Stricter foreign investment regime in Germany focuses on purchaser features

The German federal government has tightened restrictions on foreign investment and has introduced criteria which examine companies and individuals associated with a takeover, including the degree to which their actions are controlled by a foreign government. The changes to the foreign trade law are thought to be a reaction to the intense debate about foreign investments, especially Chinese investments.

The new regulation says that the characteristics of the person acquiring a German company can represent an actual threat to Germany as a business location. For this reason, information about buyers and their background will be scrutinised.

The German Federal Ministry of Economy and Energy (BMWi) can examine and prohibit the acquisition of companies based in Germany by foreign investors. A key question in this process is whether the planned acquisition of companies and company divisions by foreign investors could pose an "actual threat" to the public security and order of the Federal Republic of Germany.

Even before these changes the purchaser's background mattered. For this reason, not only documents related to the target company had to be disclosed for the investment examination procedure, but also detailed information about the indirect and direct acquirers. This included information about their authorised representatives, too.

As the BMWi thus had already included purchaser-related information in its examinations, it is welcomed that the regulator now provides the authorities with instructions in the form of standard examples. This will make the decisions of the authorities more predictable and improve legal clarity. But uncertainties remain, as the rules are not conclusive and the BMWi still has a wide assessment leeway for its examinations.

Investor-related examination criteria

The new explicitly investor-related examination criteria in Germany's foreign trade regulation point out that certain factors in the person of the purchaser are especially relevant for the evaluation of a transaction and its potential to pose an "actual threat" to the public security and order of the Federal Republic of Germany or to material security interests.

It is relevant to the examination if an investor is directly or indirectly controlled by the government of a third country. In particular, control can be exercised based on the ownership structure or through financial resources provided by the government, if it is beyond a minor extent. This also includes resources provided by government agencies or armed forces of a third country.

The regulator gives no further guidance on the meaning of control based on the ownership structure. It is understood that control can be exercised through voting rights or capital shares. It is not clear whether a foreign government exercises control with 25% of the voting rights or capital shares, or only with 50% and more.

The same applies for exercise of control by financial resources. This certainly includes funds made available through loans or similar financial instruments. It is still unclear to which extent support measures, such as the provision of guarantees or other securities or the granting of subsidies, must be regarded as funding within the meaning of the regulation.  Agreed is that financial resources that are provided in an amount and at an interest rate customary in the market, are considered insignificant and thus irrelevant.

According to the new law, the risk that the purchaser might be involved in criminal or illegal activities is also relevant to the examination. German authorities will have to asses this risk on grounds of the German criminal and administrative offense law.

Crimes from the catalogue of criminal offenses of the Act against Restraints of Competition and crimes or administrative offences based on German Foreign Trade Act and the German Military Weapons Control Act are especially relevant to the examinations. For reasons of proportionality, the BMWi will be required to only take crimes and administrative offense based on these laws into account in the examination. Offences under a comparable foreign criminal law standard can also be taken into account. In addition, there must be objective facts that the investor was or is involved in such an act.

A considerable risk that the purchaser might become involved in such conduct in the future is also relevant. This is the case when there are indications that the investor might not act unlawfully in the future. It remains to be seen how the BMWi will deal with such discretion given to it. It also remains to be seen how diligent the BMWi will be in its future assessments, so as not to rashly justify an actual threat to the public security and order of the Federal Republic of Germany. General experiences, according to which the acquisition of German companies by investors from China are considered to pose a significant security threat, do not justify investment restrictions.

In the light of the new foreign investment law, potential purchasers of German businesses should consider whether the planned transaction is in line with German law. The extensive duration of proceedings should be taken into account and the transaction schedule should provide enough time for the examination of the investment by the BMWi.