Transparency of the Regulatory System
Germany has transparent and effective laws and policies to promote competition, including antitrust laws. The legal, regulatory and accounting systems can be complex but are transparent and consistent with international norms.
Formally, the public consultation by the federal government is regulated by the Joint Rules of Procedure, which specify that ministries must consult early and extensively with a range of stakeholders on all new legislative proposals. In practice, laws and regulations in Germany are routinely published in draft, and public comments are solicited. According to the Joint Procedural Rules, ministries should consult the concerned industries’ associations (rather than single companies), consumer organizations, environmental and other NGOs. Consultation generally takes between two to eight weeks.
The German Institute for Standardization (DIN) is open to foreign members.
International Regulatory Considerations
As member state of the European Union, the Federal Republic of Germany must observe and implement directives and regulations adopted by the EU. EU regulations are binding and must immediately be applied by the Member States. They constitute immediately applicable law. A directive, whilst also being intended for the Member States, merely constitutes a type of framework law that is to be elaborated by the Member States in an individual legislative process. Directives are implemented along normal German legislative procedures.
Member States of the European Union need to implement directives within a given period of time. Should a deadline not be met, the Member State may suffer the initiation of an infringement procedure, which could result in high fines. Germany has a set of rules that prescribe how to break down any payment of fines devolving on the Federal Government and the Länder. Both bear part of the costs depending on their responsibility within legislation and the respective part they played in non-compliance.
The German Länder (federal states) have a say in European affairs through the Bundesrat (upper chamber of parliament). It is incumbent upon the Federal Government to instruct the Bundesrat at an early stage on all plans at EU level that are relevant for the Länder.
The federal government notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT) through a National Notification Office within the Federal Ministry of Economic Affairs and Energy (BMWi).
Legal System and Judicial Independence
German law is both predictable and reliable. Companies can effectively enforce property and contractual rights under German law. Germany’s well-established enforcement laws and official enforcement services ensure companies/investors to consistently assert their rights. German courts are fully available to foreign investors in the event of an investment dispute.
The judicial system is independent, and the federal government does not interfere in the court system. The legislature sets the systemic and structural parameters, while lawyers and civil law notaries use the law to shape and organize specific situations. Judges are highly competent. International studies and empirical data have attested that Germany offers an efficient court system committed to due process and the rule of law.
In Germany, all important legal issues and matters are governed by comprehensive legislation in the form of statutes, codes and regulations. The most important legislation in the area of business law includes:
- the Civil Code (Bürgerliches Gesetzbuch, abbreviated as BGB), which contains general rules on the formation, performance and enforcement of contracts and on the basic types of contractual agreements for legal transactions between private entities;
- the Commercial Code (Handelsgesetzbuch, abbreviated as HGB), which contains special rules concerning transactions among businesses and commercial partnerships;
- the Private Limited Companies Act (GmbH-Gesetz) and the Public Limited Companies Act (Aktiengesetz), covering the two most common corporate structures in Germany – the ‘GmbH’ and the ‘Aktiengesellschaft’; and
- the Act on Unfair Competition (Gesetz gegen den unlauteren Wettbewerb, abbreviated as UWG), which prohibits misleading advertising and unfair business practices.
Germany has specialized courts for administrative law, labor law, social law, finance and tax law. The Federal Patent Court hears cases on patents, trademarks, and utility rights which are related to decisions by the German Patent and Trademarks Office. Both the German Patent Office (Deutsches Patentamt) and the European Patent Office are headquartered in Munich.
Laws and Regulations on Foreign Direct Investment
The Federal Ministry for Economic Affairs and Energy (BMWi) may review acquisitions of domestic companies by foreign buyers in individual cases to assess whether these transactions pose a risk to the public order or national security of the Federal Republic of Germany. The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis. However, in practice, restrictions of foreign direct investment are very rare.
Cross-sector investment review procedures apply to any acquisitions of a company by a foreign investor located outside the territory of the EU or the EFTA region whereby investors acquire ownership of at least 25 percent of the voting rights of a company resident in Germany. There is no requirement for investors to obtain approval for or notify any acquisition, but the BMWi may conduct a review within three months from the day of the conclusion of the acquisition agreement. An investor may also request a binding certificate of non-objection from the BMWi in advance of the planned acquisition to obtain legal certainty at an early stage. If the BMWi does not open an in-depth review within one month from the receipt of the request, the certificate shall be deemed as granted.
