Doing acquiring business in Germany, presented by Dirk Hamann

What I'm going to do is, this is actually the start of a series of webinars on doing business in Germany. So I will kick off with focusing on the foreign direct investment laws in Germany that are about to change yet again. What I'm going to do is, for those of you who are not familiar with how this works in Germany, I will take you through the status quo of the system in Germany. And for those who are already familiar with it, the more important and interesting part will be the second part, where I will explain what the German government has in mind for changing these laws in due course, meaning during the summer. I myself, I have been advising Germany, in particular the German Ministry for the Economy and the German Ministry for Defense. On various occasions, I had to do with aspects of the foreign direct investments in various M&A transactions. For example, when KKR acquired the defense department from Airbus. I've also been involved in aspects of Airbus, Boeing, World Trade Organization disputes cases and the likes. And I'm quite close to the German government and the various ministries, and in particular the department within the Ministry of the Economy that is dealing with all these matters here. So I hope I can shed some light on what's going on here. Germany has always tried to be— oh, let me just take you to the first slide— be quite liberal when it comes to foreign direct investments because Germany obviously is depending on export business very much and is very open to accepting investments from abroad as well into Germany. But it has tightened its rules recently because of more activity, in particular from China, trying to acquire certain German enterprises recently. And it discovered that the foreign direct investment laws should be tightened a little bit in order to protect from— for security interests for Germany in recent times. Now, due to the coronavirus situation and the recession that will hit also Germany hard, it's quite likely that there will be acquisition opportunities in Germany in due course. Some companies may be in trouble, and it's likely that they can be acquired at very good terms for those who have got the firepower to acquire and doing M&A in Germany in particular. So this is quite relevant, what we are talking about now. What I'm doing is, I will start by explaining the system on the basis of the slide that you can see here. Take a couple of minutes in order to get familiar with it. Generally, we have to see that Germany looks into sector-specific aspects that is dealing with, in particular, military weapons and equipment and crypto technology, um, that is being dealt with differently than the general sections to which the right-hand part of the slide applies. Um, and the, the first thing to realize is that the general section is only relevant for non-European foreigners acquiring business in Germany, whereas the sector-specific part applies to any foreigner trying to acquire in these specific sectors. Now, let's look quickly into the, the left-hand side of the slide. So the sector-specific aspects that is only relevant, as I said, for the defense sector basically. This means that anyone who wants to acquire a significant stake in any of these companies needs to notify the German government of its intention to do so. And The German government then has the right to look into the proposed transaction. And if it doesn't pick up the transaction within 3 months, the approval is deemed to be granted. But if it opens a review procedure, it has to involve other ministry, in particular the Ministry of Defense as well. And then is entitled to review the case within 3 months. Within 3 months after receipt of the full set of documents that are required to be supplied by the participants, by the parties of the transaction, to the German government. The, um, there's one practical aspect here that is also relevant for the procedure in the general sections, which is because it's the same requirement. And these terms, these periods, start only after receipt of the full set of documents. And the German government has some discretion in playing around with this requirement. I've seen it that they, after the relevant parties to the transaction did supply information and documents on the envisaged transaction, they requested more documents. And as long as the document requests have not been fully satisfied, these periods will not start to run. So they have room to maneuver with these periods that are listed here on this chart. But that is only relevant for the minority of cases where we have to do with the defense sector. What is more relevant for most of the people listening to this, to this presentation, is the right-hand side of the slide that, as I said, deals with the general industries. The, uh, in this section, Germany requires only a notification of the business transaction where the target company is operating within so-called critical infrastructure. There is no real definition by mandatory law, but it applies generally to the energy sector, to telecommunications, to the finance sector, to healthcare, to transport, and as well to relevant media enterprises, plus companies that supply or develop software for these critical infrastructure areas. Now, in, in this case where critical infrastructure is involved, the participants, the parties to the transaction, need to notify the intention to enter into this transaction. In all other cases, there is no such notification obligation. Now, the parties to a transaction are well advised to, in any case, notify the German government in relevant cases and to also apply for a so-called certificate of non-objection in order to clear the way for these, for an intended transaction anyway. In particular, when it comes to limited auction scenarios where maybe there is competition to acquire a certain target company also from European potential purchasers, because European purchase opportunities are not caught by these regulations, they are a disadvantage for the non-European buyers that have to evidence at a certain stage of transaction anyhow that there is deal security, that there is transaction security, that they're capable of purchasing the target. If there's any doubt that this is a— could be a problem, they are at a disadvantage to European buyers, obviously. So they are well advised to ask for this certificate of non-objection by the German Ministry for the Economy. Now, if a buyer applies for such certificate, the German government has got 2 months to pick up this process. If they don't do so, this is an implied approval of— for the transaction. If they do pick up the transaction, they now have again 3 months to investigate further what they would like to do with it, whether they would like to approve, whether they would like to ask for certain agreements and conditions by way of negotiating a contract with the potential parties involved or not. Again, they will ask for documents and may ask for additional documents, as you see here, and then have got 4 months after receipt of the full set of documents to make up their mind what to do with the deal. So you can see, if the purchaser does nothing, the German government becomes aware of the transaction intended, there's quite long periods that are available for the German government to investigate the case. And these long periods obviously are not good for most of the transactions I know of. So again, because of the timing issues here, the parties are well advised in significant cases to proactively ask for the certificate of non-objection. Now, not every transaction falls under these regulations. In case of the target company operating a critical infrastructure, the German government has recently lowered the threshold for picking up the review process here to allow 10% of or more of the voting rights that are intended to be acquired in the target company. In other cases, that is where no critical infrastructure is involved, the threshold is 25% of the voting rights in the target company. When it comes to calculating the voting rights that are intended to be acquired, obviously there is possibly third-party voting rights to be calculated as