Tightening of the Foreign Investment Control in Germany - Review of 2020 and Outlook for the Forthcoming 17th amendment to the Foreign Trade and Payments Ordinance

The number of corporate acquisitions controlled by the German Federal Ministry for Economic Affairs and Energy (BMWi) has steadily risen in recent years.

Within the framework of cross-sector foreign investment control, the BMWi can examine whether the acquisition of a domestic company by an acquirer originating from outside the EU endangers the public order or security in Germany. In general, this concerns company acquisitions if the investor directly or indirectly acquires at least 25% of the voting rights. However, the acquisition of companies that are of relevance for national security is subject to a 10% threshold and, in addition, there is an obligation of reporting such acquisition to the ministry without delay following the conclusion of the relevant contract ("signing").

If the domestic target company manufactures certain goods listed in Section 60 of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, "AWV") – in particular military goods - the so-called sector-specific foreign investment control applies. Such acquisition is always subject to a 10% threshold. Furthermore, not only acquirers from outside the EU are relevant in the context of the sector-specific foreign investment control, but also acquirers from other EU member states.

Review of the tightening in 2020

During 2020, far-reaching changes with regard to foreign investment control took place in Germany as a result of amendments to foreign trade law that had already been implemented. These were the 1st amendment to the Foreign Trade and Payments Act (“AWG”) and the 15th and 16th amendments to the AWV. These amendments were made based on the obligation to transpose the so-called EU Screening Regulation (Regulation (EU) 2019/452 of March 2019).

As a consequence, the provisions of the AWG and AWV become more and more important in the context of cross-border transactions. The most significant changes to the foreign investment control associated with these amendments can be summarized as follows:

(a) A uniform deadline regime was implemented in Section 14a AWG for both the sector-specific and cross-sector foreign investment control. In any case, after 5 years following signing an investment review by the BWMi can no longer take place. Only in this case the parties involved in the transaction have legal certainty in this respect. Apart from this exceptional case, the BMWi may decide within two months after becoming aware of such an acquisition whether an investment review shall be carried out or not. If the review is carried out, in principle, it must be completed within 4 months after the BWMi's receipt of the complete transaction documentation. However, the BMWi is entitled to unilaterally extend this review period or to suspend its expiration if certain conditions are met. Therefore, it cannot be expected that the new uniform deadline regime will lead to a shortening of the procedure.

b) In addition, the BMWi's level of review increases significantly. This includes, for example in the framework of cross-sector foreign investment control, a lower threshold for screenings by the BMWi. Henceforth, only a likely effect on the public order or security is required instead of an actual and serious threat. When examining whether there is a likely effect on the public order or security, the BWMi must also take into account the background of the investor (cf. Section 55 (1b) AWV). For example, the BMWi has to verify whether the acquirer is directly or indirectly controlled by the government of a third country or whether there is a significant risk that the acquirer has been or is involved in economic crimes. Even though the BMWi should always take into account all circumstances of the individual case, it cannot be excluded that the implementation of Section 55 (1b) AWV will make it more difficult for acquirers from certain countries to take over especially security-relevant companies from critical sectors in Germany.

Furthermore, these amendments expand the scope of screening insofar as in addition to the security interests of Germany, the security interests of other EU member states are taken into account. In this context, a national contact point was established at the BMWi, which is part of the European cooperation mechanism. For example, statements made by the EU Commission or other EU member states on transactions to be reviewed by the BMWi are submitted to the national contact point in Germany.

c) With regard to the cross-sector foreign investment control further case groups have been added to the catalogue of notifiable acquisitions in case that the above-mentioned 10% threshold is met. The constant expansion of this catalogue pursuant to Section 55 (1) sentence 2 AWV will inevitably lead to an intensification of the foreign investment control. For more information about the introduction of the new case groups No. 8-11 in order to ensure a functioning healthcare sector in the light of the Covid-19 pandemic, please refer to the article "Because of Covid-19: German Government Accelerates Implementation of Tighter Foreign Investment Control in the Pharmaceutical and Med Tech Sectors".

d) The legal effectiveness of the transaction, which is subject to an investigation carried out by the BMWi, is subject to the condition subsequent pending the investigation procedure that the BMWi prohibits the acquisition. This applies to both the sector-specific and the cross-sector foreign investment control. Moreover - with regard to notifiable acquisitions subject to the cross-sector foreign investment control - the legal closing of the transaction shall also be subject to a condition precedent that the transaction is approved by BMWi, cf. Section 15 (3) AWG. Pending approval, any acts mentioned in Section 15 (4) AWG which, for example, already allow the acquirer to influence decisions of the target company or to participate in the profits, are prohibited and subject to an imprisonment or a fine in order to prevent the de facto execution of the transaction. In individual cases, a violation may even result in the prohibition of the acquisition. In order to avoid this, the formation of so-called clean teams is recommended, e.g. with regard to the exchange of company-related information.

