Out-Law / Your Daily Need-To-Know
Germany’s foreign direct investment (FDI) rules have been frequently amended in recent years to significantly extend the government’s screening rights.
Germany's FDI screening system has been in place since 2004
The latest developments occurred on 27 April 2021 when the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung) was amended to include new business areas on the list of sectors in which acquisitions by foreign investors have to undergo a security screening. The list was extended from 11 to 27 security-relevant areas. Foreign investment in these 27 areas must be notified to the German Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz, BMWi), and may not be conducted until the ministry has finished its review.
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Germany's FDI rules
German FDI rules, as set out in the Foreign Trade and Payments Law (Außenwirtschaftsgesetz) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung), stipulate two different sets of screening competencies with respect to acquisitions in German companies: a sector-specific screening for acquisitions of companies active in the military sector or in IT security technology, and a cross-sector screening for all other types of companies. Depending on the set of rules, the addressee of the foreign investment screening (foreign investor or non-EU/EEA investor), the thresholds and screening procedures differ. In either case, the FDI rules apply to any direct investment as well as any indirect investment in a German company. Furthermore, acquisitions by a German acquirer, whose predominant shareholder is a foreign investor, may trigger governmental screening. Finally, an acquisition of a German company by way of an asset deal may also be subject to FDI controls.
Sector-specific investment control
The sector-specific FDI controls apply to companies active for example in the production of weapons, military equipment and IT security products. An investment in these specific sectors may become subject to governmental screening if a foreign investor acquires 10% or more of the voting rights of a target company operating in this sector.
The latest amendments to German foreign trade law underline the general national and European trend to tighten investment control regulations.
Any transaction fulfilling the sector-specific screening requirements must be notified to the BmWi. Following this notification the BMWi has two months to open an investigation procedure. If the government does not start the investigation procedure within that time period, the transaction is deemed to be approved (de-facto governmental clearance). In that case the BMWi cannot prohibit the transaction any more.
Prior to the end of this deadline, the BMWi can open an investigation procedure to examine whether essential security interests of the Federal Republic of Germany are endangered. If the BMWi decides to open an investigation procedure, it will demand further information about the transaction from the investor. On receipt of such information, the BMWI has four months to come to a final decision.
Regardless of any notification, the BMWi is authorised to open an investigation procedure up to five years after the conclusion of the purchase agreement.
Cross-sector investment controls
With respect to the cross-sector control, the FDI rules provide for three thresholds at which an acquisition of a foreign investor from a non-EU/EEA jurisdiction may be subject to a governmental screening:
- acquisition of 10% or more of the voting rights of a target company operating in at least one of the sectors in the first column below;
- acquisition of 20% or more of the voting rights of a target company operating in at least one of the sectors in the second or third columns below; or
- acquisition of 25% or more of the voting rights of a target company in any sector.
| 10% threshold sectors | 20% threshold sectors | |
|---|---|---|
| operators of critical infrastructure | personal protective equipment | aerospace |
| software for critical infrastructure IT or telecommunications | essential pharmaceutical products | nuclear technology |
| telecommunications surveillance | specific medical products | quantum technologies |
| cloud computing services above the threshold for critical infrastructure | specific in vitro diagnostics | 3D printing |
| telematics infrastructure | satellite operators | data networks |
| media with reference to current affairs and widespread impact | artificial intelligence | smart meter gateways |
| government communication infrastructure | autonomous driving/flying | employment of people working in security-sensitive positions in essential facilities |
| robots with specific qualities/abilities | raw materials on the EU List of Critical Raw Materials | |
| semiconductors and optoelectronics | classified patents/IP | |
| cyber security | farming of an agricultural area larger than 10,000 hectares |
Acquisitions in one of these 27 sectors must be notified by the investor to the BMWi after the conclusion of the related purchase agreement.
In all other cases, notification is voluntary. To be on the safe side and to shorten the governmental screening period, an investor may apply for government clearance of the transaction. A transaction is deemed to be cleared if the BMWi does not open an investigation procedure within two months of receiving the clearance request (de facto governmental clearance) or a clearance certificate is issued by the BMWi.
The BMWi has two months to open an investigation procedure after it becomes aware of the conclusion of the purchase agreement in a transaction - for example, due to notification by the investor. If the BMWi does not start the investigation procedure within that time period, the transaction is deemed to be approved (de facto governmental clearance). In that case, the BMWi cannot prohibit the transaction any more. Before the end of the deadline, the BMWi can open an investigation procedure to examine whether the acquisition of a domestic company by a non-EU/EEA investor or the direct or indirect acquisition of a stake in a domestic company by a non-EU/EEA investor poses a probable impairment to the public order or security of the Federal Republic of Germany. If the BMWi decides to open an investigation procedure, it will demand further information about the transaction from the investor. On receipt of such information, the BMWi has four months to come to a final decision. Regardless of any notification, the BMWi is authorised to open an investigation procedure up to five years after conclusion of the purchase agreement.
Legal consequences
The legal effectiveness of any purchase agreement of a target company that falls under any of the above screening rules is subject to a condition subsequent as long as:
- the BMWi has not cleared it;
- the transaction has not been de-facto cleared; or
- the deadline for government examination has expired.
In the case of an investment in a target that falls under the cross-sector investment control and is subject to notification requirements, or the sector-specific investment control, any legal transaction to implement the purchase agreement is pending invalid as well. In this case, certain implementing actions are explicitly prohibited during the pending period - for example, to disclose to the foreign investor certain company-related information or to grant the acquirer any profit distribution rights. For this reason, we usually recommend to file for a clearance certificate to avoid any uncertainties about a transaction.
If the BMWi comes to the conclusion that a transaction impairs the public security and order of the Federal Republic of Germany or another EU member state, the government may prohibit the transaction or demand that the investor restructure the transaction, for example by making divestments. Additionally, the BMWi may approve the transaction under conditions. In this regard, the BMWi may request assurance letters, regular written reports on compliance with obligations ordered by the BMWi or even the conclusion of an investor's agreement regulating the acquirer's rights and duties.
Details about the foreign investment screening procedures in Germany are not publicly disclosed. However, the government explained that the number of screening procedures increased from 78 cases in 2018 to 306 cases in 2021.
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