Position Paper on the 13th Amending Act to the German Foreign Trade Act

Modifications Proposed by the German German Private Equity and Venture Capital Association (Bundesverband Deutscher Kapitalbeteiligungsgesellschaften - BVK) to the Scope of Application and to Certain Procedural Rules

1. Summary

The BVK considers the contents of the German Federal Government’s proposed amendments to the German Foreign Trade Act (Außenwirtschaftsgesetz - AWG) and the German Foreign Trade Regulation (Außenwirtschaftsverordnung – AWV) to be generally unproblematic for BVK members, because their investments in Germany are not expected to have any adverse effects on public policy or security. However, in order to facilitate the expedient practical application of the provisions, in particular for investors not affected by the new content, the BVK would propose several modifications thereto. This is commensurate with the Federal Government’s aim that the majority of non-Communityinvestors not be hindered by the planned control provisions. The possibility of government intervention should not lead to non-Community capital being withheld from Germany.
The BVK assumes that in order to achieve legal certainty, many acquirers will notify the Federal Ministry of Economics and Technology (Bundesministerium für Wirtschaft und Technologie) of the acquisition before making an investment. The aim therefore should be to simplify the procedure for such an advance clarification so that there are as few bureaucratic hurdles as possible for the acquirers. Investors should be assured of achieving rapid and dependable legal certainty in unproblematic cases.
This is particularly important in order to avoid substantial disadvantages for those investors involved in competitive divestiture proceedings (so-called auctions). Such auctions have in the meantime become the typical means by which companies are bought and sold, especially for private equity investors. In the context of such competitive auctions, any uncertainty about a possible refusal, over a longer period, can constitute a significant disadvantage for a particular bidder vis-à-vis other bidders, even if an actual refusal is unlikely. Indeed, besides a high selling price and otherwise reasonable terms, sellers are mainly interested in the certainty of a potential transaction. In the opinion of the BVK, such disadvantages for bidders should be minimised. Greater uncertainty about transactions with certain bidders would also be troublesome for the seller. Sellers would be, in some cases, faced with the decision of either accepting an offer that is commercially-promising, yet not 100% assured of being realisable, or one that is commercially-less attractive but which can be finalised without such uncertainty. Moreover, it may be disadvantageous for a seller if certain bidders choose not to participate in the auction, due to not being prepared to accept the disadvantages vis-à-vis other bidders that the regulations would cause.
The main purpose of the private equity and venture capital companies represented by the BVK is the acquisition and sale of business interests. They are therefore, as bidders and sellers, particularly dependent on efficient auction proceedings. The BVK is thus very much interested in an attenuation of the practical effects of this regulation.
The BVK proposes that only those acquisitions be subject to German Foreign Trade Act control in which the foreign investor would not only hold 25% of the voting rights after the acquisition, but which are also subject to German or European merger control. This synchronisation with the provisions of merger control law would result in the acquirers only having to compile comprehensive information once, for submission to the Federal Ministry of Economics and Technology on the one hand and the Federal Cartel Office, or the European Commission, on the other. The Federal Ministry of Economics and Technology’s planned right of examination and refusal would therefore remain intact. According to the BVK’s proposal, the Ministry would be able to prohibit the acquisition, or issue formal directives thereto, within one month of receipt of the information, in order to guarantee public policy and security in the Federal Republic of Germany. Upon expiry of this one-month period, the investor’s legal situation would be certain, and any competitive disadvantage during auctions as well as the additional bureaucratic encumbrance would be kept to a minimum.  
German and European merger control procedures are reliable instruments for the assurance of a functioning competitive market. Acquisitions which are not subject to these merger controls are of low economic importance. One must assume that such “trivial cases” would be unlikely to endanger public policy or security in the Federal Republic of Germany.
Finally, the BVK proposes, for legal reasons, to exclude acquirers from overseas countries and territories, as listed in Annex II to the EC Treaty, from the regulation. The BVK supports such an exclusion inter alia because private equity funds are situated in some of these countries, such as the Cayman Islands or the British Virgin Islands.