Outlook: 17th amendment to the AWV

Following last year's amendments to the AWG and the AWV, the 17th amendment to the AWV will further tighten the foreign investment control. The German business associations already submitted their comments on the current draft bill.

a) The above-mentioned continuous expansion of the catalogue of notifiable acquisitions within the scope of cross-sector foreign investment control will be continued with this amendment. An expansion of the catalogue from 11 up to 27 case groups is planned (now provided for in Section 55a AWV-E). As expected, this especially pertains to sensitive sectors such as artificial intelligence, robotics, autonomous driving and flying, quantum and semiconductor technology. This significant expansion of the catalogue will presumably lead to an increasing number of screenings of domestic company acquisitions by the BMWi.

b) In addition, it is important to highlight the following planned change: So far, Section 56 AWV did not expressly provide that additional acquisitions or an increase in shares above the relevant thresholds specified in Section 56 (1) AWV (10%/25%) could also trigger a foreign investment control. However, this is now part of the 17th amendment to the AWV as a clarification and to reflect the past practice of the BMWi (cf. Section 56 (2) AWV-E). The reason behind is that each additional acquisition of voting rights by a foreign investor can lead to an increase in influence. However, it is problematic that the implementation of further thresholds with regard to such an additional acquisition is not planned. This would mean that any further acquisition of voting rights - no matter how small - could be subject to scrutiny by the BMWi or even create a duty to notify.

c) In addition, it is of considerable importance for the transactional practice that Section 56 (3) AWV-E will provide that an effective participation in the management or control of the domestic company by a non-EU citizen may trigger a foreign investment control. According to Section 56 (3) Sentence 1 AWV-E, this will especially be the case if an acquisition of voting rights is accompanied by (1) the pledge of additional seats or majorities in supervisory bodies or in the management, (2) the granting of veto rights in strategic business or personnel decisions, or (3) the granting of information rights. However, this only applies if such a participation in the management or the control of the domestic company must (individually or together with voting rights) correspond with the influence in the target company covered by an acquisition of voting rights of 10% or 25%.

d) An expansion of the sector-specific foreign investment control is also planned. For example, the BMWi will be entitled to examine whether the acquisition of the target company by a foreign investor is likely to impair essential security interests of the Federal Republic of Germany in case that the domestic company develops, manufactures or modifies military goods within the meaning of Part 1 Section A of the Export List or has actual control over the relevant goods, cf. Section 60 (1) No. 1 AWV-E.

Summary

We have to wait and see to what extent the comments of the business associations will lead to adjustments of the changes planned according to the draft bill of the 17th amendment to the AWV. However, it is already clear that the transaction practice will be increasingly influenced by the restructured foreign trade law and confronted with considerable legal uncertainty. So far, there has been a lack of clear standards with regard to many of the provisions that have already been amended by the amendments to foreign trade law implemented in 2020. It is likely that the upcoming 17th amendment to the AWV will create further legal uncertainty. This is because, as things stand now, it will no longer even be possible to apply for a certificate of non-objection with regard to transactions subject to notification or in the event that a screening procedure has already been initiated pursuant to Section 55 (3) AWV (cf. Section 58 (3) AWV-E). Hitherto, the application for a certificate of non-objection has been a suitable instrument for a company to obtain binding information from the BMWi more quickly in the course of a transaction. As this will no longer be possible, especially in the case of the acquisition of domestic companies from a particularly security-relevant sector, this will make the timing of the transaction considerably more difficult. Therefore, in the future, the parties involved in such a transaction will have to more precisely analyze the risks associated with the changes that have been made or are planned, in particular with regard to reporting obligations, the prohibition of execution combined with a criminal penalty and the timing of the transaction.