Company takeovers: New rules for foreign investments in Germany and new proposal by EU Commission

Company takeovers by non-EU investors will be subject to stricter requirements in the future. In July, the German Cabinet adopted an amendment to the German Foreign Trade and Payments Regulation with the objective to better protect German companies from takeovers. On 13 September 2017 the EU Commission produced its own proposal for an EU-wide framework for the screening of foreign investments in the EU:

Stricter Rules in Germany

The Federal Ministry for Economic Affairs and Energy is entitled to examine foreign investments by investors neither coming from EU nor from an EFTA state in case the investor acquires 25 percent or more of the voting rights in the German target company. The Ministry then examines whether the acquisition constitutes a threat to the public order or security. However, only in specific sectors with a direct link to military items or concerning products with IT security (encryption) functions, the investor was obliged to report the investment that reached the threshold (sector-specific examination of corporate acquisitions). In all other cases (non sector-specific), it is the Ministry’s responsibility to find out about the transaction and to decide whether to open a review.

It is now easier for the federal government to review and prohibit takeovers of strategically important companies by foreign investors. For the first time, a “threat to the public order or security” is now clearly defined. A “threat to the public order or security” is presumed in case the investment affects critical infrastructure. This includes German companies developing software for the power and water supply system, the telephone network, power stations, banks, hospitals, airports or stations. Furthermore, this also applies to companies offering cloud computing services. In order to ensure this, the previous two months review period has   now been extended to a period of four months. On the one hand, this enables the authorities to be better informed. On the other hand, this could have an impact on the timing for deals which should be taken into account by investors. In addition, it has been clarified that indirect investments (foreign investors establish a company inside the EU in order to buy a German company) can be subject to review.

The mandatory industry-sector specific review has been extended to companies developing or manufacturing key technology in the field of defense, thus to a broad range of military equipment and components. In cases where a duty to report acquisitions already existed in the past, the amendment now makes clear which information is to be provided to the Ministry for Economic Affairs and Energy. The review period for the industry-sector specific review has been extended from one month to three months.

Additionally, it is now explicitly set out that the Ministry can negotiate with the contracting parties about contractual arrangements that protect the security interests of Germany. The new rules came into force on July 18, 2017.

The Commission’s Proposal

On EU level, the European Commission published a new draft EU Regulation on 13 September 2017 which, if adopted, would empower the EU Member States and the Commission to screen and block or even unwind foreign investments in the EU on the grounds of “security or public order”. The draft EU Regulation sets out an “enabling framework” that would require Member States Governments to share information on sensitive takeovers with each other and with the European Commission, and to inform which acquisitions they intend to screen. The European Commission would be able to give a non-binding opinion if it felt a takeover was “likely to affect security or public order in one or more Member States”. The Commission’s role would be reinforced in cases where the target companies were involved in “projects or programs of Union interest”. In such cases the EU country concerned would have to “take utmost account of the Commission’s opinion and provide an explanation … in case its opinion is not followed”. Such projects and programs are broadly defined in the proposed regulation and an indicative list is annexed to the proposal. However, before the EU Commission’s proposal becomes final and enters into force, it still has to pass the EU Parliament and the EU Council which may both introduce amendments to the proposal.