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.

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.