On 27 April 2021 the German government adopted the 17th amendment (“Amendment”) to the Foreign Trade and Payments Ordinance (“AWV”) aligning the German Foreign Direct Investments (“FDI”) regime with the EU Screening Regulation. The Amendment significantly extends the number of sectors and target activities that require mandatory notification in Germany and brings significant procedural changes and clarifications. The revised Ordinance entered into force on 1 May 2021 and will apply to all transactions signed thereafter.
The Amendment follows a series of prior legislative changes. In light of the COVID-19 pandemic, the German government previously adopted the 15th AWV-Amendment in June 2020, which introduced far reaching filing obligations in the healthcare sector. Subsequently, the first amendment of the Foreign Trade and Payments Act introduced standstill obligations backed by fines and criminal charges in July 2020. Together with the 16th AWV-Amendment in October 2020 the German FDI regime was also aligned with the requirements of the EU Screening Regulation.
Our blog provides an overview of the German FDI regime and highlights the key changes introduced by the Amendment.
Extension of filing requirements to critical technologies and other strategic sectors
The German government has repeatedly emphasized its intention to take a closer look at FDI into Germany and to enable a closer review of foreign investments into strategic sectors. The number of transactions that have undergone screening by the German Federal Ministry of Economics and Energy (“BMWi”) have almost tripled over the past 4 years and the numbers are expected to further increase with the latest amendment.
In Germany, a mandatory FDI notification is required for the acquisition by a foreign investor of a domestic company with activities that either fall into the list of defence related activities (so-called sector-specific examination), or that concern other sensitive activities under the so-called cross-sectoral examination. A mandatory filing requirement has suspensory effect, meaning that closing is prohibited until FDI clearance is received. Notably, the closing prohibitions also include restrictions on the disclosure of certain sensitive informative (e.g. know-how) to the investor before FDI clearance is obtained and therefore requires strict compliance review during the negotiation and due diligence phase of a transaction. A breach of the closing prohibitions can be fined and ultimately lead to criminal sanctions.
Sectors subject to the sector-specific examination
With respect to the sector-specific examination (i.e. mainly for defence related activities) the Amendment extends the list of sensitive sectors requiring mandatory FDI notifications for the acquisition by a non-German investor of a domestic company, that develops, manufactures or is in the possession of the following products:
- All goods as defined in Part I Section A of the Export List (Teil I Abschnitt A der Ausfuhrliste), while the previous law only referred to certain list positions;
- Goods that fall within the scope of a classified patent or utility model;
- Goods with certain IT-security functions for the processing of classified information or essential components for the IT-security functions of such goods;
- Domestic companies that amount to a defence-important facility.
Sectors subject to the cross-sectoral examination
The Amendment significantly extends the list of sensitive sectors under the cross-sectoral examination to include 16 additional activities, allowing the BMWi in particular to review foreign investments in emerging technologies:
- Operation of satellite systems;
- Development or manufacture of goods related to artificial intelligence;
- Development or manufacture of automated / autonomous vehicles or unmanned drones;
- Development or manufacture of certain industrial robots;
- Development, manufacture or refinement of semiconductors and optoelectronics (including certain equipment for their production);
- Development or manufacture of certain IT-security equipment or systems;
- Operation of air carriers or the manufacturing / development of aerospace goods or technologies;
- Development, manufacture, modification or use of certain goods related to nuclear technology;
- Development or manufacture of certain goods that apply quantum technologies;
- Development or manufacture of goods for additive manufacturing processes (i.e. 3D printing of metallic or ceramic components);
- Development or manufacture of goods for the operation of wireless or wireline data networks;
- Manufacture of smart meter gateways;
- Operation of certain IT and communication services relating to security-sensitive government bodies;
- Extraction or processing of certain raw materials and their ores;
- Development or manufacture of goods based on classified patents or utility models;
- Large agricultural producers (cultivating more than 10,000 hectares).
The Amendment transferred most of the activities listed in Article 4(1) of the EU Screening Regulation into German law and provided helpful definitions for the rather broad and vague terms contained in the EU Screening Regulation. However, it is worth noting that the Amendment refrained from transferring the access to, or control of “personal data” into the national regime and concludes that since almost every company processes a substantial amount of personal data, the introduction of such a category could have led to an almost unlimited notification obligation. The Amendment neither introduces separate categories for biotechnology, nanotechnology, energy storage, or defence, but finds that those technologies are sufficiently addressed within the other categories.
