F. Third Party Involvement
I. Antitrust Issues
The European and German antitrust laws cover the following three fields of regulation, also known as the three pillars of antitrust law:
- Prohibition of agreements restricting competition;
- Prohibition of abuse of a dominant position;
- Merger control.
The German and European antitrust laws coexist in such a way that both the German Act Against Restraints of Competition (GWB) and the European Treaty on the Functioning of the European Union are applicable as the case may be.
As the prohibition of abuse of a dominant position is only of secondary importance in case of foreign investments in Germany, the other two pillars are described below.
1. Restraints of Competition
All agreements between undertakings, decisions by associations of undertakings and concerted practices which have more than minor restrictions of competition as their object or effect are prohibited by the GWB. A prohibition under European antitrust law also requires that the agreement may affect trade between EU member states. The term agreement not only covers such between competing companies (horizontal agreements), but also agreements between companies which operate at different levels of the economy, e.g. in a supplier-customer relationship (vertical agreements).
Anti-competitive agreements between companies are exempt from the general prohibition if certain conditions are fulfilled, e.g. according to the GWB, specific cooperation facilities of small or medium-sized enterprises may be permitted in order to equalize disadvantages in competition with powerful large-scale enterprises.
Agreements that do not comply with the applicable anti-trust law may be void altogether or with regard to specific clauses, and are not enforceable. Moreover, third parties may be entitled to claim for removal, injunctive relief and/or damages. Finally, the authority can order an end to the conduct objected to in administrative proceedings and impose a fine of up to millions of Euros. Depending on its contribution to uncovering the cartel, a cooperative cartel member can be granted a reduction of up to 100 % of the fine imposed.
2. Merger Control
Merger control interdicts the construction of oligopolies or monopolies in the market by means of acquisition. When a company or a person intends to buy a company in the market in which they are already involved, they might have to apply for a merger control procedure if the turnover of the involved companies exceeds certain thresholds. According to the principal of a one-stop- shop on EU-level, German merger control is not applicable if the thresholds of the European Community Merger Regulation (ECMR) are met. In this case a notification must only be filed with the European Commission. Recently, the 8th amendment of the German GWB has introduced broad alignment with EU law.
In general, transactions that are subject to merger control must not be closed before clearance or before the statutory waiting periods have expired.
a) European Merger Control
A merger is governed by the ECMR if the combined aggregate worldwide turnover of the companies is greater than EUR 5 billion and the aggregate EU-wide turnover of each of at least two companies involved in the merger is greater than EUR 250 million.
Furthermore, the ECMR is applicable if the combined aggregate worldwide turnover of all companies involved is higher than EUR 2.5 billion and the following terms are complied with simultaneously:
- The aggregate EU-wide turnover of each of at least two of the companies involved in the merger is higher than EUR 100 million;
- The aggregate turnover of each of at least two companies involved in a merger in each of at least three of these member states is higher than EUR 25 million;
- The combined aggregate turnover of any company involved in the merger in each of at least three member states is higher than EUR 100 million.
A merger is not subject to European merger control if two third of the EU-wide turnover of all involved companies is made in only one member state.
The substantive test to assess a merger is the SIEC-test, which examines whether a merger will have a significant impediment on effective competition. Market dominance is an example of such an impediment. As a rule of thumb, the Commission will assume market dominance if the undertakings have a market share of 50 % or more after the merger. Clearance of the notified merger may be made subject to structural or behavioral conditions and obligations.
The merger control procedure is divided into two phases. Phase I lasts for 25 days from the filing; 90 % of the notified mergers are cleared within this phase. Phase II is opened only if an in- depth investigation procedure is necessary. It lasts up to 90 days, but may be extended.
b) German Merger Control
The German merger control regime is contained in sections 35 to 47 of the GWB. German merger control will only apply if the combined aggregate worldwide turnover in the preceding financial year is higher than EUR 500 million and at least one company must have a turnover within Germany of more than EUR 25 million and a further company must have a turnover within Germany of EUR 5 million.
For the calculation of turnover on the acquirer’s side, the turnover of all companies controlled or controlling the acquirer have to be taken into account. On the target side, turnovers only attributable to companies controlled by the target company (i.e. not the group) are taken into account. In this respect, turnover thresholds are based on net turnover, derived from sales of products and provision of services. Excluded is all income generated from business activities in the normal course excluding taxes, intra-group sales and transitory items. If the operations of a company consist of trade in goods, only three fourth of the turnover is taken into account. It should be noted that the Federal Cartel Office (FCO) treats several timely successive transactions within two years between the same parties as one merger. For media companies the respective turnover has to be multiplied by the factor of 8. For financial institutions and insurance companies, different thresholds are applied according to their business.
