Home
Internal
published on 13 April 2023 | reading time approx. 3 minutes
If a company is being sold to a foreign buyer, the German Foreign Direct Investment (FDI) regulation is increasingly relevant. Given potentially added complexity, sellers should early on obtain clarity as to whether the transaction will be subject to FDI review.
If a company (or part thereof) is being sold to a foreign or non-EU/EFTA buyer, whether through a share or asset deal, especially if companies of the German Mittelstand are involved, FDI review governed by the German in foreign trade regulation can be increasingly significant.
Unlike in merger control and antitrust clearance procedures, figures relating to the target’s turnover, number employees or market share are irrelevant to the FDI review process based on German FDI regulation. The focus is rather on specific buy-side aspects and the specific business activity of the target. Comparable to merger control, transactions that are subject to a notification requirement under FDI rules are subject to an stand-still obligation until approval, possibly with conditions, has been granted by the German Federal Ministry for Economic Affairs and Climate Protection (Bundesministerium für Wirtschaft und Klimaschutz - BMKW).
Although it is the buyer who – if required– must notify a planned transaction, given the scope of information required to be included in such notification, the whole notification process will not be possible without the participation of the target and the sellers. Once the BMKW initiates a FDI review procedure, all parties involved in the acquisition process, thus also the seller, are required to provide defined required information and have a duty to cooperate.
It is, therefore, in the interest of the seller to early on gain clarity as to the possibly increased complexity of the envisioned transaction, to be able to assess possible risks and respectively to obtain legal certainty with respect to the transaction.
Considering the time factor when structuring the transaction is a key element in transaction planning. For the planning of the transaction process by the seller, this means that the potential buyer and the seller's own business activities must be assessed as early as possible against the background of a possible obligation to notify the transaction within the scope of the FDI regulation.
First of all, it should be clarified whether the potential buyer is a relevant buyer for the purposes of the FDI review. Of particular relevance in practice is the cross-sector FDI review, which basically relates to all companies regardless of their business activity or products. Relevant buyers are buyers who are not resident or domiciled in the EU/EFTA.
In this respect, it is not enough to consider the direct buyer (buy-side); rather, the entire chain of buyers should be analysed. For example, if the parties were directly or indirectly involved in a chain of buyers with strong links to "hostile" states, irrespective of their control rights, this can complicate or delay the FDI review process.
Depending on the specific business activity of the target – currently especially in the semiconductor sector – transactions involving buyers from "friendly" countries are also subject to careful examination by the BMWK, which must be taken into account when planning the transaction.
If the buyer is a relevant buyer, it should be furthermore clarified whether the transaction is subject to the notification obligation and thus may not be closed until the transaction is approved by the BMWK. If the target is active in the area of Critical Infrastructure (such as energy and water supply, transport, telecommunications, but also medical care) – and if certain thresholds are reached or exceeded – or in the area of Critical Technologies (such as semiconductors, robotics, Artificial Intelligence, and quantum technology), the acquisition must be notified to the BMWK and can only be closed after approval has been granted.
Sellers must therefore be prepared not only to wait a longer period of time between the signing of the purchase agreement and the closing – until the review procedures classified by the BMWK as particularly sensitive are completed – but also to face a possibly time-consuming and cost-intensive coordination process involving also the buy-side and the BMWK, and brace themselves for a possible drawn out uncertainty of the outcome, as some FDI cases in the semiconductor sector involving Chinese buyers have shown.
The four-month period of the main screening phase as part of the review procedure is manageable at first glance.
However, it does not commence until all required documents have been received and the process may be delayed due to a holdup in the event of inquiries, such as about the seller's technology or business activities.
In addition, the BMWK may unilaterally extend the review period by up to three months if the case is particularly complex (e.g. cases regarding assessment of the target company's technology). If the acquisition touches especially on defence interests, the BMWK may extend the review period by another month, so the entire period may be extended unilaterally by a total of four months.
With the consent of the immediate buyer and the seller, the review period may be extended as often as needed, e.g. to enable further screening if the period is about to expire.
If the transaction does not require mandatory notification to the BMWK, however, on a case by case analysis in case of any doubts, it might be feasible to consider to apply for the so-called certificate of non-objection to obtain legal certainty for the transaction. If no such certificate is obtained in case 25 percent or more of the voting rights are acquired, the BMWK may decide unilaterally to examine the transaction and may do so within five years from the signing date of the purchase agreement with the risk that the transaction will have to be reversed.
Claudia Geercken
Associate Partner
Send inquiry
Transaction advisory | Mergers & Acquisitions