On the other hand, the Amendment goes beyond the non-exhaustive list in Article 4(1) of the EU Screening Regulation by adding further activities to the list of critical technologies under German law, for example in regard to autonomous vehicles or unmanned drones, optoelectronics, additive manufacturing processes and network technologies.
Procedural changes and clarifications
Besides the sectoral extensions, the Amendment introduces a number of procedural changes and clarifications:
Revision of the investment thresholds
The Amendment introduces new investment thresholds that apply to share acquisitions in domestic companies. For domestic companies that are active in a sector that is subject to the sector-specific examination (i.e. defence), as well as for domestic companies that operate critical infrastructures, a mandatory notification requirement arises, if after completion of the transaction the foreign investor’s share meets or exceeds an interest of 10% in the voting rights of the domestic company. For all other sensitive sectors, a 20% threshold applies.
Moreover, the Amendment provides for thresholds regarding additional voting right acquisitions by existing shareholders. So far, the BMWi’s practice was to require new notifications in sensitive sectors for any increase in voting rights – even for minimal increments. After the Amendment such additional investments will only trigger a mandatory filing requirement, if the following thresholds are met or exceeded:
- 20, 25, 40, 50, 75% of the voting rights in domestic companies subject to the sector-specific examination or in domestic companies that operate critical infrastructures;
- 25, 40, 50, 75% of the voting rights in all other domestic companies that are active in a sensitive sector.
Regardless of whether the target business amounts to a sensitive activity, the BMWi has powers to open an ex officio review for any investment into a domestic company, if it meets or exceeds the relevant voting share thresholds (i.e. 25, 40, 50 or 75%) or amounts to a relevant asset acquisition.
Please find below a chart summarizing the German FDI rules and procedure, which is based on the BMWi’s chart (Link) that we have amended for the purposes of this post:
No safe harbour – review below the applicable voting right thresholds
The Amendment seeks to clarify that the BMWi has powers to open an ex officio review for atypical acquisitions, even where the applicable voting right thresholds are not met. Such atypical acquisitions exist, where the foreign investor strengthens its influence over a domestic undertaking by other means than through the acquisition of voting rights. Accordingly, the BMWi has powers to open an ex officio review if the investor receives a position that grants him influence over the domestic company which is going beyond his voting right interest. The Amendment refers to the granting of additional seats or majorities in supervisory bodies or in the management, as well as to veto rights in strategic business decisions or certain information rights.
Narrow exemption for internal restructurings
Under the long-standing practice of the BMWi, internal restructurings that meet the applicable investment thresholds and involve foreign entities may trigger a mandatory filing requirement or ex officio review. The Amendment introduces a narrow exemption and excludes acquisitions of a domestic company, if the acquisition contract is signed between two wholly-owned subsidiaries of a the same parent company, and if the parent company and both subsidiaries are incorporated under the same jurisdiction. All other internal restructurings remain subject to a notification requirement or a potential ex officio review by the BMWi.
Stricter rules on share attribution
The Amendment extends the existing rules on voting right attribution between investors for the purpose of calculating the investment thresholds. Already based on the previous rules, any voting right in the domestic target company which is held by an entity in which the investor holds a relevant interest, is fully attributed to the investor. The same applies to voting rights of entities, with which the investor has an agreement on the joint exercise of voting rights.
The Amendment introduces a rebuttable presumption, that an agreement on the joint exercise of voting rights exists and thereby allows for full share attribution, if two state-controlled investors from the same jurisdiction are invested in the respective domestic target company. This presumption will not trigger a mandatory filing requirement, but allows the BMWi to open an ex officio review even though the investment itself does not meet the applicable investment thresholds.
The Amendment concludes a series of adjustments to the German FDI regime that aimed at tightening the FDI review in line with the EU Screening Regulation. However, Germany’s minister of economics, Peter Altmaier, already announced further revisions of the regime “in the coming weeks”. Parties are well advised to monitor these developments and to consider the implications of FDI filing requirements in Germany early in advance of signing a transaction.
The assessment of FDI related risks has become a must-consider item for M&A transactions and Germany – together with the UK that recently adopted a mandatory FDI regime (see our blog post) – is a good example for the current trend across the EU towards more mandatory FDI filing requirements and closer FDI review. The European Commission is taking an active role in this context and requires Member States on the basis of the EU cooperation mechanism to provide comprehensive information for investments that are undergoing screening (please see the recently published template notification Form B).