KUNZ Rechtsanwälte has received the draft bill dated 22 January 2021 on the 17th Ordinance Amending the Foreign Trade and Payments Ordinance. We are happy to comment on this from the perspective of a law firm that regularly advises on acquisitions of companies and shareholdings on both the buyer and seller side.
1) Regulations on the control of foreign direct investment naturally have a fundamentally aggravating effect with regard to the implementation of transactions. After all, foreign direct investment is still to be welcomed in principle, as it brings with it fresh capital, the potential for follow-up investment and new entrepreneurial concepts. Therefore, investment control should primarily be concerned with catching cases of misuse of the investment for foreign purposes.
The planned new regulations should also be measured against this objective if the list of sensitive sectors is increased from 11 to 27. For these 27 sectors, a reporting obligation will then apply in the event of the acquisition of at least 10% of the voting rights by investors from non-EU/EFTA countries. The planned new regulation therefore already means a considerable expansion of the reportable transactions. Whether all sectors have to be included should, in our view, be questioned once again.
The new regulations will also cause considerable additional work for the administration. This effort must be managed both technically and in terms of personnel. Transaction advisors should therefore examine the notification requirement at an early stage. Uncritical cases would then have to be handled in the same way in administrative practice as applications for clearance certificates have been in the past. In this way, the administration's checks could be concentrated on the really critical cases.
2) Even if the proposed new regulations are handled pragmatically by the administration, the number of cases in which an investigation is initiated is likely to increase significantly. This is also the aim of the new regulation. On the other hand, the following circumstance should have a facilitating effect: Within the framework of the procedure for issuing the clearance certificate, the investment was already deemed to have been released without action by the authorities after a period of two months from the date of knowledge of the conclusion of the contract. In the future, this presumption will also apply to reported transactions. As a result, if the notification is made in time, it should be easier to control the aggravating circumstances in practice. Even if an investigation procedure is initially initiated, the investment will nevertheless be deemed to have been released after a period of four months following receipt of all the necessary documents, unless the authority orders the prohibition within this period and takes enforcement action.
3) Also significant for practice is the planned provision according to which any additional acquisition above the thresholds of 10% or 25% of the voting shares is to be subject to investment control in the future. This planned provision initially sounds quite bureaucratic and burdensome, and one wonders why larger thresholds of at least a further 10 percentage points of the voting rights were not chosen. However, experience from transaction consulting shows that lower increases in voting rights tend to occur less frequently anyway. Despite the broad wording, increases in voting rights to more than 50 or more than 75% will be of practical relevance in case of doubt.
4) Another planned new regulation concerns so-called atypical acquisition situations. In these cases, an effective participation in the management or control of the domestic target company is acquired by means other than the acquisition of voting rights. This can be done by granting seats on supervisory bodies, veto rights or information rights. These cases may also give rise to a reporting obligation. In this respect, too, lawyers should point out to investors in good time the risks arising from circumvention transactions.
Overall, the proposed new provisions of the 17th amendment to the Foreign Direct Investment Ordinance have a burdening effect on the foreign investor and, in individual cases, could even call the investment as such into question. The increased powers of intervention also make it more likely that the worst consequence from the investor's point of view will occur, namely the reversal of a direct investment that has been classified as not permissible after execution. To avoid this risk, precautionary advice from the lawyers engaged by the investor is all the more important.
In practice, however, the effects are unlikely to be as noticeable as they might appear at first glance. If the investors' lawyers address a possible reporting obligation at an early stage, there are good prospects of being able to clarify open questions in advance, if necessary. Good coordination between lawyers, investors and the authorities is likely to be crucial to the success of the tightening of investment control, which is apparently considered necessary from a regulatory point of view.
Your contact:
Dr. Hermann J. Knott LL.M. (UPenn)
Partner
Attorney-at-Law (Germany and New York)