Special rules apply for the acquisition of companies that operate in sensitive security areas, including defense and IT security. In contrast to the cross-sectoral rules, the sensitive acquisitions must be notified in written form including basic information of the planned acquisition, the buyer, the domestic company that is subject of the acquisition and the respective fields of business. The BMWi may open a formal review procedure within one month after receiving notification, or the acquisition shall be deemed as approved. If a review procedure is opened, the buyer is required to submit further documents. The acquisition may be restricted or prohibited only within one month after the full set of documents has been submitted.
Any decisions resulting from review procedures are subject to judicial review by an administrative court.
The German Economic Development Agency GTAI provides extensive information for investors, including about the legal framework, labor-related issues and incentive programs, on their website: http://www.gtai.de/GTAI/Navigation/EN/Invest/investment-guide.html
Competition and Anti-Trust Laws
German government ensures competition on a level playing field on the basis of two main legal codes:
The Law against Limiting Competition (reformed in 2013) is the legal basis for the fight against cartels, merger control and monitoring abuse. State and Federal cartel authorities are in charge of enforcing anti-trust law. In exceptional cases the Minister for Economics and Energy can provide a permit under specific conditions; the last case was a merger of two retailers (Kaisers/Tengelmann and Edeka) to which a ministerial permit was granted in March 2016.
The Law against Unfair Competition (amended last in 2015) can be invoked by regional courts.
Expropriation and Compensation
German law provides that private property can be expropriated for public purposes only in a non-discriminatory manner and in accordance with established principles of constitutional and international law. There is due process and transparency of purpose, and investors and lenders to expropriated entities receive prompt, adequate, and effective compensation.
There have not been expropriatory actions in the last five years and none are expected for the near future. Certain long-running expropriation cases date back to the Nazi and communist regimes. During the financial crisis, the parliament adopted a law allowing an emergency expropriation if the bankruptcy of a bank had endangered the entire financial system, but the measure expired without having been used.
ICSID Convention and New York Convention
Germany is a member of both the International Center for the Settlement of Investment Disputes (ICSID) and New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning local courts must enforce international arbitration awards under certain conditions.
Investor-State Dispute Settlement
Investment disputes involving U.S. or other foreign investors in Germany are extremely rare. According to the UNCTAD database of treaty-based investor dispute settlement cases, Germany has been challenged a handful of times, none of which involved a U.S. investor, A much-publicized ICSID arbitration request filed in 2012 by a European energy company under the Energy Charter Treaty, challenging Germany’s decision to phase out nuclear energy, remains pending.
International Commercial Arbitration and Foreign Courts
Germany has a domestic arbitration body called the German Institution for Dispute Settlement. ”Book 10” of the German Code of Civil Procedure addresses arbitration proceedings. The International Chamber of Commerce has an office in Berlin. In addition, chambers of commerce and industry offer arbitration services.
German insolvency law, as enshrined in the Insolvency Code, supports and promotes restructuring. If a business or the owner of a business becomes insolvent, or a business is over-indebted, insolvency proceedings can be initiated by filing for insolvency; legal persons are obliged to do so. Insolvency is not a crime, but prosecutors must check for certain types of deliberate behavior.
Under a regular insolvency procedure, the insolvent business is generally broken up in order to release as much money as possible through the sale of individual items or rights or parts of the company. Proceeds can then be paid out to the creditors in the insolvency proceedings. The distribution of the monies to the creditors follows the detailed instructions of the Insolvency Code.
Equal treatment of creditors is enshrined in the insolvency code. Some creditors have the right to claim property back. Post-adjudication preferred creditors are served out of the insolvency assets during the insolvency procedure. Ordinary creditors are served on the basis of quotas from the remaining insolvency assets. Secondary creditors, including shareholder loans, are only served if insolvency assets remain after all others have been served. Germany ranks third in the global ranking of “resolving insolvency” in the World Bank’s Doing Business Report, with a recovery rate of 84.4 (cents on the dollar).