There are exemptions: A merger will not be subject to control, if a non-controlled company is involved which has a worldwide turnover of less than EUR 10 million. However, in contrast to before the 8th amendment, a notification obligation now exists irrespective of whether or not a market is a de minimis-market, i.e. a market in which goods or commercial services have been offered for at least five years and each of the product markets had a sales volume of less than EUR 15 million in the last calendar year. However, the FCO must clear a merger in such a market.
Even the acquisition of a single built-up or undeveloped property by way of an asset deal may principally meet the merger requirements of a so-called acquisition of assets, if the respective thresholds are exceeded.
The most significant change implied by the 8th amendment concerns the substantive test in German merger control. Whereas until now the dominance test was applied, German merger control is now in line with the ECMR and applies the SIEC-test. The creation or strengthening of a dominant position will only be an example of a substantial impediment. Note that the FCO will presume an individual market dominance if the company has a market share of 40 % or more.
In case the respective legal requirements are fulfilled, the parties must file a pre-merger notification. Hereafter, the FCO with seat in Bonn shall decide within one month (phase I) if the main merger control procedure has to be conducted. Without such a demand by the FCO, the approval is deemed granted. 95 % of the notified mergers are cleared in phase I. In the event of a main merger control procedure (phase II), the FCO assesses the merger depending on the market and company structure and conduct. Clearance may be subject to structural or behavioral obligations. After a deadline of four months (resp. five if obligations are assessed), the approval is deemed granted.
II. Foreign Investment Approvals
In principle, investments in German businesses are free and – except for only a few specific public related industries – not restricted (freedom of investment principles). The acquisition of companies with offices or places of business in Germany is only restricted with respect to investors with their seats or management outside the European Union (EU)/European Free- Trade Area (EFTA) on the one hand and the acquisition of German war-related industries on the other hand; that way the authorities have the exceptional right to restrain any acquisitions which endanger the public order or security of the Federal Republic of Germany.
1. General Investment Approvals
Since 2009, each direct or indirect acquisition of at least 25 % of the voting rights of a German company by an acquirer with its seat or management outside the EU/EFTA may be reviewed by the Federal Ministry of Economics and Technology (FMoET) within three months, beginning upon conclusion of the obligation to acquire a company (see B.IV.5.), respectively upon publication of the decision to make a takeover bid or publication of obtainment of control. Only if and to the extent the FMoET requests the delivery of documents relating to the acquisition, it has an additional two months to issue orders or prohibit the acquisition in case it endangers the public order or security of the Federal Republic of Germany.
If no concerns exist, each acquirer has a right to issuance of a clearance certificate vis-à-vis the FMoET. The application for a clearance certificate requires a description of the scheduled acquisition and information about the acquirer and its business. The clearance certificate is considered to be granted if the FMoET has not instituted review procedures within a period of one month beginning upon receipt of the application.
2. Approvals for Acquisitions of Defense-Related Industries
Only in case of the acquisition of a German company that manufactures or develops military weapons, cryptographic systems or other defense-related goods, the transaction must be announced to the FMoET. The notification requirement also applies in case of an indirect acquisition if a foreigner holds 25 % or more of the voting rights of the German parent acquirer.
The FMoET can only prohibit such acquisition within one month after receipt of the announcement, if and to the extent the prohibition is essential in order to protect the security interests of the Federal Republic of Germany.
III. Public Financial Control
When investing in German companies, investors are subject to various regulatory requirements, depending in particular on the kind and amount of their investment and the type of company in which they invest. As a general rule, these requirements are applicable in cases of companies incorporated in Germany; however, in some cases they may also apply to companies whose shares are admitted for trading on a regulated market in Germany. Due to the upcoming implementation of the of the Directive on Alternative Investment Fund Managers (Directive 2011/61/EU) into German law, additional notification requirements will also be triggered if investments are made in non-listed German companies by the managers of such funds (see 5. below).
