Germany extends Foreign Direct Investment Review

In recent years, the review of foreign direct investments (“FDI review”) has become more and more important, also in Germany. While foreign investments in German companies are generally encouraged, some of such investments are now subject to closer scrutiny, especially in sectors such as defence, critical infrastructure, and sectors otherwise considered relevant for the national security or public order of Germany. Foreign investments in relevant sectors are subject to review by the Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie – BMWi), and relevant transactions may – in certain cases – be void until cleared. 

On 1 May 2021, the 17^th Amendment to the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV) entered into effect. We would like to take these latest changes as an opportunity to provide an overview of the German FDI review regime and aim to answer some of the more frequently asked questions.

Where are the rules on foreign direct investment review codified?

The basic source of FDI review rules in Germany is the Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG), which contains, inter alia, rules on time limits and restrictions that apply to foreign direct investments (Sections 14a and 15 AWG). Further, the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV, English translation available at http://www.gesetze-im-internet.de/englisch_awv/index.html) contains some of the more detailed elements of the German FDI review regime (Sections 55 et seqq.), such as notification requirements and the relevant standards of review. Last not least, the AWV references the Federal Office for Information Security Act (BSIG) and the ordinance on critical infrastructure (BSI-KritisV), which defines what qualifies as “critical infrastructure”.

Which types of FDI review exist in Germany?

There are three types of German FDI review:

• The sector-specific review (Sections 60 et seqq. AWV) aims at protecting essential interests of national security and applies to foreign investments in particularly security-sensitive sectors, such as the production of weapons. This review is referred to here as “sector-specific review”.
• The cross-sector review applies to companies that fall within one of the currently 27 sample categories set out in Section 55a AWV, which are considered as typical examples of areas that might affect the public order or security of the Federal Republic of Germany. These examples include, inter alia, operators of critical infrastructure as defined in the BSIG, such as gas, energy, and water suppliers, as well as telecommunications and data cloud providers, and companies in the pharmaceuticals and the emerging technologies sectors. The scope is under constant review by the Federal Government and is continuously being expanded; most recently by the above-mentioned 17^th AWV Amendment, from previously eleven to now 27 categories. This review is referred to here as “cross-sector review in a sample category”.
• The general cross-sector review applies to acquisitions outside of the 27 sample categories listed in Section 55 para. 1 AWV. Although such transactions are not subject to a notification obligation, they can be investigated if they are likely to affect the public order or security of the Federal Republic of Germany, any other Member State of the European Union or projects or programmes of Union interest. This review is referred to here as “general cross-sector review”.

What kind of transactions are subject to FDI review?

The German FDI review applies to the direct or indirect acquisition of 10, 20 or 25 percent of the voting rights in a German company, depending on the sector in which the company is active. It also applies to add-on acquisitions (Aufstockungserwerbe), i.e., transactions where a foreign investor already holds a stake in a German company and acquires additional interests. In such cases, another review is required every time the investor reaches or exceeds the thresholds of 20, 25, 40, 50 or 75 percent of the voting rights.

The German FDI review can also be triggered by the acquisition of control or management rights in a German company even if the nominal shareholding does not reach the relevant thresholds, provided that the acquisition gives the foreign investor an equivalent legal position that corresponds to the thresholds noted above.

Finally, the German FDI review applies to the acquisition of a business unit of a German company or the essential assets of a German company or of a business unit of such company.

What kind of investors are subject to FDI review?

The German FDI review applies to transactions involving non-EU investors and, in certain cases, foreign (i.e. “non-German”) investors, depending on the relevant type of review:

• Non-EU investors within the meaning of the AWV and the AWG are parties registered in a country outside the European Union or the European Free Trade Association (EFTA). Branches and permanent establishments of a non-EU investor in the EU are also deemed non-EU, since the focus is on the ultimate controlling entity. Post Brexit, this effectively means that companies with their registered office in the UK are now to be regarded as non-EU investors and are subject to the German FDI regime. However, FDI review may also apply to investments by EU investors if there are indications of an attempted circumvention of the German FDI review.
• Foreigners within the meaning of the AWV and AWG are natural persons or legal entities with residence, usual domicile, or registered office outside the Federal Republic of Germany. However, FDI review may also apply to investments by German nationals if there are indications of an attempted circumvention of the German FDI review. In case of a German investor, the transaction is subject to FDI review only if the investor is controlled by a foreign parent, for example, a private equity fund registered and domiciled outside the EU/EFTA.

1. Sector-specific review

When is the sector-specific review triggered?

The sector-specific review aims at protecting essential security interests of the Federal Republic of Germany and is carried out where a foreigner acquires a direct or indirect interest of 10 percent or more of the voting rights in a German company or business unit or the essential assets of a business unit. In case of an add-on acquisition, another review is required every time the thresholds of 20, 25, 40, 50, or 75 percent of voting rights are met or exceeded for the first time. As noted above, foreigners are natural persons or legal entities with residence, usual domicile, or registered office outside the Federal Republic of Germany. However, FDI review may also apply to investments by German nationals if there are indications of an attempted circumvention of the German FDI review.

