The EU – Issues And Opportunities

Editor: Tell us about your practice and Jones Day’s presence in Germany.

Rempp: I have been practicing for more than 25 years in New York, Düsseldorf, Frankfurt and Munich. My practice focuses on complex cross-border M&A and private equity transactions usually involving a large number of jurisdictions. Over the last two years, Jones Day has invested heavily in Germany. Jones Day's German practice now has more than 100 lawyers in our three offices in Düsseldorf, Frankfurt and Munich. Jones Day's commitment to the German market is a reflection of Germany's economic strength and political stability coupled with a mature and sophisticated legal system. We are confident that Germany will continue to attract significant foreign investment long term. At the same time, most German businesses are beneficiaries of globalization and, thus, increasingly confronted with difficult legal issues abroad, which Jones Day is perfectly positioned to assist with.

Editor: I understand one of the big problems in the Eurozone is high youth unemployment. Do you see anything being done to address this problem?

Rempp: As you probably know, there is an economic north/south division within Europe. Most northern economies are doing comparatively well. With a few exceptions, the southern economies are not. Some of the southern economies, including the largest ones – Italy and Spain – are currently facing youth unemployment rates above 40 or even 50 percent. This is a frightening ticking bomb. It leads to a brain drain with the most gifted young people seeking employment opportunities in other countries. The problem has been persisting for quite some time now. As a result, these countries are confronted with a "lost generation" of young people who have never had a job in their lives. The anger and dissatisfaction of this "lost generation" with the political and economic system bears the risk of major political unrest.

Editor: Do EU banks still have a long way to go to achieve the Basel III requirements? Is there a greater need for centralized banking throughout the Eurozone? What about centralized support for troubled banks?

Rempp: The vast majority of the larger banks that are critical for the system are well on their way to meeting the Basel III requirements on time. So are the national governments throughout the EU in terms of implementing the necessary laws and regulations. Whether there is a need to further centralize our banking system in Europe is a heavily debated question. My personal view is that we only need more centralized banking regulation if and when we decide to establish centralized support for banks in trouble.

You probably know that there’s an ongoing debate between countries led by Germany and the southern European countries. Germany argues that we should first centralize and unify regulations throughout Europe before we centralize support and create a joint European support system for banks in trouble. Opponents would like to create a joint support system right away.

Editor: How does that problem affect Germany?

Rempp: Essentially, a joint support system means that the German taxpayer would have to automatically step in and provide funds if a non-German bank is in financial difficulties. While that kind of system makes sense long term, it presupposes, in my view, that all banks within that system must be subject to the same regulations, legally and on a political level. Currently, to a very large extent, they are not. The German view on this is not surprising: While we are willing to provide support to non-German banks on a case-by-case basis, we are not willing to automatically pay for every bank in trouble, unless all banks are subject to the same regulations and the same discipline that the German banks are.

Editor: Germany has recently been criticized for its growing trade surplus as one of the reasons for southern Europe’s economic difficulties. What do you think of that criticism?

Rempp: First of all, it is correct that Germany again had a huge trade surplus in 2013 – in fact, the largest trade surplus among all countries worldwide. Whether that trade surplus is the reason for southern Europe's economic difficulties is a different question. Mathematically, yes. It all goes back to competitiveness. If Germany and its products were less competitive, other economies, including southern Europe’s, would benefit in terms of both increased domestic sales and exports abroad. In essence, the critics say that Germany's labor cost as well as its domestic consumption are too low. Excessive labor cost is exactly what Germany was criticized for in the 1990s and has subsequently rectified during the Schröder government and its so-called Agenda 2010. In my view, the solution is that the southern European economies should strive to become more competitive through increased efficiency and lower labor cost.

Editor: Chancellor Merkel has been forced into a joint government with the Social Democrats. How is that going to affect things?

Rempp: Both the Christian Democrats and the Social Democrats have been forced into this coalition government. Germany, its economy and its businesses will very likely benefit from the new coalition government. Typically, coalition governments with large majorities have the ability and willingness to push through necessary but unpopular reforms. What we have seen from the new coalition government during the first few weeks has been positive to a large extent, including with respect to the very recently announced reforms in the energy sector.

Editor: Have M&A transactions started to pick up in the EU?

Rempp: No, 2013 has been the slowest year since 2009. I don’t see any reason why 2014 should be better than 2013 in terms of number or value of transactions.

Editor: What about cross-border transactions?

