Two major transactions have recently faced headwinds in Germany and the United Kingdom, jurisdictions traditionally perceived as investor friendly. Specifically, Taiwanese-based investor GlobalWafers Co. Ltd. failed to obtain foreign direct investment control clearance from Germany for its tender offer for Siltronic AG; and a US-based investor did not pursue its plans to acquire UK-based chipmaker Arm Limited due to national security concerns in the United Kingdom, among other reasons.
In September 2020, the two wafer suppliers GlobalWafers and Siltronic entered into a Business Combination Agreement whereby GlobalWafers announced its intention to acquire all outstanding ordinary shares of Siltronic via a voluntary tender offer. In December 2020, GlobalWafers filed for issuance of a certificate of non-objection (Unbedenklichkeitsbescheinigung) in respect of the transaction with the German Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz, BMWK)[1]. The takeover offer lapsed after the transaction reached the long stop date on 31 January 2022 because the parties did not receive any decision from the BMWK by that date.
The BMWK’s ability to run down the clock without taking a decision arises out of the flexible review periods for the BMWK in the applicable German legislation. This provides for broad stop-the-clock mechanisms allowing the BMWK to extend a review far beyond the standard review period of six months for more complex cases. In the present case, the (extended and interrupted) review period ended after the long stop date for the transaction, thus allowing the BMWK to not render any decision on the merits.
The attempts by GlobalWafers to request the competent Berlin Administrative Courts to approve the transaction in interim relief proceedings over the last two weeks in January proved to be unsuccessful. The courts in two instances rejected the request, arguing that difficult legal foreign direct investment (FDI) questions arose as a result of the transaction, which the courts were unable to resolve in interim relief proceedings. Further, the courts rejected the argument that the transaction be deemed approved because of inaction by the BMWK because it had, among other things, issued yet another request for information a few days before the long stop date.
With respect to the proposed acquisition of Arm Limited (Arm) by a US-based investor, the UK Secretary of State for Digital, Culture, Media and Sport issued a public interest intervention notice (PIIN) in April 2021 on national security grounds triggering an investigation by the Competition and Markets Authority (CMA). In December 2021, the CMA published its Issues Statement explaining that the UK Secretary of State had raised specific national security concerns, including (1) exposure to regulatory processes that could alter Arm’s governance structures and generate concerns about the provenance and security of Arm IP, and (2) the reduction of the United Kingdom’s autonomy to develop, operate, or support defense and security systems that utilize Arm IP. The purchaser decided not to continue with the planned transaction at the beginning of February 2022 while the CMA’s phase 2 review (due to end on 2 May 2022) was still ongoing.
The German and UK governments are taking an increasingly cautious approach in assessing transactions relating to sensitive technologies and intellectual property. The two governments are rigorously applying the tightened FDI screening rules that both jurisdictions have introduced over the last few years. Both FDI screening regimes are broad in substance, going far beyond traditional national-security-related concerns, and increasingly consider potential supply chain concerns of public interest, particularly in relation to technologies deemed to be politically sensitive, such as semiconductors, artificial intelligence, and autonomous driving.
The applicable laws are also nascent and there is little decisional guidance from the governments or the courts, thus making it difficult for foreign investors to assess whether a specific transaction is in scope and how it is likely to be assessed by the authorities. In Germany, while the BMWK is in practice open to engage in informal consultations, it has no obligation to publish any of its decisions. In the United Kingdom, given the infancy of the new screening regime, there have been no final decisions yet and it remains to be seen how these will be reasoned and how much can be published due to confidentiality concerns.
The initial experience in complex cases such as the proposed acquisition of Arm and Global Wafers/Siltronic shows that the statutory review periods only provide certainty for deal timing in non-issue cases (i.e., those not relating to sensitive or critical technologies high on political agendas in the European Union, Germany, or the United Kingdom).
In cases involving sensitive or critical technologies, the commercial deadlines to implement a transaction may not have any bearing on the timing of the BMWK’s decision. This might lead (as in Global Wafers/Siltronic) to a transaction falling apart without having a reasoned decision which the addressee could appeal.
In the United Kingdom, if the Secretary of State needs more time to investigate the transaction beyond the statutory timeline of up to 105 working days, the Secretary would seek to agree an extension with the merging parties if the transaction is deemed to give rise to a national security risk. While, in principle, the parties could veto any further extension and thus force the Secretary of State to take a decision within the statutory deadline, in practice, parties appear unlikely to do so, as there is a high risk that this would result in a decision to block the transaction or to impose unfavorable remedy conditions. This issue did not arise in respect of the Arm transaction because it was still subject to the old procedure.
Based on this recent experience in two key jurisdictions, FDI screening diligence, planning, and execution should be a high priority in global cross border transactions with potentially sensitive assets. The procedural challenges of these proceedings need to be carefully factored into the overall transaction planning, considering all relevant deadlines. These two examples show that a synchronization of timelines may prove difficult in practice, so that any potential FDI issue should be identified and addressed early on in a deal process.
Morgan Lewis is continuously monitoring developments and practices with respect to FDI screening worldwide.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Frankfurt
Michael Masling
London
Frances Murphy
Omar Shah
Brussels
Christina Renner
Izzet Sinan
CFIUS Contacts
Washington, DC
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Ulises R. Pin
David Plotinsky
Christian Kozlowski
Katelyn M. Hilferty
Eli Rymland-Kelly
Boston
Carl A. Valenstein
[1] Before 8 December 2021, the BMWK was known as Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie, BMWi).