Higher regulatory hurdles for M&A transactions?

Investment control under foreign trade law

As the lar­gest eco­nomy in Eu­rope, Ger­many re­mains at­trac­tive to for­eign in­ves­tors. Gone, howe­ver, are the days when they could buy Ger­man com­pa­nies wi­thout too much trou­ble. In prin­ci­ple, any ac­qui­si­tion of a Ger­man com­pany by a for­eign player is sub­ject to re­view by the Fe­deral Mi­nis­try of Eco­no­mics and Cli­mate Pro­tec­tion (BMWK), re­gard­less of its eco­no­mic va­lue.

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In this way, the Ger­man go­vern­ment aims to en­sure that for­eign di­rect in­vest­ment does not jeo­par­dize pu­blic safety and or­der in Ger­many. Against this back­ground, nu­me­rous amend­ments to the law in re­cent years have led to a con­side­ra­ble tigh­te­ning of Ger­man in­vest­ment con­trol law. On this ba­sis, the Ger­man go­vern­ment has re­cently in­ter­ve­ned in se­veral plan­ned tran­sac­tions or even pro­hi­bi­ted them al­to­ge­ther.

The cen­tral chal­lenge is re­gu­larly to cla­rify whe­ther the tar­get com­pany is ac­tive in one of the 27 eco­no­mic sec­tors clas­si­fied as par­ti­cu­larly sen­si­tive. This re­qui­res early coor­di­na­tion bet­ween the com­pany and the ad­vi­sors. Must the tran­sac­tion be no­ti­fied to the BMWK? Is it ad­visa­ble to ap­ply for a de­ter­mi­na­tion that the ac­qui­si­tion is harm­less? The con­se­quen­ces of non-com­pli­ance can be dra­ma­tic. If there is no com­mu­ni­ca­tion with the BMWK, the lat­ter is aut­ho­ri­zed to pro­hi­bit the tran­sac­tion for five years from the date of con­clu­sion of the con­tract and to or­der its re­ver­sal. To avoid such le­gal un­cer­tainty, the re­view of in­vest­ment con­trol re­qui­re­ments has be­come a stan­dard is­sue in tran­sac­tions with in­ter­na­tio­nal par­ti­ci­pa­tion. In ad­di­tion, many neigh­bo­ring EU coun­tries are also tigh­te­ning or in­tro­du­cing new con­trol re­gimes. This has a par­ti­cu­lar im­pact on Ger­man tar­get com­pa­nies with sub­si­dia­ries in other EU coun­tries, which are also to be in­clu­ded in the ac­qui­si­tion pro­cess.

Control of third-country subsidies

As of July 12, 2023, the EU Re­gu­la­tion 2022/2560 on sub­si­dies from third coun­tries that dis­tort the in­ter­nal mar­ket (the For­eign Sub­si­dies Re­gu­la­tion) has also been in force. With this re­gu­la­tion, the EU aims to pre­vent state-sub­si­di­zed com­pa­nies from non-EU coun­tries from dis­tor­ting com­pe­ti­tion wi­thin the Eu­ro­pean sin­gle mar­ket. In or­der to achieve this goal, a no­ti­fi­ca­tion re­qui­re­ment was in­tro­du­ced for cer­tain busi­ness com­bi­na­ti­ons. The re­qui­re­ment is that

• at least one of the com­pa­nies in­vol­ved is lo­ca­ted in the EU,
• one of the com­pa­nies in­vol­ved has ge­ne­ra­ted to­tal sa­les in the EU of at least EUR 500 mil­lion in the pre­vious fis­cal year, and
• one of the com­pa­nies in­vol­ved has re­cei­ved a third-coun­try fi­nan­cial contri­bu­tion (e. g. grants, lo­ans, ca­pi­tal in­jec­tions, tax ex­emp­ti­ons, etc.) of at least EUR 50 mil­lion wi­thin the last th­ree ca­len­dar years.

As of 12.10.2023, such tran­sac­tions must be no­ti­fied to the EU Com­mis­sion upon con­clu­sion of the con­tract. Tran­sac­tions that have not yet been com­ple­ted by that date should also be re­viewed for a pos­si­ble no­ti­fi­ca­tion re­qui­re­ment. If the Com­mis­sion con­clu­des that a third-party sub­sidy gran­ted dis­torts the in­ter­nal mar­ket, it may pro­hi­bit the mer­ger of the com­pa­nies or or­der the re­ver­sal of a tran­sac­tion that has al­re­ady been com­ple­ted. It can also im­pose fi­nes of up to 10% of the pre­vious year's tur­no­ver of the com­pa­nies in­vol­ved for failure to no­tify and other in­frin­ge­ments of the EU re­gu­la­tion.

