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A veto is retooled in Germany

An requirement for non-EU investors to face onerous federal scrutiny of most deals has been streamlined.

After a protracted battle, a draft law that would have significantly dampened foreign investment in Germany has been favourably amended, to the relief of the private equity industry.

The law sought to impose a lengthy veto period on transactions involving the direct or indirect acquisition of at least 25 percent of the voting rights of a German company by a non-EU investor. During the three months following the date at which the transaction became legally effective, Germany’s Federal Ministry of Economics and Technology would have had the right to decide to review the deal. Once the notice of review had been submitted, the Ministry would then have had two months to decide whether the transaction creates “public order or security concerns”, at which point the government would be able to void the deal agreement.

Now, the legislation has been amended to include an option whereby non-EU investors can seek pre-clearance from the Ministry, said Doerte Hoeppner, managing director of the German Private Equity and Venture Capital Association (BVK). Once the application for pre-clearance has been submitted, the Ministry has just one month to decide to review the deal or not.

The original draft would have had “devastating” consequences for foreign investors and German companies alike, she said.

“Nobody would invest in Germany anymore if there were such insecurity and you couldn’t be sure if your investment would take place or not,” Hoeppner said.  “And if you have to tell the seller that you cannot be sure whether your offer will really go through the Ministry’s, then of course nobody would sell you anything.”

The one-month review period is not overly burdensome, since all EU mergers already have to go through a one-month review period to ensure that the resulting business combination is not anti-competitive under the EU Merger Control Act.

 Most other countries in the EU, as well as the US, have enacted similar measures to give the government the authority to stop transactions that would endanger national interests.

There are still some important items on the BVK’s agenda, however. As the rest of the Western private equity world fights government attempts to regulate the industry, German fund managers are lobbying the government to pass formal regulation for private equity funds, Hoeppner said. The country still lacks a stable legal framework for the industry, which adds a level of uncertainty to transactions. This week the BVK presented a detailed recommendation to the government for the 2009 to 2013 legislative period, but until federal elections are held on 27 September, progress is unlikely, Hoeppner said.