before, the German government had prevented the state-owned State Grid Corporation of China from investing in the grid operator 50Hertz. The planned acquisition of 20% of the voting rights remained below the then-applicable FDI screening threshold. Instead, the German Federal State indirectly (by an investment of the state-owned bank KfW) acquired the shareholding in 50Hertz.
In December 2020, the German government approved a transaction ban regarding the acquisition of the German satellite and 5G technology company IMST GmbH by the Chinese state-owned China Aerospace Science and Industry Corporation.
In 2022, the German government blocked the acquisition of the medical device producer Heyer Medical by the Chinese Aeonmed group (April), the acquisition of Elmos Semiconductor SE by the Chinese Sai Microelectronics group and a further Chinese investment in the German semiconductor company ERS Electronics (November), and limited a proposed 35% investment by the shipping and logistics company China Ocean Shipping Company (COSCO) in the German container terminal operator HHLA Container Terminal Tollerort GmbH to a slightly below 25% shareholding investment in a partial blocking decision (October). Moreover, the business combination between the German semiconductor company Siltronic AG and the Taiwan-based GlobalWafers Co Ltd failed due to security-related concerns in the FDI screening in early 2022.
In addition, it can be assumed that further transactions have been discouraged due to the security concerns of the German authorities.
EU co-operation mechanism under the EUFIS Regulation
At EU level, the EU Foreign Investment Screening Regulation provides a framework for FDI screening by the EU member states. The EUFIS Regulation became fully applicable on 11 October 2020. It does not create a separate EU investment screening procedure, but rather, it leaves it up to the member states whether they screen FDI. If member states carry out FDI screening, they must comply with the procedural rules and certain minimum standards of the EUFIS Regulation, including on transparency of rules and procedures, non-discrimination among foreign investors, confidentiality of information exchanged, recourse against decisions, and measures to identify and prevent circumvention. The EUFIS Regulation introduced a co-operation mechanism for the exchange of information between member states and the European Commission, including the right to comment. In 2021, the European Commission was involved in more than 400 FDI screenings under this mechanism.
If a foreign investment in a member state does not undergo screening, other member states may comment and the Commission may provide an opinion within 15 months of completion of the foreign investment. Member states have the last word on whether a specific investment, within the scope of their respective screening scheme, should be allowed or not.
Neither the EUFIS Regulation nor German FDI laws confine the regulatory toolbox in response to transactions that affect security or public order. If required, the German government may, for example, fully or partially ban the transaction or unwind a completed transaction. If the German authorities have security concerns, the MoE often tended to aim for conclusion of a so-called mitigation agreement. In such mitigation agreement, the MoE requests security-related commitments of the transaction parties (typically, buy-side and target), for example, on the protection of classified information and other sensitive data, (non-)integration of a target’s critical IT systems into the acquirer’s IT systems, or assurances that German companies or sites will be maintained and that certain production or R&D divisions will not be relocated out of Germany or the EU. More recently, the MoE imposed such remedies more frequently through an administrative order.
Against this background of increased German scrutiny of FDI, buyers and sellers alike should generally aim to assess FDI screening matters early on in the deal. This involves, firstly, an analysis of sensitive aspects that trigger an FDI clearance requirement. If the transaction requires FDI clearance, the acquisition of the German target may not be closed prior to the issuance of the MoE clearance certificate. This statutory condition precedent cannot be waived.
Secondly, even if an FDI filing is not mandatory, it often makes sense to voluntarily apply for a so-called certificate of non-objection. Such certificate confirms that the transaction does not endanger security or public order, and thus gives transaction security to all the parties. It is quite common in transactions with non-EU/EFTA investors to provide for a closing conditional on an FDI green light to ensure deal certainty and, in particular, to avoid the potential unwinding of an acquisition in the event of the transaction being prohibited or restricted after closing.
The transaction parties need to consider FDI aspects when negotiating the purchase agreement. They need to factor in, for example, the implications for the closing schedule and long-stop dates, limitations on the sharing of particularly sensitive information under applicable FDI gun-jumping rules, and the allocation of risks potentially resulting from state intervention in the FDI screening. The parties may, for example, address whether, to what extent and under which conditions the purchaser has to accept potential MoE conditions to a clearance or remedies requested in a mitigation agreement or through an administrative order. Furthermore, it is usually agreed that the acquirer should prepare and submit the FDI filing in close co-operation with the seller.
The above underlines that the FDI screening is (also) relevant to the transaction timeline. In this respect, recent regulatory updates of FDI screening set uniform screening deadlines for all FDI screening procedures. The deadline for the initial review is now two months for any FDI filing (FDI Phase I). If the MoE opens an in-depth screening (FDI Phase II), the deadline is, in general, a further four months for the in-depth screening, starting from submission of the information requested at the opening of the Phase II screening. The MoE may extend the four-month period by three months where there are special factual or legal difficulties. The review period may be extended by another month if the Federal Ministry of Defence claims that the transaction specifically affects German defence interests. The Phase II period is suspended if the MoE requests further information or negotiates a mitigation agreement with the parties to the transaction.
An obligatory filing must be made in due time after conclusion of the contract. To ease timing constraints, the parties often prepare the FDI filing before signing the acquisition documentation. The early collection of the required information will generally speed up the process.
Worldwide, FDI screening regimes have recently been introduced or extended, and existing FDI controls have been tightened. Germany tightened its FDI screening regime several times in recent years, and a further tightening is already in discussion. In light of recent developments in the European security climate, trade relations and state industrial strategies, and increased awareness of technological sovereignty, a further tightening of German FDI screening is to be expected.
These developments have established FDI screening matters as a major element of cross-border M&A, in addition to merger control. The additional screening for acquisitions facilitated by third-country subsidies is soon likely to become another regulatory pillar of cross-border M&A.
The co-operation mechanism under the EUFIS Regulation may prolong the duration of formal FDI screening proceedings. In the case of security concerns, negotiation of mitigation agreements has become more common and can be time-consuming.
Despite intensified FDI scrutiny, prohibitions of FDIs will certainly remain the exception in Germany. As in the past decade, the German government will continue to welcome the vast majority of FDIs. Still, giving adequate consideration to FDI screening aspects in transactions based on the MoE’s regulatory practice remains a central component of cross-border M&A and will likely become even more important. In any case, careful planning and organisation of FDI filings are the key to easing the FDI screening process.
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