Notification obligations under foreign trade law – the risks and stumbling blocks for M&A transactions

The legal due diligence assessment carried out as part of an M&A transaction provides a careful assessment of the legal risks associated with the target and is an indispensable element of every transaction. Often, little or no attention is paid to the notification requirements for foreign trade transactions under the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV). This article provides an overview of the reporting obligations to make you more aware of this issue and the consequences of failure to comply.

Failure to comply with the reporting obligations is an administrative offence

Any due diligence assessment should examine the notification obligations because the intentional or negligent infringement of these reporting obligations constitutes an administrative offence under § 19 (3) No. 1b of the Foreign Trade and Payment Act (Außenwirtschaftsgesetz, AWG), in combination with § 81 (2) No. 19 of the AWV and can result in fines of up to EUR 30,000.00 for each infringement. As a legal person acts through its representative body, the responsibility for carrying out the notification lies with the board of directors. Directors, (including former directors), therefore commit any infringements of the reporting obligations. Accordingly, directors can be personally liable. A continued, undetected breach would affect any new directors appointed after a transaction. In addition, legal persons can also be fined under § 30 of the Act on Regulatory Offences (Gesetz über Ordnungswidrigkeiten, OWiG).

Reporting obligations

The Foreign Trade and Payments Ordinance establishes various notification obligations for foreign trade transactions, particularly in relation to capital movements and payments. These obligations apply to domestic natural or legal persons. For legal persons, this will depend on the location of the company’s head office, as stated in its articles of association. Generally, the reporting obligations can coexist and exist independently. The following notification requirements for capital movements and payments should be highlighted:

• Under § 64 (1) of the AWV, natural and legal persons located in Germany must notify the status (e.g., shareholding and voting rights) and selected information about the asset structure (e.g., assets and liabilities) of companies located abroad when that natural or legal person holds 10% of the shares or voting rights directly in a foreign company or 50% of the shares or voting rights indirectly in a foreign company through an independent foreign company (so-called K3 notification). In addition, permanent establishments and allocated assets of foreign subsidiaries are also subject to the notification requirements.
• The notification requirements under § 64 (1) of the AWV apply inversely to the assets of foreign natural and legal persons in Germany pursuant to § 65 (1) of the AWV (so-called K4 notification). The obligation also applies to the domestic company and not the foreign company.
• Under § 66 (1) of the AWV, those subject to the notification requirements must notify the assets and liabilities of foreign persons to the German Federal Bank (Deutsche Bundesbank) each month where these assets or liabilities total more than EUR 5 million at the end of a month (so-called Z5 and Z5a notifications).
• Under § 67 (1) of the AWV, those subject to the notification requirements must notify the German Federal Bank of any payments received from foreigners or residents for the account of a foreigner (incoming payments) or payments made to a foreigner or a resident for the account of a foreigner (outgoing payments) (so-called Z4 notification).
• Possible actions in the case of infringement and how to observe the requirements in due diligence assessments and M&A transactions

Foreign trade law provides the possibility to make a voluntary declaration about an infringement of the notification requirements (leniency application) and receive immunity (§ 22 (4) of the AWG). According to this provision, a negligent breach of the reporting obligations will not be prosecuted as a regulatory offence (not for intentional breaches), where the violation is uncovered by in-house controls and notified to the relevant authority, and appropriate measures have been taken to prevent the same type of breach reoccurring. If all conditions for a leniency application are fulfilled, the administrative offence won’t be prosecuted.

The purchaser might also uncover the offence during the due diligence process. The (potential) buyer should ask about compliance with these notification requirements. If an infringement is uncovered, future infringements should be prevented. For past infringements, we recommend alerting the vendor and discussing the possibility of a leniency application, which could be developed jointly. Compliance with the notification obligations or - in the case of an existing infringement – the need to bear the consequences and make a leniency application should be taken into account when agreeing on the purchase price, in the catalogue of guarantees, and in the release rules.

Summary

The notification obligations under foreign trade law are hidden risks that should be given greater attention in M&A transactions in the future. Nobody wants to take on liability for an administrative offence with significant fines when they acquire a company. Consequently, every due diligence assessment should at least consider the obligations to notify the German Federal Bank, and the sale and purchase agreement should reflect compliance with these obligations.

Benjamin Knorr

Robert Schmid