1. Acquisition of Shares: Notification Requirements
When acquiring or selling shares in companies admitted for trading on a regulated market, as well as warrants, financial instruments or other instruments which give an unconditional right to acquire shares with voting power in such companies and, in so doing, exceeding or falling below certain thresholds in voting rights (3%, 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75%), any investor has to notify the company and the BaFin without undue delay, at the latest within four trading days. The notification period begins at the point at which the notifying party knows or in consideration of the circumstances must have known that his percentage of voting rights has reached, exceeded or fallen below the above-mentioned thresholds. It is assumed that the notifying party gets to know of this two trading days after reaching, exceeding or falling below the respective threshold. Voting rights may generally not be exercised if the notification requirement is not complied with.
Any purchaser of listed shares reaching or exceeding the threshold of 10 % or any higher threshold must disclose to the issuer within 20 trading days whether
- the investment is aimed at implementing strategic objectives or generating a trading profit;
- it plans to acquire further voting rights within the next twelve months by means of a
- purchase or by other means;
- it intends to exert an influence on the appointment or removal of members of the issuer’s administrative, managing and supervisory bodies; and
- it intends to achieve a material change in the company’s capital structure, in particular as regards the ratio between own funds and external funds and the dividend policy.
With regard to the objects of the purchase and the source of financing, the notifying party must state e.g. whether and to what extent means are debt or equity. Public tender offers are exempt from such disclosure, as well as purchases by investment companies regulated under the Undertaking for Investments in Transferrable Securities (UCITS) directive. The issuer is required to publish any information thus disclosed and information on all cases in which the disclosure requirement has been violated. Issuers may exclude application of the disclosure requirement in their by-laws.
When acquiring shares in AGs that are not listed on a regulated market and exceed the threshold of 25 % of the shares, the purchaser has to notify the company and the company has to publish such notification. No similar notification requirements apply to purchases of shares or interests in companies of other legal types, such as GmbHs.
2. Public Tender Offers
Any bidder making a public tender offer (see B.V.) to purchase shares as a whole or in part in a company admitted to trading on a regulated market is subject to certain notification and publication requirements. An offer document in the German language must be submitted to and approved by the German Financial Supervisory Authority (BaFin). Additional requirements apply to takeover bids and mandatory offers in case voting rights reach or are intended to reach at least 30 %. Upon written application by the bidder, BaFin may grant an exemption from the mandatory offer requirements in certain circumstances. In case of conflicting foreign rules, reliefs may be obtained with regard to cross-border purchases.
3. Control of Banks and Financial Institutions
When intending to acquire shares in a bank or other regulated financial services provider subject to the supervision of BaFin and, in so doing, exceeding certain thresholds in capital or voting rights (the minimum is 10 %), the purchaser must notify BaFin and the German Federal Bank of his intention to buy such qualified holding and must also provide evidence of his tustworthiness. An “intent of acquire” should be assumed as soon as the executive board of the interested acquirer (finally) has decided if applicable with the consent of the supervisory board in favor of the acquisition. BaFin will evaluate the notification within 60 working days as of the date of the letter by which it confirmed in writing the receipt of the full notification. Such assessment period might be prolonged up to 90 working days. BaFin may prohibit the intended acquisition, inter alia, if facts justify the assumption that the notifying party is not trustworthy or for other reason does not meet the requirements to be complied with in the interest of a sound and prudent management of the regulated entity.
With regard to listed shares, the prohibitions of insider trading and market manipulation should be observed as general rules of conduct.
The granting of loans to portfolio companies based in Germany may be subject to license requirements depending on the amount and quantity of the loan(s) granted.
Depending on the type of transaction and portfolio company, there may be further regulatory requirements, such as anti-money laundering checks on investors.
5. Additional Disclosure Requirements arising from AIFMD
Due to the implementation of the Directive on Alternative Investment Fund Managers (AIFMD) in German law on July 21, 2013 by means of the introduction of the Capital Investment Act (KAGB), the regulatory framework regarding the management of alternative funds will significantly change. With respect to M&A-transactions, disclosure requirements and rules on asset stripping in particular must be considered when control over non-listed companies is acquired.
a) General Disclosure Requirements
The AIFMD provides for a set of rules establishing several disclosure obligations for managers of alternative investment funds (AIFM) managing alternative investment funds (AIF) that acquire major holdings or control of non-listed companies and issuers. Hence, when such AIFM acquires, disposes or holds shares of a non-listed company on behalf of the AIF, the AIFM must notify BaFin of the proportion of voting rights of the non-listed company held by the AIF any time that portion reaches, exceeds or falls below the thresholds of 10 %, 20 %, 30 %, 50 % and 75 %.
b) Disclosure Requirements in case of Acquisition of Control
When an AIF, individually or jointly, acquires control over a non-listed company or an issuer the AIFM managing such AIF shall notify
- the non-listed company concerned;
- the shareholders of the company; and
- the competent authorities of the home member state of the AIFM.
