Germany’s new foreign investment rules raise challenges for PE

On 12 July the German government adopted the ninth ordinance amending the foreign trade and payments ordinance presented by the economic affairs ministry. The stated aim of this legislation was to introduce better rules for the scrutiny of corporate acquisitions by investors from countries outside the European Union.

Mainstream media outlets have speculated that this amendment is a response to the increased inflow of Chinese capital into German technology-enabled industrial companies. Last month unquote" reported on this trend in the private equity industry, where trade sales of these assets to Chinese strategic investors have been on the rise.

[The new law] could give non-EU and EFTA bidders a disadvantage in an already competitive auction process. In certain situations we could advise the early negotiation of a termination fee to be paid by the acquirer in the event of a negative review" - Daniel Wiedmann, P+P Pöllath + Partners

The actual changes to the law are minimal. The government already had the power to scrutinise takeovers involving the shareholding of at least 25% of a German company by investors from outside the EU and EFTA and to consider whether they pose a threat to public policy or public security. The application of the law is changing though, as Daniel Wiedmann of law firm P+P Pöllath + Partners explains: "The review was introduced in 2009 but not many in-depth reviews were conducted at first and they were mainly related to Chinese investments. We are now seeing more investigations into a broader cross-section of investors, including US-based private equity companies."

The ministry will now have longer to review acquisitions, "indirect" acquisitions will also be reviewed and the list of "security-sensitive areas" will be expanded. This could conceivably include a broad range of telecommunications, industrial automation, transportation and healthcare companies. "More clarity on what falls inside and outside of the review process is certainly welcome. But there are a number of issues that are still unclear," says Wiedmann.

The motivation behind the change is two-fold. Firstly, in the interests of fair competition, federal minister Birgitte Zypries wants to ensure that acquirers from "countries whose economic system is not as open as ours" are on a level playing field with European, and specifically German, companies. The ministry also wants to ensure that key technologies, developed in Germany, are not appropriated by foreign governments.

Wiedmann thinks this could have unintended consequences and potentially even unfairly favour EU bidders. "It could give non-EU and EFTA bidders a disadvantage in an already competitive auction process. In certain situations we could advise the early negotiation of a termination fee to be paid by the acquirer in the event of a negative review," he says. CVC took this precaution in the sale of Ista to Chinese acquirer Cheung Kong Property Holdings. The €4.5bn buyout agreement included a €200m break-off fee to be paid by the acquirer in the event that certain clearances were not obtained prior to the closing of the deal.

Indirect investments
The scope of "indirect" investments considered is also ambiguous. The official press release notes that foreign investors setting up EU-domiciled vehicles for the purpose of avoiding scrutiny will not be exempt. However this still leaves a large grey area. Some Chinese investment firms have set up joint ventures with German GPs for the purpose of sourcing and managing deals that could conceivably be affected.

Even more indirect is the practice of investing in German or EU-based funds. "Under a strict interpretation of this law it could apply to a fund that has a non-EU entity holding more than 25%. I would argue for an interpretation that only considers the acquisition of voting rights - but exactly how the law will be applied is currently unclear," Wiedmann explains.

Clearly this amendment will not stop outside investment in German private equity, nor does it aim to. But extra diligence is now required on both sides of the process. "P+P Pöllath + Partners would advise players on both sides of these transactions to conduct their own risk assessment and buyers should communicate with the ministry as early as possible on the likelihood of an in-depth review," says Wiedmann.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Regulation
• DACH
• Investments
• Top story
• Germany
• P+P Pöllath + Partners