Foreign trade law - BMWK can not "close" investment screening proceeding

It doesn’t happen quite often that an administrative court reviews a decision of the Federal Ministry of Economics and Climate Protection (BMWK) on a planned company acquisition. Even more rarely, an administrative court has the opportunity to show BMWK the limits of its decision-making power. Both occurred most recently in November 2023 in a proceeding at Berlin Administrative Court (VG 4 K 536/22). But what happened?

In case of a direct or an indirect investment in a German company (target company) by a foreign investor, it must always be considered whether the investment is subject to the report or disclosure obligation under the Foreign Trade and Payments Ordinance (AWV). In the latter case, the transaction must be screened by BMWK and is, if necessary, subject to conditions. In the worst case, the investment is declared prohibited in accordance with Section 59 or Section 62 AWV. The purpose of this investment screening is to avoid negative effects on the public order or security of Germany - for example on critical infrastructures or the defence industry. It is important to know that BMWK only has a period of two months to initiate the screening process after the notification of an investment or after gaining knowledge ex officio in accordance with Section 14a AWV. Otherwise, the approval of the investment is deemed to be granted.

In this specific case, the target company was a German oil refinery. A certain percentage of the target company’s shares were held by owner no. 1. A majority share was held by owner no. 2, who also had a pre-emptive right to the shares held by owner no. 1.

The British purchaser concluded a purchase agreement with owner no. 1 for the acquisition of its shares. The SPA included two conditions: the waiver or non-exercise of the pre-emptive right by owner no. 2 and the non-prohibition of the acquisition by BMWK. The purchaser informed BMWK about the planned acquisition pursuant to Section 55a para. 4 sentence 1 AWV, that later started the screening process pursuant to Section 55 para. 1 AWV.

Unfortunately, owner no. 2 exercised its pre-emptive right to the shares of owner no. 1, as a result of which the planned acquisition initially failed. The purchaser informed BMWK about that development and declared the investment screening process to be irrelevant.

After some time, the contractual negotiations between the purchaser and owner no. 1 resumed. The purchaser notified BMWK again of the planned acquisition. However, BMWK did not notify the purchaser that the investment screening process had been (re)opened. Shortly thereafter, owner no. 1 terminated the SPA. The purchaser and owner no. 1 are still disputing the validity of the SPA today (as of February 2024).

A few months later, BMWK “closed” the investment screening process by issuing a note to the purchaser. BMWK justified its decision by stating that - due to the exercised pre-emptive-right of owner no. 2 - there was no “transaction” anymore to look at. Furthermore, the SPA was terminated by owner no. 1.

Since the purchaser was still interested in the acquisition, he brought an action before the Berlin administrative court (VG Berlin) against BMWK’s decision to “close” the investment screening process and claimed the declaration that the acquisition was deemed to be approved in accordance with the investment control regulations. The action was successful.

VG Berlin classified BMWK's notice of “closing” as an administrative act pursuant to Section 35 of the German act on administrative procedures (VwVfG) and declared that BMWK is not authorized by law to discontinue the investment screening process, which in fact made the notice of “closing” unlawful.

Since BMWK has not initiated the investment screening process due time after the (second) notification of the acquisition, the approval was granted by fiction pursuant to Section 58a para. 2 Alt. 2 AWV in conjunction with Section 14a para. 1 AWG. The pending dispute over the validity of the termination of the SPA by owner no. 1 does not contradict the approval, since it is not evident that the transaction cannot be realized in future. In the opinion of VG Berlin, a still disputed acquisition claim does not prevent a decision by BMWK in the investment screening process or the fiction of approval due to expiry of deadline.

If the purchaser and owner no. 1 reach an agreement, the acquisition is deemed to have been approved by BMWK. It is not known whether an appeal has been lodged against this decision.

We should take the following lessons from this decision with regard to international company acquisitions:

1. It is worthwhile not to accept decisions of BMWK "without complaint" in the literal sense. The BMWK may and must sometimes intervene in corporate transactions and thus in fundamental rights, but it must also facilitate transactions if the law provides so. There is no decision in either direction without a legal basis.
2. BMWK should be kept up to date during the course of a "moving" transaction. The screening periods may be triggered again, but this way the fictional approval effect can also occur as early as possible.