2. Status

In July 2008, the Federal Ministry of Economics and Technology tabled a reworked draft bill for the amendment of the German Foreign Trade Act, which grants the Ministry a right of examination and refusal in cases of acquisition by a non-Community business of a stake in a German company, if public policy or public security, as defined by articles 46 and 58(1) of the EC Treaty, are threatened and if the acquisition leads to a participation of at least 25% of the voting rights.
This reworked draft contains, in the opinion of the BVK, numerous substantial improvements vis-à-vis the original autumn 2007 draft. We particularly note in this respect the exclusion of acquirers from EU member states and member states of the European Free Trade Association, as well as the concretisation of the concept of public policy or public security.
The present version of the 13th Amending Act to the German Foreign Trade Act and the German Foreign Trade Regulation provides for the following procedure: pursuant to section 53 para. 1 of the Regulation, the Federal Ministry of Economics and Technology may examine the planned acquisition within three months of the signing of the purchase agreement or the publication of the decision to make a takeover offer or the acquisition of control. If the Federal Ministry of Economics decides to exercise its examination right, the acquirer is obliged to provide the transaction documents after a corresponding notification. The list of documents to be provided will be published in the Federal Gazette (Bundesanzeiger). Within two months of receipt of the documents, the Federal Ministry of Economics and Technology, with the approval of the Federal Government, may refuse the acquisition or issue formal directives. Pursuant to the planned section 31 para. 3 of the German Foreign Trade Act, the legal validity of the acquisition would be subject to the resolutory condition of the Ministry’s refusal.
Should legislators proceed with the draft bill for the amendment of the German Foreign Trade Act despite the many fundamental concerns already voiced with regard to the previous draft (cf. only the Annual Report 2007/2008 of 7 November 2007 prepared by the Council of Economic Experts), we would consider it reasonable to reduce the scope of its application and to modify the envisaged procedural rules.

