Co-authored by Marcel Döhren
In times of economic turmoil and disruption, Germany, and other countries across the globe, face an increasing number of insolvencies. With a company’s existence at stake, timely investments are often vital to saving a company in financial trouble. Foreign investment control adds to the complexity of insolvency proceedings. Below, we provide a brief overview of what companies in insolvency proceedings or investors looking to acquire a stake in such companies should consider regarding Foreign Investment Control in Germany.
Quick recap of German Foreign Investment Control
Let’s start with some (very) basics: Foreign investment control (FIC) enables the German government to investigate, restrict, or even completely prohibit foreign investments in “domestic companies”. The responsible German Ministry of Economics (BMWK) examines whether an investment is likely to jeopardize public safety or essential security interests of Germany or another EU Member State.
Investors from outside the European Union/EFTA are obliged to notify transactions in which they directly or indirectly acquire 10% (or 20%) or more of the voting rights in a company active in specific industry sectors, which include aerospace, cybersecurity, media, medical products, robotics, quantum technology, semiconductor, nuclear and biotechnology, as well as various software products and AI.
With regard to target companies developing or manufacturing military goods, dual-use goods, and/or IT-safety products, a notification obligation even applies to all non-German investors (so including from European countries) acquiring at least 10% of the voting rights in that target company. Furthermore, the BMWK can initiate a review procedure regardless of the target’s business if an investor from outside the EU/EFTA acquires 25% or more of the voting rights of the target company.
Foreign investment control comes into play in insolvency proceedings when the insolvent companies (or parts of them) are sold or when investors invest in such a company (for a deeper understanding of German foreign investment control, take a look here and here).
Some things to keep in mind
There are a few things to keep in mind when it comes to FIC and insolvency cases:
- The turnover of the target company is not decisive for the notification obligation. Even the (indirect) acquisition of very small German outlets or subsidiaries can trigger a notification obligation.
- If a notification obligation applies, the parties must not complete the transaction before clearance. Failure to comply may result in fines and criminal prosecution. This presents challenges, particularly for transactions during insolvency or restructuring proceedings, and can influence the selection of the investor and the timeline. Potential filing obligations should therefore always be assessed early on. In cases where parties anticipate concerns by the BMWK, they should discuss whether offering remedies is feasible.
- Selecting an investor that might pose fewer challenges from an FIC perspective is difficult in insolvency or restructuring cases where potential investors can be scarce.
- Not only the first acquisition of voting rights could trigger reporting obligations. Quite to the contrary, acquiring additional voting rights (e.g., as part of a Debt-Equity-Swap) may trigger additional filing obligation, e.g., when thresholds of 40%, 50% and 75% are reached. The standstill obligation applies to all of these acquisitions of additional voting rights.
- It is important and frequently overlooked that the notification obligation is not based solely on the direct investor but rather on indirect investors, too. Depending on the activity of the target company, a notification obligation can already be triggered by the fact that a pure minority shareholder who holds at least 10 % of the acquiring company is registered outside the EU (see here for a recent case).
- During insolvency proceedings, due diligence is already challenging due to the tight timeline. If notification obligations apply, the exchange of certain information is prohibited: Information related to products and services that trigger a notification obligation may generally not be disclosed.
A last advice
The good news is that prohibitions in Germany are relatively rare and typically involve acquirers from specific countries, as far as publicly known. Nonetheless, the BMWK is diligent in examining transactions, especially when concerns are raised by third parties (see our blog on third-party interventions here). In insolvency cases, where ‘time is money’ rings particularly true, it’s crucial to act swiftly. One must take into account that even a Phase I proceeding can take up to two months and insolvency cases are not exempted by law. Therefore, it is advisable to get in touch with the BMWK as early as possible as they are often willing to accelerate the review in simple cases where time is of the essence.
Co-author Marcel Döhren studies law at the University of Dusseldorf (and works at ROCAN as a
student research assistant).
Photo (for this post) by Towfiqu barbhuiya on Unsplash
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