Additionally, the AIFM must make available the following information:
- the identity of the AIFMs which either individually or in agreement with other AIFMs manage the AIFs that have acquired control;
- the resulting situation in terms of voting rights;
- the conditions subject to which control was acquired;
- the policy for preventing and managing conflicts of interest;
- the policy for external and internal communication relating to the company in particular as regards employees; and
- the date on which control was acquired.
In its notification to the company, the AIFM shall request that the board of directors of the company inform the employees’ representatives or, where there are none, the employees themselves, without undue delay of the information. The AIFM shall use its best efforts to ensure that the employees’ representatives or, where there are none, the employees themselves, are duly informed by the board of directors. Additionally, the AIFM acting on behalf of the AIF, must disclose its intentions with regard to the future business of the non-listed company and the likely repercussions on employment, including any material change in the conditions of employment.
Any notification must be made as soon as possible, but no later than 10 working days on which the AIF has reached, exceeded or fallen below the relevant threshold or has acquired control over the non-listed company.
c) Specific Requirements regarding the Annual Report of AIFs exercising Control of Non-Listed Companies
When an AIF, individually or jointly, acquires control over a non-listed company or an issuer the AIFM managing such AIF is further required to request and use its best effort to ensure that the annual report of the non-listed company includes additional information and is made available by the board of directors of the company to the employees’ representatives or, where there are none, to the employees themselves. Such additional information to be included in the annual report must contain at least a fair review of the development of the company’s business representing the situation at the end of the period covered by the annual report. The report must also include, inter alia, any important events that have occurred since the end of the financial year and the company’s likely future development.
d) Rules on Asset Stripping
When an AIF, individually or jointly, acquires control of a non-listed company or an issuer, the AIFM managing such an AIF shall for a period of 24 months following the acquisition of control of the company by the AIF:
- not be allowed to facilitate, support or instruct any distribution, capital reduction, share redemption and/or acquisition of own shares by the company;
- in so far as the AIFM is authorized to vote on behalf of the AIF at the meetings of the governing bodies of the company, not vote in favor of a distribution,
- in any event use its best efforts to prevent distributions, capital reductions, share redemptions and/or the acquisition of own shares by the company.
capital reduction, share redemption and/or acquisition of own shares by the company; and
IV. Pre-Emption Rights
1. Pre-Emption Rights concerning Shares
The main purpose of any kind of pre-emption right is to prevent unmeant changes in regard to the proportions of shareholdings and the accession of new shareholders in the company. Hence, in many cases, the articles of association or existing shareholders’ agreements of certain companies contain pre-emption rights in favor of the existing shareholders. Usually, the articles of association provide for detailed terms and provisions on the execution of pre-emption rights, in particular the beneficiaries shall be informed prior to an envisaged transaction or immediately after or within a specific time frame after the share purchase agreement has been concluded. Therefore, provisions relating to pre-emption rights must be reviewed carefully in a due diligence process. Furthermore, it is advisable to address this issue with the respective pre- emptor in a timely manner. In many cases, it should be easy to negotiate a waiver of the respective pre-emption rights.
2. Pre-Emption Rights concerning Real Estate
The land register is only allowed to register the purchaser of a property as new owner if confirmation is provided that the municipality does not execute its pre-emption right. A municipality may have a statutory pre-emption right, e.g. in case the real estate property is located in a redevelopment area or if the property is required for other public purposes. Therefore, usually all purchase agreements regarding German real estate (asset deal) stipulate that the purchase price shall not fall due before the respective waiver has been issued by the municipality.
Further, statutory and contractual pre-emption rights may exist, e.g. the statutory pre-emption right of a tenant to purchase his apartment in case it was converted into a separately owned condominium (see A.III.2.c)) during the term of his lease and is now being sold for the first time. Furthermore, preemption rights can be freely created by contract with any third party, including municipalities. Please note, however, that the pre-emption right must be registered in the land register in order to affect a transaction. Pre-emption rights that are not registered in the land register and are therefore not obvious to a potential purchaser will only allow entitlement to damages vis-à-vis the other party. If registered, the pre-emption right is enforceable not only against the owner of the estate, but also any of his successors.