The authority of the BMWi to carry out a sector-specific review extends only to investments involving a target company that engages in activities specified in Section 60 para 1 AWV, covering matters such as the production, development, or modification of weapons, ammunition, and military equipment as per Part I Section A of the Export List.

How does the BMWi become aware of an investment and what is the further procedure?

Transactions that are subject to a sector-specific review must be notified to and be approved by the BMWi before the transaction is completed. The notification must include all information specified in no. III. of the General Order of the BMWi dated May 27, 2021, such as the identities of the seller, the target, the direct and the indirect acquirer (including all of its direct and indirect shareholders), as well as certain transaction details, such as the purchase price and the type of the transaction. The notification must further include an outline of the acquirer’s and the domestic target’s business areas.

Until approval is granted by the BMWi, the acquisition agreement is void and the parties are not allowed to close the transaction. Furthermore, the investor may not exercise the voting rights in the target company or receive security-relevant information from the target company.

An infringement of these obligations can be punished with imprisonment of up to five years or criminal fines, as well as with substantial administrative fines of up to EUR 500,000. If the transaction does not raise concerns, the BMWi will issue a written clearance decision. An acquisition is deemed cleared even without express written approval if the BMWi does not initiate an investigation into the acquisition within two months of notification.

What are the possible outcomes of the review?

In most cases, the review will result in the clearance of the transaction. In cases where a transaction is deemed likely to affect the public order or security of the Federal Republic of Germany, the BMWi may clear it subject to conditions, or may ultimately prohibit the transaction.

A transaction that is prohibited cannot be implemented. If it has already been closed (whether in part or in full) it must be unwound. It is important to note that, in the context of the German FDI review regime, an unwinding of a transaction may mean that the target falls back to the seller.

The decisions of the BMWi are independent administrative acts that can be challenged in total or limited to conditions imposed in the administrative court of Berlin, if necessary.

2. The cross-sector review in a sample category

When is the cross-sector review in a sample category triggered?

This type of review applies to transactions where the German target company is active in any of the 27 categories listed in Section 55a para. 1 no. 1 to 27 AWV. It is initiated where a non-EU investor directly or indirectly acquires voting rights in a German company or a business unit or the assets of a business unit exceeding specific thresholds. These thresholds amount to 10 per cent of the voting rights for the categories listed in Section 55a para. 1 no. 1 to 7 AWV and to 20 per cent for the categories listed in Section 55a para. 1 no. 8 to 27 AWV.

The cross-sector review in a sample category also applies to add-on acquisitions (Aufstockungserwerbe), i.e., transactions where a foreign investor already holds a stake in a German company and acquires additional interests. In case of an add-on acquisition, another review is required when each of the thresholds of 20, 25, 40, 50, or 75 percent of voting rights is met or exceeded for the first time.

As explained above, the review usually extends to transactions involving non-EU investors, i.e., investors from outside the EU and the EFTA. However, acquisitions made by EU investors may exceptionally also be investigated if there are indications that the transaction is aimed at circumventing the German FDI review regime.

The relevant categories of Section 55a para. 1 nr. 1 to 27 AWV include, inter alia, critical infrastructure as specified in the BSIG and the BSI-KritisV, such as energy, water, food, information technology and telecommunications, health, finance and insurance, transport, and traffic. This list of categories has been continuously expanded since inception and includes German companies that are active in the development, manufacturing, and marketing of medicinal products and vaccines, including their precursors and active ingredients, as far as they are crucial for the national healthcare provision, or that are holding corresponding licenses under pharmaceuticals law. The list also covers the emerging technologies sector, such as semiconductors, artificial intelligence, 3D-printing and quantum technology.

How does the BMWi become aware of an investment and what is the further procedure?

Similar to the sector-specific review, investments subject to the cross-sector review in a sample category (Section 55a para. 1 AWV) must be notified to the BMWi in writing. The notification is subject to the same set of rules as illustrated for the sector-specific review above. However, the review by the BMWi of a likely effect on public order or security goes beyond Germany and includes other Member States of the European Union and projects or programmes of EU interest. The notification must include all information specified in no. III. of the General Order of the BMWi dated May 27, 2021, such as the identities of the seller, the target, the direct and the indirect acquirer (including all of its direct and indirect shareholders), as well as certain transaction details, such as the purchase price and the type of investment. The notification must further include an outline of the acquirer’s and the domestic target’s business areas as well as any of their relationships with or contacts into official bodies.

Until approval is granted by the BMWi, the acquisition agreement is void and must not be completed. Furthermore, the investor may not exercise the voting rights in the target company or receive of security-relevant information from the target company.

An infringement of these obligations can be punished with imprisonment of up to five years or criminal fines, as well as with substantial administrative fines of up to 500,000 EUR. If the transaction does not raise concerns, the BMWi will issue a written clearance decision. An acquisition is deemed approved even without express written approval if the BMWi does not initiate an investigation into the acquisition within two months of notification.