3. Alternative Procedural Rules

3.1 Instead of the draft section 53 of the German Foreign Trade Regulation envisaged by the 13th Amending Act, we propose that the following sections 53 to 55 be newly incorporated under a second title headed “Control of Corporate Acquisitions in Foreign Trading”. The present second title, headed “Notification Regulations according to Section 26 of the German Foreign Trade Act”, would then be moved to a third title with the same name and would commence with section 56.  
“Section 53 Control of Corporate Acquisitions
(1) The provisions on control of corporate acquisitions in German foreign trading shall be applicable if a non-Community resident acquires a resident company or a direct or indirect stake in such a company. A resident company in which a non-Community resident holds at least 25% of the voting rights shall also be deemed to be a non-Community resident.  
(2) Paragraph 1 shall only apply if
1. the non-Community acquirer directly or indirectly holds at least 25% of the voting rights in the resident company after the acquisition. In calculating the non-Community acquirer’s percentage of voting rights, the shares of other companies in the company to be acquired shall be attributed thereto, if the acquirer holds 25% or more of the voting rights in said other companies. The voting rights of third parties, with whom the non-Community acquirer has concluded an agreement on the joint exercise of voting rights, shall also be attributed to the acquirer; and
2. the merger control provisions pursuant to section 35 of the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen - GWB) or pursuant to Article 1 of Council Regulation (EC) 139/2004 of 20 January 2004, as amended, shall be applicable.
(3) Branches and permanent establishments (Betriebsstätte) of the acquirer shall not be deemed Community residents. Non-Community acquirers from member states of the European Free Trade Association (Iceland, Lichtenstein, Norway, Switzerland) and overseas countries and territories listed in Annex II of the EC Treaty shall be treated as Community residents.
Section 54 Notification by the Acquirer
The acquirer may notify the Federal Ministry of Economics and Technology of the information on the acquisition which must be included in a complete notification of the merger to the Federal Cartel Office or to the European Commission according to the applicable merger control provisions. Irrespective of whether or not the acquisition has already been agreed to with legally binding effect, the notification to the Federal Ministry of Economics and Technology can be accomplished by forwarding a copy of the merger notification sent to the Federal Cartel Office or to the European Commission, by sending the draft of such a notification or in another manner in text form.  
Section 55 Right of Examination and Refusal
(1) The Federal Ministry of Economics and Technology may examine the acquisition, within three months of the date of signing of the contractual agreement on the acquisition of voting rights, as to whether it has an adverse effect on public policy or security in the Federal Republic of Germany; in cases of public offers, the period begins with the publication of the decision to make an offer or publication of the acquisition of control. The Federal Ministry of Economics and Technology shall advise the acquirer of its decision to conduct an examination according to sentence 1 within this time period. In this notice, the Federal Ministry of Economics and Technology shall issue an order for notification of the information which must be included in a complete notification of the merger to the Federal Cartel Office or to the European Commission according to the applicable merger control provisions. Section 54, sentence 2 shall apply accordingly.
(2) The Federal Ministry of Economics and Technology may refuse the acquisition or issue formal directives within one month after receipt of the information according to Section 54 or paragraph 1, to the extent necessary to ensure public policy or security in the Federal Republic of Germany. In the event of receipt of information according to section 54 and according to paragraph 1, the earlier date of receipt shall be decisive for the calculation of the time limit. No refusals or formal directives shall be issued after expiry of the applicable deadline. The Federal Ministry of Economics and Technology shall notify the Federal Government of the results of its examination. The consent of the Federal Government shall be required for refusals or the issuance of formal directives.
(3) Upon application by an acquirer, the Federal Ministry of Economics and Technology may issue a certificate stating that the acquisition is free from concerns with regard to public policy and security in the Federal Republic of Germany. The right to examine expires with issuance of the certificate and no refusal or formal directive may be made.
(4) The Federal Ministry of Economics and Technology may implement the measures necessary to execute the refusal. It may, in particular,
1. refuse or limit the exercise of voting rights in the acquired company that belong or are attributable to the non-Community acquirer, or
2. nominate a trustee to rescind a completed acquisition.”

3.2 We also propose to draft section 7, paragraph 2, number 6, sentence 2 of the German Foreign Trade Act as follows:

“Non-Community acquirers from member states of the European Free Trade Association (Iceland, Lichtenstein, Norway, Switzerland) and from overseas countries and territories as listed in Annex II of the EC Treaty shall be treated as Community residents.”

3.3 The alternative procedural rules proposed here do not affect the other amendments envisaged in the 13th Amending Act to the German Foreign Trade Act, except with regard to the necessary textual adjustments.

4. Explanation

4.1 Purpose of the amendments proposed by the BVK
By way of the possibility for the acquirer to notify the Federal Ministry of Economics and Technology of the transaction via the information required for merger control, pursuant to section 54 of the German Foreign Trade Regulation Draft, the acquirer shall be put in the position of obtaining legal certainty as to whether the Federal Ministry will exercise its prohibition right, preferably at the same time as or before conclusion of the merger control procedure. If the acquirer takes advantage of this opportunity, it will in practice be possible in many cases to achieve this legal certainty almost at the same time as or even before conclusion of the merger control procedure. Although the certificate of lack of concerns (Unbedenklichkeitsbescheinigung), proposed in the bill and adopted in the BVK draft, is a step in the right direction, it does not meet this need because the acquirer’s application does not create a deadline and the issuance as well as the timeframe of a potential certificate of lack of concerns is entirely at the Ministry’s discretion.
Since the information to be provided to the Federal Ministry of Economics and Technology corresponds to the information which must be relayed to the competent merger control authority at the time of the notification, the additional burden on the acquirer is kept to a minimum; at the same time the Federal Ministry of Economics and Technology can be provided with comprehensive information without it having to request specific information separately, as is envisaged in the present draft bill.  
As a result, the proposed amendments provide a speedy procedure running parallel to the merger control procedure and requiring a minimum of additional effort for the companies concerned and the Ministry.

