COVID-19 crisis inspires global tightening of Foreign Investment Screening

Global Publication June 30, 2021

Foreign direct investment (FDI) screening in Germany is governed by the Foreign Trade and Payments Act (Aussenwirtschaftsgesetz) and the Foreign Trade and Payments Regulation (Aussenwirtschaftsverordnung or AWV). The Ministry for Economic Affairs and Energy (the Ministry) carries out the reviews in consultation with the Foreign Office, the Ministry of Defense and the Ministry of the Interior. On May 1, 2021, the 17th revision of the AWV came into force and has significantly expanded the list of sectors designated as critical infrastructure subject to mandatory review. The list now includes 27 categories of critical infrastructure, including artificial intelligence, robotics, nanotechnology and cybersecurity, in line with Article 4(1) of the EU FDI Regulation (2019/452).

German law distinguishes between cross-sector and sector-specific reviews. The industry sector concerned by the acquisition determines which procedure is applicable. Any acquisition of a German company by investors located outside the territory of the EU or EFTA whereby investors acquire at least 25 percent of the company’s voting rights (or 10 percent in the case of companies operating the most critical infrastructures such as energy or transport facilities) can be subject to a cross-sector review (regardless of the transaction value or turnover of the parties). With the latest revision, the government introduced a second category of critical infrastructure to which a threshold of 20 percent applies and which includes, in particular, the newly added sectors that are listed in Article 4(1) of the EU FDI Regulation. It has been clarified as well that acquisitions carried out through internal restructurings are not subject to FDI screening.

The defense and crypto technology sectors are subject to the stricter regime of sector-specific review. If the target is active in any of these sectors, any acquisition by a non-German investor of at least 10 percent of the target’s voting rights is subject to a mandatory filing obligation. The defense and crypto technology sectors include the manufacture and development of weapons of war, ammunition, military equipment and technology for processing classified government information, covering all military items listed in Part 1, Section A of the German Export List.

For both cross-sector and sector-specific reviews, incremental share acquisitions can now trigger a notification obligation as well, even if the Ministry already approved the initial acquisition. In this regard, the government has set specific thresholds (20, 25, 40, 50 or 75 percent of the voting rights). Following the recent amendments, investments resulting in an effective participation in a domestic company (so-called atypical acquisitions of control) through obtaining additional influence in supervisory bodies or management, veto rights on strategic decisions or rights to sensitive information are also subject to review. As before, asset deals are caught by FDI screening if the acquisition concerns a separable part of a company or all essential operating resources of a company or of a separable part of a company.

In a cross-sector review, filing is voluntary except in cases involving companies operating critical infrastructure, in which case filing is mandatory. Acquisitions involving an atypical acquisition of control as described above, however, are excluded from the mandatory filing obligation. In situations where a filing is voluntary, parties can request a certificate of non-objection to obtain legal certainty. Sector-specific acquisitions are subject to a mandatory filing obligation.

In both cross-sector and sector-specific reviews, the authority has two months after obtaining knowledge about the acquisition either to approve the transaction or to open a second-phase investigation. If the authority does not open a second-phase investigation within two months, the transaction is deemed to be approved. A second-phase investigation must be completed within four months after receipt of complete documentation. Procedural deadlines are suspended during any negotiations on possible commitments by the parties to obtain approval. The opening of a review procedure is legally precluded five years after conclusion of the acquisition agreement.

As regards the standard for substantive assessment, in a cross-sector review, the authorities examine whether the acquisition is likely to impair the public order or security of Germany, another Member State of the European Union or projects or programmes of Union interest in the sense of Article 8 of the EU FDI Regulation. The authority can take into account the control exercised by foreign governments/public authorities over the acquirer; previous activities by the acquirer that damaged the public order or security of Germany or other EU Member States; and risks that the acquirer might be involved in specific criminal activities. In the case of a sector-specific review, the authority will examine whether essential security interests of Germany are likely to be impaired. If the Ministry concludes that the transaction is likely to generate undesirable effects (e.g. impairment of public order or security), it can prohibit it or approve it with conditions. Conditions can include the obligation to notify the Ministry of future incremental share acquisitions. The Ministry’s decision can be appealed to the Administrative Court of Berlin.

Any transaction for which a mandatory filing is required is subject to a standstill obligation until clearance is granted. An infringement of such an obligation may constitute a criminal offence and is punishable by a fine or imprisonment of up to five years. Transactions implemented in breach of a standstill obligation are provisionally invalid until the Ministry grants its approval. Investors can close transactions that are not subject to a mandatory filing obligation without waiting for approval, though transactions can be unwound or subjected to conditions retroactively.

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