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Minority acquisitions targeted by new German foreign investment rules

Executive summary

On 19 December, the German Government tightened further its rules on foreign investments in German businesses by non-EU/non-EFTA  investors. No parliamentary approval was needed and the reforms entered into force on 29 December 2018.
The reform lowers significantly the threshold at which the German Government can intervene in transactions involving critical sectors. Non-EU/non-EFTA investors will be required to notify transactions and obtain clearance for acquisitions of 10% or more (down from 25% or more) of the voting rights in German companies. As previously, the covered sectors include companies active in the defence and IT security sectors, as well as critical infrastructures and software for such critical infrastructures.  The lower threshold will now also apply to media companies. The German Government has further clarified that all companies in which the acquirer holds 10% or more of the voting rights must be taken into account when assessing the voting rights “controlled” by the acquirer.
While we expect these changes to lead to increased scrutiny of minority acquisitions in the abovementioned sectors, this reform will not lead to any substantive or procedural changes.  The increased number of filings may however further extend the duration of review periods and therefore have an impact of deal timelines.  Thorough pre-signing planning is therefore more important than ever.

Main elements

New threshold of 10% of voting rights in certain sectors
Prior to the changes, all non-EU/non-EFTA foreign investments could only be reviewed and prohibited for reasons of public order or national security if the investor acquired at least 25% of the voting rights in a German company.
The amendment now lowers this threshold to 10% or more of the voting rights for acquisitions of companies operating in specific sectors that are potentially relevant to public order and national security. This applies, in particular, to the acquisition of companies active in:
  • the defence sector (including certain export controlled items);
  • certain products with IT security functions;
  • critical infrastructure such as energy, information technology and telecommunications, transport and traffic, health, water supply, food production, finance and insurance; and
  • software for such critical infrastructure.
The German government has further clarified that all companies in which the acquirer holds 10% or more of the voting rights will be taken into account when assessing the number of voting rights “controlled” by the acquirer.  This will require a careful analysis of attributable voting rights.
10% threshold will also apply to media companies
Acquisitions of media companies will also be subject to the lower 10% threshold and a filing will be mandatory.  The definition of a media company refers to companies active in the media industry that contribute to the shaping of public opinion by means of broadcasting, telemedia or print products, and which are characterised by providing up-to-date information and of having a widespread impact. In practice, this will likely comprise TV and radio stations, newspapers, etc., but may not affect companies that produce other types of content, such as crosswords or children’s magazines. It is unclear if the definition will also cover social media and/or other digital communication platforms.
Immediate effect
The amendments entered into force on 29 December and have immediate effect. They affect all transactions that were signed on or after 29 December 2018 and, potentially, also those that were not closed prior to this date.

Further background and outlook

The amendment was triggered by the Chinese state-owned State Grid Corporation of China’s planned acquisition of a 20% minority stake in 50Hertz, a German power grid operator. In this particular case, the German government was unable to intervene on grounds of public order and security because the investment was below the 25% threshold that applied at the time. In order to prevent the sale, the government bought the 20% stake via the majority owner’s pre-emption right. Following the reforms, investments like the one attempted by State Grid Corporation of China will now be subject to review.
The amendments are part of a general political trend of growing concerns about foreign investments in Germany, Europe and worldwide.
It is apparent that foreign investment considerations have become ever more important in international transactions. They must be considered well in advance of planning and structuring any transaction involving a foreign investor and a German business. Even in cases with limited substantive concerns, we expect the timelines for obtaining approval to become longer.
For more information please contact  Dr. Juliane Hilf and Dr. Frank Röhling.