M&A Transactions in Germany: How To Tackle Tightened Regulation
Over the last years, numerous investors based outside the European Union have acquired German companies. As geopolitical changes are likely to further increase the importance of Germany as a European hub, the interest continues to be high. At the same time, governmental regulation has also been significantly tightened: the German Ministry of Economic Affairs and Energy is now examining very carefully and significantly longer whether an acquisition threatens public safety and order. This applies not only to the purchase of large and healthy companies, but also of small medium-sized companies and also in acquisitions during the crisis. Recent transactions have lead to the following key findings:
1) The threshold for a review by the ministry has been significantly reduced since December 2018 with regard to acquisitions in security-related areas: if an investor based outside the European Union intends to acquire a German company, the ministry can now start the review process at 10 percent of the company shares if the transaction is related to sensitive infrastructures (e.g. electricity, gas and water supply, telecommunications, media, robotics/automation, data lines, IT security). In all other areas, the previous threshold of 25 percent has remained unaffected.
2) Even for small M&A transactions with a purchase price of less than € 1 million and even distressed M&A transactions by way of an asset deal, it is likely that the ministry will start an official review process. This procedure usually takes four months as the the maximum period. From application to decision, the process may well take seven months, which should be taken into account in terms of the time schedule of the transaction and contract drafting by way of conditions precedent.
3) Since an approval from the ministry is by no means assured (as seen in the cases “Leifeld” and “50Hertz”), foreign investors should, in the period between signing of the purchase agreement and the ministry’s decision, organize the interim financing of the target company stepwise with regard to the legal uncertainty and relate their capital commitments to certain milestones in order to limit financial risks in the event of a prohibition.
4) During the review process, the ministry requires full transparency with regard to the companies and persons involved. This comprises inter alia disclosure of shareholdings as well as the private addresses and dates of birth of all involved managing directors. In addition, the latest annual accounts of all companies involved must be made available.
5) The ministry comes up with detailed technical questions about the products of the companies and involves various internal departments and other ministries (e.g. Federal Ministry of the Interior). The questions predominantly focus on data protection, safeguarding trade secrets of German customers and securing technological know-how. It is recommendable to develop the answers in close cooperation between lawyers and technical experts. In addition, technical data on all products of the German company should be compiled prior to the transaction in order to save time.
6) In addition, the ministry expects a detailed statement on the strategic plans of foreign investors with regard to the German target company. In this respect, it should be made clear what the specific purpose of the acquisition is and why this is advantageous for the German target company. In addition, lists of all customers of the German company are to be made available to the Ministry. It should also explain how joint sales and customer acquisition shall be done.
The German Minister of Economic Affairs underscored publicly that foreign investors are still highly welcome in Germany. At the same time, however, national security should be strengthened by enabling the ministry to review transactions related to sensitive infrastructures and also the media sector in an earlier stage.
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