German FDI regulator spoils GlobalWafers' €4.35 billion Siltronic deal

Deal summary

The German Siltronic AG produces silicon wafers, which are an essential resource for the semiconductor industry. The planned takeover by GlobalWafers would have created the world's second-largest producer, behind Japan's Shin-Etsu. 

In Germany and worldwide, semiconductors are considered a key technology. They are installed in cars, smartphones and many other electronic devices. Fuelled by the COVID-19 crisis, a global semiconductor shortage has developed, making its role in Germany's and Europe's self-declared pursuit of technological sovereignty even more important. Hence, the German government already included semiconductors in last year's reform of FDI regulations as one of 16 critical technologies likely to affect public order or security. Non-EU and non-EFTA investors intending to acquire at least 20% of the voting rights or comparable control rights in a German target with corresponding business activities must notify the deal to the Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz – BMWK) before closing.

GlobalWafers made its bid before the reform was passed, so in principle there was no obligation to notify yet. For legal certainty and deal security, the parties nevertheless submitted a voluntary notification in December 2020 and applied for a certificate of non-objection (Unbedenklichkeitsbescheinigung). In the subsequent FDI screening procedure, the BMWK was unable to complete all the necessary steps before the bid expired, a BMWK spokesperson said. This particularly applied to the BMWK's review of the conditional merger control clearance by the Chinese competition authority, which had not been granted until 21 January.

With expiry of the bid, the deal fell through and FDI screening became obsolete, resulting in the procedure being terminated without a formal decision. Unlike in the IMST deal, the Federal Government did not need to justify why it might have been opposed to the takeover.

GlobalWafers also failed in its attempt to force a deemed clearance in court because of the BMWK's inaction. The court argued that the expiry of the statutory review period had been suspended until the Chinese competition authority had issued its decision. Officially, the BMWK wanted to assess whether any of the commitments made by GlobalWafers would impact the FDI screening procedure.

Timeframe for FDI screening

The German FDI screening procedure consists of two phases: a general review (Phase I) and an in-depth review (Phase II). For the timeframe, it makes no difference which of the two regulatory frameworks for FDI screening of sector-specific review (defence-related deals) or cross-sectoral review (all other deals) applies.

• In Phase I, the BMWK has two months to decide whether to initiate an in-depth review. The clock starts to run when the BMWK learns about the deal, e.g. through a (mandatory or voluntary) notification. If the BMWK does not render a decision on the initiation of Phase II within two months, the deal is deemed cleared.
• In Phase II, the BMWK has four months to render a decision. If the BMWK does not restrict or prohibit the deal within four months, the deal is deemed cleared. However, this timeframe is subject to some uncertainties:
  • The clock does not begin to run until the BMWK has received all the information necessary for review. The information to be submitted is specified in a general administrative act. In practice, there are often follow-up questions and the BMWK has in the past been very reluctant to confirm whether submitted information is complete.
  • In complex cases, the BMWK may unilaterally extend the review period by three months. The review period may be extended by one more month upon request by the Federal Ministry of Defence (Bundesministerium der Verteidigung) if the deal particularly affects Germany's defence interests. Further extensions are possible if the parties agree.
  • The clock stops when the BMWK requests additional information or negotiates mitigation agreements with the parties. Such negotiations usually take several months, and in difficult cases even longer.
  • Coordination between different Federal Ministries and the cooperation mechanism with the EU Commission and other EU Member States established in the EU FDI Screening Regulation may also have an impact on the timeline

Key takeaways on timeline and contractual measures

The key takeaways from the failed Siltronic deal concern timing: the timeframe of FDI screening procedures can be substantially longer than those of comparable regulatory procedures, such as merger control filings. Deal planning suffers from the described timeframe uncertainties. In complex cases (e.g. investors from the Far East and targets from the high-tech sector), Phase II review often takes significantly longer than the generally envisaged maximum of six months.

The Siltronic deal provides an example of this: more than a year after filing, the BMWK's apparent disregard of timing implications of the FDI screening procedure for the deal shows that parties need to carefully consider and address review timelines. Parties cannot rely on regulators' goodwill to timely close a deal.

Also, parties should note that FDI regulators do not operate in a vacuum. Deal reviews can be interdependent – even if one review is subject to German FDI rules and the other to Chinese competition law, like in the Siltronic deal.

The duration of the procedure and the eventual failing of the Siltronic deal further – and once again – demonstrate heightened scrutiny of and protectionism against FDI in sectors that governments deem critical for economic development. In recent years, Germany and regulators worldwide have significantly ramped up scrutiny of planned takeovers of high-tech companies by foreign investors. The scope of the German FDI regime was once again extended on 1 January – this time focusing on critical infrastructure. This follows a number of reforms over the recent past, with last year's reforms focussing on critical technologies. In parallel, the EU is working on a €45 billion European Chips Act to secure the supply of semiconductors. Similar initiatives of the EU and Member States address, e.g. 5G, AI, robotics and battery technology.

You should therefore make sure to address potential risks of delay or even failure of M&A deals from the start, for example by:

• defining (deemed) clearance as a closing condition – if notification is mandatory, the deal is subject to a standstill obligation and the parties must await clearance before closing;
• including a right of termination in case the deal is not cleared before a certain long stop date;
• agreeing on a break-up fee to be paid by the buyer in case of a prohibition – ideally in a separate agreement because the law is silent on whether, in case of a prohibition, the entire agreement becomes invalid; and
• specifying how the parties shall react in case of a prohibition or an order and who bears the costs. In practice, the buyer is often required to challenge prohibitions and orders at their own expense. If an order is economically reasonable, the buyer is often required to comply with it.

Authored by Sebastian Faust, Stefan Kirwitzke, and Philipp Reckers.