4.2 Section 53, Control of Corporate Acquisitions
The scope of application of the control of corporate acquisitions is set out in section 53. The creation of a separate title serves the purpose of clarity and emphasises the particularity of investment restrictions. Para. 1 of section 53 adopts the contents of the conditions in the present draft bill.
Section 53, para. 2, contains differences as compared to the section 53 proposed by the 13th Amending Act. The requirements set forth in no. 2 must be met cumulatively, i.e. the foreign investor must hold at least 25 percent of the voting rights after the acquisition and, in addition, the transaction must be subject to German or European merger control. This enables a synchronisation with the merger control regulations. It should be noted in this respect that, under certain circumstances, the acquisition of at least 25 percent of the voting rights but less than 50 percent of the voting rights, despite community-wide importance in other respects, may not subject to European merger control. However, in any event, such acquisitions would be subject to German merger control if the latter’s other prerequisites are fulfilled.
If such other prerequisites are also not fulfilled, there should be no reason to subject the respective acquisitions to German Foreign Trade Act control. On the contrary, such cases have been intentionally excluded from merger control by the legislator, inter alia because they only have marginal effects in Germany (cf. Reason 2, Government Draft Publication 852/97, p. 56). According to case law of the Federal Court of Justice, subjecting such cases to merger control would also violate the principle of proportionality (cf. Federal Court of Justice, WuW/E 3037 et seq., 3042 Raiffeisen). These considerations apply equally to the control of corporate acquisitions according to the German Foreign Trade Act.

4.3 Section 54, Notification by the Acquirer
Section 54 provides the acquirer with the opportunity to achieve legal certainty at an early stage and without substantial additional effort. The companies involved must comply with their merger control notification obligations in any case. The acquirer thus has the ability to launch the examination procedure according to the German Foreign Trade Act by way of communication of the information required according to these regulations to the Federal Ministry of Economics and Technology.
According to the proposed draft, the forwarding of a draft notification or the presentation of the information in another written manner is sufficient because the purpose of the notification obligation, i.e. to provide a comprehensive report on the acquisition to the Ministry, is achieved in this manner.  

4.4 Section 55, Right of refusal
The structuring of the examination and prohibition right of the Federal Ministry of Economics and Technology, possibly as a procedure in several steps, was retained. However, according to the proposed amendment, if the Ministry considers an examination to be necessary, it must also issue an order for notification of the information required for the merger control procedure at the same time as the notification of the examination. According to the proposed amendment, a publication in the Federal Gazette is no longer required. Such a publication does not appear to be either necessary or appropriate. In the version contained in the present draft bill, in the event of specific requirements, these could be in conflict with the acquirer’s justified confidentiality interests. The proposed one-month deadline corresponds to the Ministry’s original draft and is modelled on the merger control requirement. The two-month deadline proposed by the current draft, on the other hand, appears inappropriately long and would constitute an unnecessary delay of legal certainty for the company in question. One must assume that such – correctly and very restrictively formulated – real and sufficiently grave threats to public policy and security, which affect a basic interest of society, could be detected within one month as well.

4.5 Section 7, para. 2, no. 6, sent. 2 of the German Foreign Trade Act
Overseas countries and territories benefit from particular treatment, different from other third-party states, since special arrangements for association apply to them pursuant to Article 299, Paragraph 3 of the EC Treaty, based on their special relationships to individual member states. The Decision of the Council of Europe dated 27 November 2001, which provides these countries with special freedoms that are comparable to the basic freedoms, is applicable to them pursuant to the association provisions of Article 187 of the EC Treaty. Nationals of these island countries can, in principle, also invoke these special freedoms directly and thus claim for potential violations of European law. This applies particularly to potential violations of the special free movement of capital. Such nationals should thus be excluded from the regulation in the same manner as investors from EU member states. The BVK supports this position particularly because private equity investors also reside in these countries and territories.