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Protecting Germany?27/02/2008. Source: SJ Berwin.
 M&A and private equity activity in Germany has reached an all time high in recent years: BVK figures show that 2007 set a new record, and that deal values have increased dramatically over the last five years.
Many investors see exciting opportunities ahead, and - as we reported towards the end of last year - there have been some considerable improvements in the legal framework for commercial activity. These have often been overshadowed in the press by a focus on the hostility of some German politicians to financial investors, but the reforms have in fact delivered real benefits.
Nevertheless, there are clear limits to the appetite for liberalisation, and it is still politically expedient to propose restrictive legislation. Recent concerns about foreign investors taking stakes in domestic firms are just another example of mooted regulations to temper market forces.
If the latest set of proposals were to become law, the German Federal Ministry of Economics and Technology would be able to review every proposed acquisition by a "foreign" investor of 25% or more of a German company. It would permit, at least in theory, the German government to block all kinds of acquisitions, wherever the acquisition would threaten "the public order and security of the Federal Republic of Germany".
Although the changes would not require an advance notification, the Government would be entitled to evaluate an acquisition during the three months following a deal. If the ministry decided not to investigate, the acquisition would become effective at the end of the three month period. But if the ministry does launch a full investigation, the purchaser would have to provide full documentation.
In practice, a very narrow application of the rules is envisaged, and the final wording of the law is still under discussion; it remains unclear to what extent the law will go beyond already protected sectors. As the proposal stands, however, the scope for the Ministry to prohibit an acquisition is very broadly defined and the rules, if adopted by the German Parliament later this year, would apply to all acquisitions. The new rules would supplement existing (more narrowly focussed) restrictions: under a 2004 law, for instance, foreign entities that wish to purchase 25% or more of German manufacturers of armaments or cryptographic equipment are required to notify the Federal Economics and Technology Ministry. The new legislation, however, would go much further than protecting such clearly strategic sectors, and seems motivated by a wider suspicion of overseas investors - and sovereign wealth funds in particular.
The ministry's possible prohibition of an acquisition is intended to be used only in exceptional cases, and the European Union's guaranteed freedom of capital movement is – according to the draft law – to be respected unless a restriction is needed in order to maintain public order and security. But - as a result of the unusual wording of the law (which says that the acquisition is provisionally void until the expiry of the relevant investigation period), and the breadth of its potential application - costs, risks and delays will be added to the M&A process for non-German acquirers.
These proposals serve to highlight a continuing political environment in Germany that remains difficult for financial investors. The delay and amendments to the expected new Private Equity Law, and the so-called "Risk Limitation Act" - which would add other burdens for acquirers - are further examples.
So, overall, the general legal environment for German business has been improving in an economy that faces stiff competition from its European partners, and the rest of the world. But high profile and chauvinistic political moves - not only in Germany, but also elsewhere in Europe and beyond - graphically demonstrate that there are limitations to such liberalisation. Concerns are echoed in many countries, but a cautious and thoughtful policy response - and not sweeping legislative change - is required.
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on its services to the private equity industry please contact Jonathan Blake or Simon Witney in its London office +44 (0)20 7533 2222 or visit our website at www.sjberwin.com.
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