Rempp: In Jones Day’s European M&A practice, almost every transaction is cross-border and involves at least two, most of the time several, jurisdictions. The fact that there are practically no more transactions where target, seller and buyer are all located in the same jurisdiction is yet another effect of ongoing globalization. There is still a lot of uncertainty among market participants in terms of confidence in the European economies and inbound investments into the EU. At the same time, the banks', in particular the southern European banks', willingness to finance investments is low despite the fact that the European Central Bank is providing huge amounts of liquidity at record low costs. Instead of lending to businesses for investments, the banks invest the vast majority of this liquidity in seemingly safe government bonds at attractive interest rates. As a result, there are currently a lot of bargains in the form of attractive targets at low prices, but it appears that the uncertainty factor still outweighs the appetite for bargains. There is currently no reason in sight why that would change in 2014. On the positive side, however, inbound investment from the Asia-Pacific region was up in 2013 and will continue to increase in the foreseeable future.

Editor: So you’re saying Chinese investment, for example, is generally picking up?

Rempp: Yes. The three economies that are the drivers of this are China, Japan and Korea. The Korean government, for example, has started a number of initiatives to incentivize Korean investments abroad, in particular in Europe. There are similar developments in Japan. Everybody here has been talking about a tsunami of Chinese investment coming to Europe, but we are still sitting on the beach like surfers waiting for the big wave to ride. The large inbound investment from China that we have been expecting for years now has still not arrived. That is due in large part to a combination of two factors. One is that often Chinese companies, especially the large state-owned enterprises, are still not sophisticated enough in terms of doing deals, which often makes completing transactions with them very difficult to impossible. In addition, approval processes at Chinese state-owned enterprises are entirely nontransparent and extremely hierarchical and complicated, sometimes slowing things down to a point where completing a deal is not feasible.

Editor: Describe the effect of the EU’s counterpart of Hart-Scott-Rodino on M&A transactions.

Rempp: Hart-Scott-Rodino, the FTC and the DOJ in the U.S. and our system in Europe differ in many respects. One is that the enforcement level in the EU (to the extent it is public) is higher than in the U.S. – and that’s just the Commission in Brussels and does not include enforcement actions by the national antitrust authorities in the individual EU countries. In Brussels the enforcement level is roughly six percent while in the U.S. it is somewhere between two and four percent. It takes a long time for the EU Commission to grant antitrust approval – in complicated cases, it usually takes months to even get the filing in.

Everybody complains that MOFCOM approval in China is complicated, unpredictable and takes too long, and there are comparable complaints about Brussels too. In contrast, our experience with Hart-Scott-Rodino filings in the U.S. has been that they are fairly predictable and fast – you usually know exactly how long it’s going to take. That’s not the case in Brussels because there are so many informal steps before the actual filing which starts the clock on the approval process. Applicants have to volunteer information about the market, the relevant products, and the competition to the authorities, while in the U.S. the authorities obtain this intelligence themselves. There are quite a few other differences. For example, in Europe, the authorities can prohibit a transaction. In that situation, the applicant is forced to go to the courts to remove the prohibition – which usually takes several years and is deadly for any transaction. In the U.S., the agencies cannot prohibit a transaction. They need a court decision to do that. Bottom line is the system we have in the EU makes transactions more difficult than the system in the U.S.

Editor: Jones Day seems to be well-positioned to do cross-border transactions because of its offices throughout the world.

Rempp: Yes. When I say cross-border transactions, I mean transactions that usually involve a lot more than just two jurisdictions. Most of the transactions Jones Day advises on involve 15 to 30 jurisdictions and complex questions in many practice areas, such as antitrust, environmental, labor, pensions, tax, etc. The fact that we offer all of these practice areas in practically all relevant jurisdictions is a huge advantage and is highly appreciated by our clients.

In the long term, we are particularly well-positioned for inbound investments from China, Japan and Korea. We have a "China desk" here with three Chinese associates in Germany specializing in inbound Chinese investments. In our Paris office, we have a Korean practice with a team led by a Korean M&A partner that specializes in inbound investments from Korea. As for inbound Japanese investment, we handle those transactions with a team consisting of lawyers from our Amsterdam, Brussels, and Düsseldorf offices because these cities are home to many Japanese headquarters and large Japanese communities. We have recently been leading a number of major inbound investments from these three jurisdictions, including most recently a large German acquisition by Mitsui.