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ABA
Business Law Section
M&A Committee
International M&A Subcommittee
Laguna Beach 2012
Bernd Thalmann, LL.M.
Restrictions on
Foreign Investments
in Germany
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Contents
I. Introduction
II. State Funds / Sovereign Wealth Funds
III. Perceived Dangers of SWFs
IV. Key US Developments: Dubai or not Dubai?
V. The Committee on Foreign Investment in the United States (CFIUS)
VI. The German Federal Ministry of Economics and Technology (FME)
VII. Key Developments in Germany for Changes in Foreign Trade Law
VIII. Critical Foreign Investments in German Industry
IX. �Will Deutschland AG battle with the giant locusts?�
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Contents
X. Restrictions on Foreign Investments in Germany - Notifications
XI. Procedure
XII. Information Required for Notification
XIII. Legal Consequences
XIV. Clearance Certificate
XV. Remedies
XVI. Compliance with EU Law
XVII. Criticism
XVIII.Recommended Course of Action
XIX. Cases
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I. Introduction
Background: State Funds / Sovereign Wealth Funds
US: CFIUS / FINSA
Germany: Foreign Trade Act (Außenwirtschaftsgesetz)
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II. State Funds / Sovereign Wealth Funds
National Wealth Fund
Government of Singapore Investment Corporation
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III. Perceived Dangers of SWFs
Pursuit of strategic interests
New form of state capitalism
�SWFs are the new masters of the global financial order�
�SWFs appear to be the last remaining bastions of substantial liquid cash available�
�The cash injection follows in the wake of plans � to create a new $300 billion vehicle that would be affiliated with China's State Administration of Foreign Exchange (SAFE), the part of the central bank in charge of the daily management of China's $3.2 trillion in foreign exchange reserves.�
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IV. Key US Developments: Dubai or not Dubai?
Major US Milestones:
- 1975 Establishment of CFIUS
- 1988 Exon-Florio Amendment
- 1992 Byrd Amendment
- 2005 CNNOC / Unocal
- 2006 Dubai Ports / P&O
- 2007 Foreign Investment and National Security Act
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V. The Committee on Foreign Investment in the United States
(CFIUS)
Members:
- Department of the Treasury (chair)
- Department of Justice
- Department of Homeland Security
- Department of Commerce
- Department of Defense
- Department of State
- Department of Energy
- Office of the U.S. Trade Representative
- Office of Science & Technology Policy
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The Committee on Foreign Investment in the United States
(CFIUS)
Observers:
- Office of Management & Budget
- Council of Economic Advisors
- National Security Council
- National Economic Council
- Homeland Security Council
Non-voting, ex-officio members:
- Director of National Intelligence
- Secretary of Labor
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VI. The German Federal Ministry of Economics and Technology
(FME)
Ten Directorates-General (DGs)
- Political Co-ordination (DG L)
- Central Administration (DG Z)
- European Policy (DG E)
- Economic Policy (DG I)
- SME Policy (DG II)
- Energy Policy (DG III)
- Industrial Policy (DG IV)
- External Economic Policy (DG V)
- Communications and Postal Policy (DG VI)
- Technology Policy (DG VII)
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VII. Key Developments in Germany for Changes
in Foreign Trade Law
Major events in Germany
- 2002 Shipbuilding company Howaldtswerke acquired by One Equity Parners
- 2003 MTU Aero Engines sold to KKR
- 2004 Amendment of Foreign Trade Law: pre-notification necessary for acquisitions in defense industry / encryption technology
- 2005 Locust debate
- 2007 (September) Establishment of China Investment Corporation
- 2007 (November) First draft of law to block foreign investments published; bill is criticized as �protectionist�
- 2007 (December) Satellitendatensicherheitsgesetz: pre-notification necessary for acquisitions in satellite earth observation systems
- 2009 (April) Amendment of Foreign Trade Law takes effect
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VIII. Critical Foreign Investments in German Industry
1974 Kuweit Investment Authority acquires 7% stake in Daimler-Benz AG
1974 State of Iran acquires 25% in Krupp [Iran Foreign Investment Company still holds 4.5% in ThyssenKrupp]
2009 Aabar Investments (Abu Dhabi) acquires 9% stake in Daimler AG
2009 (December) Qatar raises stake in Volkswagen AG to 17%
Outlook: 2022 Qatar hosts the FIFA World Cup
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The Locust Debate � Background
In 1998, Grohe, a leading manufacturer of sanitary fittings, was sold to BC Partners. In 2004 Grohe was sold to a consortium of Texas Pacific/CSFB; the ensuing restructuring, leading to a loss of 500 local jobs, sparked off the locust debate.