In which cases should parties apply for a clearance?

As noted above, if the conditions for a cross-sector review in a sample category are met, a notification is mandatory. However, an application for a clearance or a no-jurisdiction letter may be advisable if there is doubt as to whether the target company is active in a business sector that is subject to a notification obligation, or if the acquisition may be otherwise deemed having a likely effect on public security or order. The question of whether such application is advisable should be assessed by a specialised lawyer on a case-by-case basis. Often enough, it may suffice to seek an informal consultation with the competent BMWi officials.

What are the possible outcomes of the review?

In most cases, the review will result in a clearance of the transaction. In cases where a transaction is deemed likely to affect the public order or security of the Federal Republic of Germany, any other EU Member State, or any project or programme of EU interest, the BMWi may clear it subject to conditions, or may ultimately prohibit the transaction.

A transaction that is prohibited cannot be implemented. If it has already been closed (whether in part or in full) it must be unwound. It is important to note that in the context of the German foreign direct investment review regime, an unwinding of a transaction may mean that the target falls back to the seller. Thus, sellers must make sure that all of the FDI rules are complied with to avoid such risk.

The decisions of the BMWi are independent administrative acts that can be challenged in total or limited to conditions imposed in the administrative court of Berlin, if necessary.

3. The general cross-sector review

When is the general cross-sector review triggered?

The general cross-sector review applies to transactions where the German target company is not active in any of the business sectors listed in Section 55a para. 1 no. 1 to 27 AWV, but for which the BMWi nevertheless considers that they may affect the public order or security of the Federal Republic of Germany, any other Member State of the European Union, or projects or programmes of Union interest.

The review can be initiated, where a non-EU citizen directly or indirectly acquires a share of 25 per cent or more of the voting rights in a German company or specific assets in Germany. In cases where a transaction is made to increase an already existing shareholding (Aufstockungserwerb), an assessment is (re-)initiated upon reaching or exceeding a threshold of 40, 50, or 75 per cent, respectively.

The review applies to investors that are “non-EU investors” within the meaning of the AWV and AWG, i.e., investors from outside the EU and the EFTA. However, acquisitions made by EU investors may exceptionally also be investigated if there are indications that the transaction is aimed at circumventing the German FDI review regime.

Even though this type of review expressly applies to transactions that do not fall under any of the regulatory examples listed in Section 55a para. 1 AWV, these examples may serve as an indication as to what kind of business activities may be deemed likely to affect public order or security. An assessment is more likely to be initiated if the domestic target company is active in a field of business that is close to any of the above-mentioned examples or maintains extensive contractual relationships (especially relating to matters of security) with state authorities. A review is also more likely if the acquirer is state-owned or otherwise subject to the control of (foreign) state authorities.

How does the BMWi become aware of a transaction and what is the further procedure?

Different from the two other types of FDI reviews, transactions that are subject to a general cross-sector review are not subject to any notification obligation, closing prohibition or risk of penalties or fines in the event the acquisition agreement is closed prior to or despite a prohibition. However, the BMWi can initiate the review of such transaction ex officio within five years following the signing date. During this period, the agreement is not void but subject to the condition of a later prohibition, pursuant to the relevant AWG provisions. However, in cases where the BMWi later prohibits the transaction, the effect of the voidness is the same as in the other types of review: The acquisition agreement is void from the outset.

To obtain legal certainty, the parties may apply for a no jurisdiction letter or a clearance to the BMWi on a voluntary basis. If the BMWi agrees that the transaction is not subject to review, it will confirm that it does not consider the transaction to be subject to review (“no jurisdiction letter”). If the BMWi considers that the transaction is notifiable but does not raise questions, it will clear the transaction. Clearance will be deemed granted if the BMWi does not initiate an investigation within two months of application or does not decide on the matter within four months of receipt of a complete notification. Once the transaction has been cleared, the condition ceases to apply and the agreement is deemed effective from the outset. If the parties do not apply for a clearance, there remains a certain risk that the BMWi might initiate an investigation up to five years of the signing date. The BMWi may of course also decide to engage in a review with the possible result of a clearance subject to conditions or a prohibition.

In which cases should parties apply for a clearance or a no jurisdiction letter?

The question of whether it is advisable to apply for a clearance should be assessed by a specialised lawyer on a case-by-case basis. An application may be advisable when in doubt as to whether the acquisition in question may be deemed likely to affect the public order or security of the Federal Republic of Germany, any other EU Member State, or any project or programme of Union interest. Often it is sufficient to seek an informal consultation with the competent BMWi officials to exclude a filing requirement with the sufficient degree of certainty.

What are the possible outcomes of the review?

In most cases, the review will result in a clearance of the transaction. In cases where a given transaction is deemed likely to affect the public order or security of the Federal Republic of Germany, any other EU Member State, or any project or programme of Union interest, the BMWi may clear it subject to conditions or may prohibit the transaction.