Just the FAQs

Non-European Union private equity investors should be aware of a new Exon-Florio-like hurdle to making certain control investments in Germany. An amendment to the Aussenwirtschaftsgesetz, or German Foreign Trade Act, which authorizes the federal government to prohibit certain foreign investors from buying stakes of 25% or more in German companies if such acquisitions would endanger "public order" or "public security," has recently taken effect. So who is considered foreign?

Entities with registered office or central headquarters outside the EU or the European Free Trade Association are considered foreign investors, including many private equity funds doing business in Europe. Also, an acquisition by an entity based in the EU or the Efta may be subject to review if a foreign investor directly or indirectly holds at least 25% of the entity's voting rights and if there is an indication that this structure is designed to circumvent the foreign investment rules -- e.g., by means of establishing a letterbox company.

Note that the Isle of Man and the Channel Islands are part of the EU customs territory. Therefore, investors based there will not be considered foreign investors. By contrast, overseas territories like the Cayman Islands, the British Virgin Islands, Bermuda, Aruba and the Netherlands Antilles are not part of the EU customs territory.

All types of transactions leading to an acquisition of 25% or more of the voting rights in a German company may be subject to review. This includes the acquisition of shares, debt-equity swaps or capital increases. This legislation is not limited to transactions in specific business sectors.

To determine whether a foreign participation in the German target meets the 25% threshold, any voting shares held by an entity that is owned 25% or more by the investor must be taken into account. Moreover, if the investor has entered into a joint voting agreement with a third party, the third party's shares are attributed to the investor.

An investment may be prohibited only if it threatens Germany's "public order" or "public security." This requires a genuine and sufficiently serious threat affecting one of the fundamental interests of society. The German government has emphasized that such a threat will exist only in exceptional cases.

Note that the interpretation of "public order" and "public security" must comply with EU law. The European Court of Justice, for example, has acknowledged that public security may require safeguarding supply in the sectors of telecommunications and electricity in the event of a crisis. General economic, financial or labor-market policy concerns are not sufficient justifications for restrictions.

An official notification is not required but, as noted below, may be made voluntarily. Without a notification, the Federal Ministry of Economics and Technology relies on information from the German Federal Cartel Office, the Federal Financial Supervisory Authority or other public sources in order to review an acquisition ex officio.

The ministry must initiate such a review within three months after (1) the signing of the transaction, (2) the publication of the decision to submit a public takeover bid or (3) the publication of the acquisition of control. If the ministry initiates a review, the investor must submit specified documentation. Upon receipt, the ministry has another two-month period to restrict or prohibit the acquisition. Should the ministry conclude that the acquisition endangers public order or public security, it may impose certain obligations on the investor or even prohibit the acquisition entirely. Such a decision of the ministry requires the consent of the federal government, i.e., the Cabinet, and is subject to review by the courts.

To obtain deal certainty, an investor may apply to the ministry for a certificate of nonobjection while the transaction is still in the planning stage. Such application merely needs to outline the basic elements of the contemplated transaction, the investor and its field of business. This information is treated as confidential. If the ministry issues the desired certificate or does not launch a formal review within one month of receipt of such application, the transaction is cleared.

Non-EU private equity investors should not over-react to this legislation, since the review is meant to occur only in unusual circumstances, but should be mindful of the opportunity to pre-clear possibly sensitive transactions. n

Peter Wand is international counsel and Daniel Wiedmann is an associate in the Frankfurt office of Debevoise & Plimpton LLP. A version of this article originally appeared in the Debevoise & Plimpton Private Equity Report.