Global | Publication | May 2021
Non-EU investors planning to acquire shares or assets of German domestic undertakings have for some time now been faced with a continuous tightening of Germany’s rules on foreign investment. The German legislator has continued on this path with the 17th revision of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung or AWV), which came into force on 1 May 2021 and substantially expands Germany’s foreign investment regime, further tightening the requirements on investors.
These changes reflect a broader global trend whereby jurisdictions are generally strengthening their foreign investment regimes. They are also in part due to Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments (EU FDI Regulation) at the EU level, which came into force in October 2020 and facilitates cooperation between EU Member States and the European Commission regarding foreign investment reviews by Member States, as well as setting out minimum standards for Member State regimes.
On the day of the publication of the 17th revision in the Federal Gazette, the Federal Ministry for Economic Affairs and Energy (the Ministry) published an explanatory memorandum providing further insight into its reasoning for the latest reforms (Runderlass Außenwirtschaft No.2/2021 or Runderlass). Key points to note regarding the changes are set out below.
In Germany, the acquisition of 25 per cent or more of the voting rights in a domestic company by a non-EU resident can be subject to a cross-sectoral examination. Submitting a notification to the Ministry is voluntary for most transactions but parties can request a certificate of non-objection to obtain legal certainty. However, the German legislator has also designated certain transactions in specific sensitive industry sectors for which notification is mandatory. In May 2020, the 15th revision of the AWV extended the mandatory notification regime to cover, in particular, important products or activities in the healthcare sector, such as personal protection equipment, and the 17th revision expands this list even further by including 16 additional sectors.
The complete list now contains 27 sectors in which the acquisition of a domestic company may be deemed to constitute a threat to public order or security, and therefore requires mandatory notification and approval before the transaction can be implemented. This notification obligation arises immediately after the conclusion of a binding contact. While the list of sectors takes inspiration from the sectors designated in Article 4(1) of the EU FDI Regulation, the AWV describes the sectors in more detail than the EU FDI Regulation. The voting rights threshold for examining acquisitions in these areas is lower – 20 per cent for some transactions and 10 per cent for others. In its Runderlass the Ministry states that it views the majority of these sectors as key technologies, which are of essential importance to Germany and the EU.
The new sectors concern (Section 55a (1) no. 12 to 27 AWV):
In the sectors mentioned above added by the 17th revision (Section 55a (1) no. 12 to 27 AWV) and the sectors added by the 15th revision (Section 55a (1) no. 8 to 11 AWV) a transaction is subject to investment control only if 20 per cent or more of the voting rights of a relevant entity are being acquired. This is lower than the threshold that had been proposed – the initial proposal for the 17th revision was that transactions in these sectors would be reviewable once the investor reached 10 per cent of voting rights. However, the German Government withdrew that proposal during the legislative process due to concerns that a 10 per cent threshold would be disproportionate for these sectors and impose a potentially significant additional burden on investors. This differs to the position regarding the critical infrastructure listed in Section 55a (1) no. 1 to 7 AWV, for example certain energy and transport infrastructure, which are deemed to have a greater degree of sensitivity and therefore remain subject to the lower threshold of an acquisition of 10 per cent of voting rights.
Investors resident outside Germany that are planning acquisitions targeting critical defence-related activities also remain subject to the lower 10 per cent threshold – but the 17th revision has now expanded the relevant activities to include all defence products specified in Part I, Section A, of the German Export Control List. In addition, the review standard in the sector specific examination has been aligned with that of the cross-sectoral examination, although the respective subject matter of the two types of investigation remains unchanged. In both cases an acquisition can be prohibited due to a “likely impairment”. However, whereas in the sector specific examination the Ministry examines a likely impairment to public order or security, the sector specific examination focuses on a likely impairment to the essential security interests of the Federal Republic of Germany.
Under the EU FDI Regulation, relevant foreign direct investments include investments that enable effective participation in the management or control of a company carrying out economic activity. To align with that approach, the AWV also now covers so-called “atypical acquisitions of control” (Section 56 (3) AWV). Such transactions confer additional seats or majorities over supervisory boards or a company’s management, veto rights concerning strategic decisions regarding business or personnel matters or the right to obtain information related to the business. However, an atypical acquisition of control does not lead to a mandatory notification obligation for a cross-sector examination.
The German legislator has also clarified that increasing shareholdings or incremental acquisitions are subject to foreign investment control, provided relevant voting rights thresholds are met. This change merely reflects current practice and was necessary, according to the Runderlass, to comply with transparency obligations and to take account of the criminal sanctions introduced last year. To make the provisions manageable an examination of such transactions will only apply if certain voting rights thresholds are reached (20 per cent, 25 per cent, 40 per cent, 50 per cent or 75 per cent) (Section 56 (2) AWV).
Overall, the changes introduced by the 17th revision reflect the increasing importance of foreign investment control in Germany, which as mentioned above is part of a broader global trend.
As the Ministry acknowledged in the Runderlass it is likely that the number of transactions subject to investment control will increase even further following these changes. The Ministry has already registered more than 140 cases so far in 2021 – more than double the number of cases registered for the whole of 2017. Acquisitions require careful review to determine whether they need to be notified, with parties risking significant sanctions (including possible criminal sanctions) if they infringe the standstill obligation for transactions requiring mandatory notification. Finally, it is also important for companies and their advisers to take account of the different deadlines under Germany’s merger control and foreign investment control procedures, which add complexity when planning transaction timetables and carrying out acquisitions.
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