well that are attributed to the potential acquirer in case there is vote pooling agreements or acting in concert involved. Now, the frequently asked question is whether All these can be circumvented where the non-European buyer at the end of the day decides to use a European acquisition vehicle for the acquisition of the European target. That is also dealt with in the German laws, obviously, and the circumvention does not work where, first of all, such a vehicle is just implemented or put in between without any other substance and operations in Germany. And where there is the suspicion that this is being done only to circumvent these rules that I was explaining for foreign direct investments. So there's no real circumvention possibility, I think, in relevant cases by putting in between an European entity here for acquisition purposes. Now, that is the existing system. And the system is— was the result of tightening some rules because of Chinese activities in recent years. But the German government wants to introduce even tighter rules in the next couple of months. So that brings us to what you will have to be aware of, what happens in the next couple of months. First of all, there's a so-called European Screening Regulation that has been adopted last year and that needs to be transformed into German law. And that actually only means that in all these cases, the cooperation mechanism with other EU member states and the EU Commission will be put in place. That means the other EU member states and the EU Commission, upon becoming aware of an envisaged transaction in Germany, are being allowed to comment on it or to express concerns. If they think this is relevant from their perspective as well. It is not binding upon the German government to take into account these concerns, if any such concerns are being expressed, but they will obviously have to deal with comments somehow in the process and making up their mind what to do with the with the transaction ahead. Also, and that is quite relevant for foreign direct investors, is that a stricter standard of review and standstill obligations will be introduced into the German law. I will come to that in a minute on the next slide. And you will just have to expect that these new rules, after some discussion in the German parliament, will be adopted during this summer, so very soon, and that also some guidelines, not put into the act as such, but an ordinance guiding rules, will also be adopted that define further what critical infrastructure and critical technologies are. Now, when it comes to a stricter standard in checking on whether a potential transaction should be prohibited or not, the government will just have to prove that the investment is likely to affect the public order or security in Germany, whatever that means. There's lots of discussion anyway for that. In formal, the formal language, or the language that is still applying at the moment, the acquisition of the investment has to endanger public order or security, which, as you can see, is much more tightened in the language in order to prove that the German government can try to influence the transaction some way or the other. Likely to affect, what that really means is that the German government has a very, very low threshold to explain or to reason their decision on how to influence the transaction. At the moment, The standstill obligations in the German law, meaning that any contract entered into by the purchaser and the seller on a certain target company is temporarily null and void until the German government has made up its mind whether to approve or not, is only applying to the specific sectors, in particular the defense sector. In the future, these obligations will apply to all foreign investments where there is a notification obligation by the parties to the German government. And that is, as I explained, in particular true for critical infrastructure to be acquired. You can also Imagine that, or maybe you know, that there was recent discussions and rumors that the US administration, in particular Trump, was keen to acquire a German startup company that is trying to develop a vaccine in the context of the coronavirus crisis. Whether this is true or not, it has led to the I believe that the German government will put under critical infrastructure also many more companies that belong to the healthcare sector. Of course, this is being seen as critical in Germany in the future. Now, standstill obligations, you might think, hmm, we just do not have to comply with it, we just go ahead with the transaction. This is going to be a problem for people who think so. That is the next bullet point, jumping the gun. That means that parties are closing the transaction anyway, despite the stance of obligations. This is going to be a criminal offense in the future and can lead to fines and to imprisonment of up to 5 years. So it's going to be treated as a very severe problem, and that is very relevant for the MLA planning for any transaction. And it's quite clear that if no contract can be entered into and implemented or consummated without having to clarify the situation on the foreign direct investment rules, this means it has an impact on the sequencing of the M&A process as such. It is very advisable for foreign investors to, as they will very likely have to work with M&A lawyers anyway for doing some acquisitions, to discuss the requirement for the potential certificate of non-objection or outright approval from the German government at the beginning of the planning for the M&A transaction and to address this at an earlier stage. The— this is obvious, as I said, in scenarios where there is a limited auction going on and there's competition for targets also from European purchasers because, as I said, you are at a disadvantage if you cannot convince the potential seller that there is transaction security because there's no issue with foreign direct investment approval from the German government. So this needs to be take into account at a very early stage. Another very practical aspect in all of this is that the procedure that is being run by the German Ministry of the Economy here is being held in the official language, which is the German language. They also insist on all documents supplied are provided to the gentleman to be in the German language. So in the international M&A arena, obviously it's quite common to draft the M&A contracts, the definitive agreements and all ancillary agreements in the English language, and nobody sees actually need to have all this in the German language as well. But for this specific area of law, when there is a likelihood to having to communicate with the German government here, everything needs to be supplied in the German language. This can be very, very burdensome and costly because everything needs to be translated. I've seen this in the transaction, for example, with KKR involved. That very voluminous contracts had been entered into in the English language only. And because of the requirement to present all this to the German government, it took actually 6 or 8 weeks to have everything translated before it could be handed in to the ministry for further review. So these are the basic aspects of foreign direct investment into Germany. And we do not necessarily have to dwell on these subjects for a full hour here in this webinar. But if there is any question in addition to that that you would like to raise, please do so. In the Q&A part of this webinar. That can also be done subsequently if anything comes to mind. You can send me an email. My contact details are included in the papers. I cannot see any open questions at the moment in the Q&A section, so that would Be it from my end here in Germany, I hope that it was sufficiently explained in order to understand what the foreign potential purchaser needs to comply with in Germany for these investments. So, from my point of view, thank you very much and goodbye.

Thanks for attending, everyone. Just a reminder to keep an eye out on your email tomorrow. It will have a link to the materials today as well as an email to send in your state bar number to get your certificate. Thank you all for attending, and you have a great day.

Bye-bye.