Amendment to Investment Control — New Challenges for M&A Practice
The number of reportable sectors will be expanded from 11 to 27. This affects areas such as artificial intelligence, robotics, cybersecurity, semiconductors, aerospace, quantum technology, critical raw materials, etc. Sector-specific investment control will also be expanded. A reporting obligation now also exists in particular for shareholdings in companies whose goods are subject to export controls.
In addition, the amendment introduces thresholds for increasing existing shareholdings. For example, the increase of an already released shareholding to 25%, 40%, 50% or 75% may be subject to a new notification requirement. Intra-group restructurings are exempt from a reporting requirement only under very narrow conditions. Finally, the Federal Ministry for Economic Affairs and Energy (BMWi) is to be able to initiate an ex officio review procedure in the case of “atypical control acquisitions” below the thresholds.
It is to be welcomed that the legislator defines the new sectors in part much more narrowly than is the case under the EU Screening Regulation. In addition, the threshold (20% of voting rights) was set higher than originally planned in order to ease the burden on start-ups and financial investors in particular.
The first requirement is that the (direct or indirect) acquirer is a non-EU national, i.e. from outside the EU or EFTA. For sector-specific investment control, however, it is sufficient if the acquirer is not from Germany. As a second requirement, the German target company must operate in a covered sector.
Third, the shareholding must reach a certain threshold. In some sectors, a notification obligation is triggered by an acquisition of at least 10% of the voting rights, for example critical infrastructure and the areas of sector-specific investment control. In other sectors, a higher threshold of 20% applies, such as in the now newly introduced sectors.
Key challenges relate to the review of reporting requirements, timing implications and potentially material risks.
Acquisitions subject to reporting requirements are subject to a prohibition on enforcement. Such transactions may only be executed after approval by the BMWi. Otherwise, there is a risk of the transaction becoming ineffective and even of criminal penalties and fines. Therefore, the domicile of the (direct or indirect) acquirer and the area of activity of the target company should be carefully examined beforehand. For transactions with an international element, it should be noted that more and more countries are introducing or have already introduced investment control regimes. If there is a reporting requirement or a risk of an ex officio audit, this should be reflected in the schedule. The procedures can take a very long time. Upstream testing up to two months and the actual testing process four months or longer.
If the transaction could meet with concerns from the federal government, the parties should consider how to handle it in advance. The federal government sometimes interprets its security interests broadly. For example, this is also about technological sovereignty. However, prohibitions have been rare so far. More often, the BMWi only releases funds on the condition that certain commitments are made. It may be advisable to stipulate in the purchase agreement whether and to what extent the purchaser is to be obliged to do so.
About Daniel Wiedmann
Daniel Wiedmann is an Associated Partner in POELLATH’s Frankfurt office. In addition to antitrust law (in particular merger control), his practice focuses on investment control. He regularly represents companies vis-à-vis the BMWi, including in in-depth review proceedings. As part of the consultations on the 17th AWV amendment, he assisted the German Private Equity and Venture Capital Association with comments and hearings.