In April 2005, the head of Germany's then governing Social Democratic Party (SPD) compared private equity firms to a "swarm of locusts" that "graze" on under-priced businesses, lay off employees and then proceed to resell the firm for a sweet profit. Executives of these companies, he said, are "extremists with no sense of responsibility."
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X. Restrictions on Foreign Investments in Germany
� Notification Required
Acquisitions in defense industry / cryptosystems / satellite earth observation systems
Notification requirement: Government can prohibit within one month �if this is necessary to assure the essential security interests� of Germany
Acquisition is invalid if no notification is made (schwebend unwirksam)
Judicial review
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Restrictions on Foreign Investments in Germany
� Notification Optional
Amendment of Foreign Trade Law (Außenwirtschaftsgesetz und
Außenwirtschaftsverordnung)
Acquisition of 25% of voting rights of German target by acquirer from outside EU or EFTA (Iceland, Liechtenstein, Switzerland, Norway)
Government can prohibit acquisition if �it endangers the public policy or security of Germany�; this requires a genuine and sufficiently serious threat, affecting one of the fundamental interests of society.
No specification of industry branches
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XI. Procedure
FME can decide to open an investigation within three months from
- signing of the acquisition agreement
- publication of the decision to make a public offer or publication of the fact that control of the company has been obtained
Acquirer is obligated to submit documentation for notification
Second phase of two months starts with receipt of complete notification
If FME wants to prohibit or impose conditions, prior consent from the Federal Government has to be obtained (i.e. cabinet decision)
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XII. Information Required for Notification
Notification must contain the following information:
1) Name and domicile of acquirer and target
2) Description of business of acquirer and target
3) Annual Accounts of last 3 years of acquirer and target
4) Amount of shares held and to be acquired
5) Authorized party to accept service in Germany
6) Group shareholdings of acquirer
7) Shareholdings of third parties in acquirer and target
8) Customers/sub-contractors of target and acquirer in same markets
9) Market shares of acquirer and target
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XIII. Legal Consequences
Purchase contract is subject to condition subsequent (auflösend bedingt) of prohibition by FME
If acquisition is prohibited:
- transfer of shares is valid, but will have to be reversed
- FME can prohibit or limit the exercise of voting rights or appoint a trustee to reverse the transfer of shares
Acquirer is entitled to clearance certificate
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XIV. Clearance Certificate
Acquirer can obtain clearance certificate (Unbedenklich-keitsbescheinigung) from FME
�Ich bestätige, dass dem geplanten Erwerb nach heutiger Sach- und Rechtslage keine Bedenken im Hinblick auf die öffentliche Sicherheit und Ordnung der Bundesrepublik Deutschland entgegenstehen.�
�I confirm that according to today�s factual and legal situation the planned acquisition does not raise concerns with respect to the public security and policy of the Federal Republic of Germany.�
Transaction is deemed to be cleared if FME does not act within one month from receipt of application
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XV. Remedies
Judicial Review
Decision of FME is an administrative act (Verwaltungsakt)
Challenge before Administrative Court of Berlin within one month
Government has large political discretion
Judicial review is limited to errors in exercising or not exercising discretion
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XVI. Compliance with EU Law
Right of Establishment (Art. 49, 54 TFEU)
Free Movement of Capital and Payments (Art. 63 TFEU)
Principle of Proportionality
Art. 65 of the TFEU allows Member States to take measures restricting the free movement of capital "which are justified on grounds of public policy or public security"
ECJ (Elf-Aquitaine-case 483/99): There must be "a genuine and sufficiently serious threat to a fundamental interest of society"
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XVII. Criticism
Scope is too large: law applies to all non-EU foreign investors
Legal uncertainty: deal subject to investigation three months after signing
No identification of relevant industry branches
No definition of public policy or security
No mechanism for FME to identify relevant transaction
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XVIII. Recommended Course of Action
Foreign investors planning to acquire more than 25% in a German company should
- enquire informally with the FME if Government intends to investigate
- if concerns are possible: apply for a clearance certificate
- check with FME which information are necessary for the application of the clearance certificate (or a complete notification)
- include a condition precedent clause in the purchase contract
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XIX. Cases
Defense Industry / Cryptosystems
- 20 cases since 2004
- No prohibitions, no conditions imposed, but assurances of parties (e.g. to divest) in few cases
All other Sectors
- 100 cases since April 2009
- Proceedings were opened in two cases, but no action was taken