In view of these dras­tic le­gal con­se­quen­ces alone, it will be ne­cessary in the fu­ture to care­fully con­sider whe­ther a pro­po­sed ac­qui­si­tion falls wi­thin the scope of the EU Re­gu­la­tion in the run-up to M&A tran­sac­tions.

Antitrust Merger Control

An­ti­trust mer­ger con­trol has long been part of the "stan­dard re­per­toire" in the tran­sac­tion pro­cess. Howe­ver, in the case of tran­sac­tions with a for­eign con­nec­tion, the chal­lenge is to cla­rify the no­ti­fi­ca­tion re­qui­re­ments in dif­fe­rent coun­tries, which in some ca­ses are struc­tu­red very dif­fer­ently, and to coor­di­nate the va­rious pro­ce­du­res. A re­le­vant for­eign con­nec­tion may al­re­ady exist if one of the com­pa­nies in­vol­ved ge­ne­ra­tes cer­tain, i. e. pos­si­bly only small, sa­les in ano­ther coun­try, which is of­ten the case.

Re­cent de­ve­lop­ments at the EU le­vel with the aim of being able to bet­ter con­trol or pre­vent so-cal­led "kil­ler ac­qui­si­ti­ons" of in­no­va­tive start-ups create ad­di­tio­nal un­cer­tainty in cross-bor­der tran­sac­tions. For ex­am­ple, the re­cent "Il­lu­mina/GRAIL" case that the EU Com­mis­sion has the power to re­view and pro­hi­bit tran­sac­tions un­der mer­ger con­trol law that do not meet the no­ti­fi­ca­tion re­qui­re­ments un­der eit­her EU law or the law of the mem­ber sta­tes. Ac­cor­ding to the la­test case law of the ECJ, tran­sac­tions that do not re­quire no­ti­fi­ca­tion can also be re­viewed by the an­ti­trust aut­ho­ri­ties on the ba­sis of the pro­hi­bi­tion of the abuse of mar­ket power.

In Ger­many, too, mer­ger con­trol will be fur­ther tigh­te­ned. As a re­sult of the 11th GWB amend­ment re­cently pas­sed by the Bun­des­tag, the Fe­deral Car­tel Of­fice will in fu­ture be able to re­quire com­pa­nies to no­tify (al­most) every tran­sac­tion in cer­tain com­pe­ti­tion-cri­ti­cal sec­tors fol­lo­wing a so-cal­led "sec­tor in­quiry".

The risks of fai­ling to no­tify or pre­ma­tu­rely exe­cu­ting a tran­sac­tion sub­ject to no­ti­fi­ca­tion (so-cal­led "gun jum­ping") are con­side­ra­ble. Fi­nes of up to 10% of the pre­vious year's sa­les of the com­pa­nies can be im­po­sed. As re­cently as July 2023, for ex­am­ple, the EU Com­mis­sion im­po­sed a fine of EUR 432 mil­lion for "gun jum­ping".

Recommendations for action

The trend is clear: re­gu­latory re­qui­re­ments for cross-bor­der cor­po­rate tran­sac­tions are be­com­ing more nu­me­rous and more ex­ten­sive. As a re­sult, the path bet­ween si­gning and clo­sing a deal is get­ting lon­ger and more com­plex. Howe­ver, this does not have to create high hurd­les for the exe­cu­tion of a pro­ject in every case. It is more im­port­ant than ever to iden­tify the above-men­tio­ned is­sues are iden­ti­fied at an early stage and to as­sess their re­le­vance. Com­pli­ance with re­gu­latory no­ti­fi­ca­tion and ap­pro­val re­qui­re­ments may re­quire com­pa­nies to un­der­take ex­ten­sive pre­pa­ratory work, which must be star­ted in good time so as not to jeo­par­dize the ti­ming of a tran­sac­tion. The con­trac­tual do­cu­ments must ad­dress how the con­trac­ting par­ties will handle these re­qui­re­ments (in­clu­ding pro­vi­si­ons on the al­lo­ca­tion of re­spon­si­bi­li­ties bet­ween the par­ties, the oc­cur­rence of con­di­ti­ons of exe­cu­tion, the hand­ling of time de­lays, the dis­tri­bu­tion of risk in the event of a pro­hi­bi­tion or a re­lease sub­ject to con­di­ti­ons, the bea­ring of costs, etc.). In this way, in many ca­ses, it will be pos­si­ble to help the plan­ned tran­sac­tion cross the fi­nish line wi­thout fai­ling due to re­gu­latory hurd­les.