The future of German foreign investment control is here… Part II: Good News and Bad News
On 1 May 2021, the amended German foreign investment control rules entered into force and will apply to all transactions which have not been signed prior to this date. Our three-part series covers the key changes and discusses the implications for future M&A. In Part I, we looked at the extensively expanded scope of the regime with 16 new sectors for which mandatory and suspensory filing requirements apply as well as the new safe harbours.
This Part II explores further elements of the reform, namely the clarifications on “atypical control” transactions, the new provisions on add-on acquisitions as well as the new safe harbour for certain internal restructurings. Further, we look at the amended rules on attribution of voting rights to investors. The latter will be of particular relevance for state-owned investors.
Newly added concept of “atypical control” transactions
A general concern under foreign investment rules are attempts by investors to structure a transaction in such a way as to circumvent a notification requirement. Prior to the reform, there was already a broad “circumvention provision” under German foreign investment law. Nonetheless, there remained some legal uncertainty for cases falling short of the voting rights thresholds, and the Federal Ministry for Economic Affairs and Energy (MoE) has been particularly concerned about the acquisition of less than 10% of voting rights where the acquisition results in decisive influence.
The new rules include a dedicated provision to address such cases, where a transaction falls short of the thresholds but the investor gains “atypical control”. This includes situations in which the voting rights remain below 10%, 20% or 25% (as applicable) but the investor obtains further rights as a result of contractual arrangements.
While the draft law published earlier this year remained very vague, the new provisions provide clearer guidance on such rights, namely (i) obtaining further seats or majorities on the management and/or supervisory board; (ii) veto rights over strategic business or personnel decisions; and (iii) certain information rights regarding information which is sensitive from a foreign investment control perspective.
While the first two criteria are relatively clear, in the sense that they link back to established concepts (such as those used in a merger control context), the third category may prove to be complex from a practical point of view, as it is often rather unclear – and difficult to establish with the appropriate degree of legal certainty – what information should be regarded as sensitive from a foreign investment control perspective. However, for most minority acquisitions (remaining below the thresholds), these criteria should not ultimately be problematic since customary minority shareholders’ rights to preserve the relevant financial interest in a target will not generally be in scope of this concept.
An acquisition of “atypical control” does not trigger a notification requirement but only entitles the MoE to call in a transaction within five years of signing. Whether a voluntary filing might be appropriate to avoid a call-in by the MoE should be determined on a case-by-case basis.
New provision on add-on acquisitions
Fortunately, the reform reduces the foreign investment burden in situations where investors already hold voting rights in a German company exceeding the relevant thresholds and plan to further increase their participation. Under the previous legal framework, every de minimis add-on acquisition triggered a further filing requirement for cases involving a target's activities in sensitive sectors. This concept was hard to understand where the additional shareholding did not confer further influence over the relevant company. It was particularly impractical in cases involving on-exchange transactions.
The new rules now stipulate that a further filing requirement is only triggered if certain thresholds are exceeded. Overall, there are three dedicated groups of thresholds, depending on which sectors are involved:
- For “traditional sensitive sectors” (as contained in the German foreign investment rules prior to this reform), the relevant thresholds are 20%, 25%, 40%, 50% or 75% of voting rights.
- For “newly added sensitive sectors” (as added by this reform), the thresholds are 25%, 40%, 50% and 75% of the voting rights.
- In all other sectors, add-on acquisitions are only in scope of foreign investment control (and may – depending on the case at hand – warrant a voluntary filing) where they exceed the relevant threshold of 40%, 50% or 75% of voting rights.
- Aside from these thresholds, the MoE has the discretion to combine any clearance decision with a reporting obligation for the parties on any further increase of voting rights, even if the above thresholds are not exceeded.
Unfortunately, the reform missed the chance to introduce a “short form filing” for such further notifications. However, in practical terms we hope that such processes will be handled swiftly, particularly if investors have only recently applied for a certificate of non-objection and have obtained clearance.
New safe harbour for internal restructurings
It is frequently overlooked that internal restructurings are generally in scope of German foreign investment control. This will continue to be the case. However, the legislation has introduced a new safe harbour where (i) the German target entity is transferred between two entities both wholly owned by the same parent entity and (ii) the two entities are incorporated in the same country.
In practical terms, this safe harbour is quite narrow and we still expect many cases in which a filing may be required. In particular, the second requirement significantly reduces the scope of the exemption. Again, we hope that, in practical terms, the MoE will apply a lower disclosure burden on filing parties and handle these cases swiftly.
Attribution of shareholdings by third parties such as state-owned enterprises
Under the pre-existing rules, when determining whether the filing thresholds were met, shareholdings held by third parties had to be attributed if they were held by (i) investors in which the relevant foreign investor held a participation which reached the applicable thresholds or (ii) investors with whom an agreement existed as regards the joint exercise of voting rights.
The new rules supplement these criteria by referencing circumstances other than formal agreements which indicate a joint exercise of voting rights. Moreover, the mere conclusion of a shareholders’ agreement (even absent the acquisition of additional shares) can trigger a filing as a result of attribution. Further, as regards attribution in other circumstances, the law has now also introduced a presumption of attribution if an investor and a third party are both state-owned enterprises and they are both (indirectly) owned by the same state. This presumption is rebuttable, and the principle of official investigation will apply (i.e. the MoE cannot simply rely on the presumption but is legally required to investigate further). The rule means that a “split and buy” strategy, in particular by Chinese investors, will not escape German foreign investment control. In light of the recent third prohibition decision which also involved a Chinese state-owned enterprise as investor, it does not come as a surprise that the German legislator has reinforced the regime to that end.
What else do investors need to know?
The German government has adopted further amendments, such as clarifying rules on the supervision of remedies and reporting obligations. We will discuss these elements in our next post and will also provide an outlook on the future of foreign investment control in Germany and potential further amendments already on the horizon.
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