Germany tightens foreign investment regime due to the EU Screening Regulation

A new foreign trade law came into force in Germany at the end of last week. The law had been amended to implement the EU Screening Regulation, which provides for a uniform approach to investment screening throughout Europe and a cooperation mechanism between the member states and the EU Commission.

"The latest amendments to German foreign trade law underline the general national and European trend to tighten investment control regulations," said Dr. Sandra Schuh, an expert for mergers and acquisitions at Pinsent Masons, the law firm behind Out-Law.

"Sellers and purchasers will no longer be able to avoid taking foreign trade law aspects into account at an early stage when foreign investors intend to acquire or partially acquire a German company," Dr. Schuh said. "From now on, the obligation to report or to apply for a clearance certificate is no longer the only decisive factor, but it can also be prohibited to implement the transaction until the German Federal Ministry of Economics and Energy (BmWi) has approved it."

"Last but not least, the Europe-wide implications of a corporate transaction must now also be taken into consideration. "The changes in the foreign trade law will have far-reaching consequences for foreign investors. The federal government has announced it anticipates that twenty additional examination procedures would be added annually," she said.

The changes to German foreign trade law tighten the screening standards for investment audits. Previously, investment audits and respective measures were only possible when planned acquisitions of companies and company divisions by foreign investors could pose an "actual thread" to the public security and order of the Federal Republic of Germany.

From now on, a "probable impairment" of the public security and order of the Federal Republic of Germany or another member state of the European Union provides sufficient cause for the BmWi to prohibit the acquisition. The new regulation applies to all foreign investments that are subject to the investment examination of the BmWi according to German foreign trade law.

"By reducing the level of risk, the Federal Ministry of Economics can now examine significantly more acquisitions by foreign investors," said Dr. Markus J. Friedl, M&A transaction expert at Pinsent Masons. "This new regulation should authorise the BmWi to be able to examine critical company acquisitions more foresightedly in the future."

Further changes to the German foreign trade law introduce a comprehensive implementation prohibition, for example an investor is prohibited from taking steps to finalise the transaction while the investment is examined by the BmWi. Accordingly, acquisitions of companies subject to reporting requirements are now pendingly invalid until the examination procedure by the BMWi has been concluded.

The amendments affect in particular companies in critical infrastructure sectors such as companies in the energy, transport, finance, health, telecommunications, water and food supply sectors.

In previous audit practice, an acquirer of a company was able to undermine the purpose of the investment audit in these areas by implementing the transaction before the end of the investment audit. The new, more comprehensive implementation prohibition is designed to prevent this. The transaction may not be carried out during the examination and no security-relevant information of the target company may be disclosed to the potential buyer in the meantime.

According to the law, anyone who disregards this prohibition can be punished with a prison sentence of up to five years or a fine. Negligent behaviour can also result in corresponding fines.

The amendments to the law also includes a new regulation of the examination and order periods of the BmWi. This is set out to unify the previously different time limits for cross-sectoral and sector-specific investment examinations.

The BmWi has already announced that a further amendment of the foreign trade and payments regulation is to follow. The focus will be on the expansion of notifiable acquisitions and acquisitions of parts of companies in critical technology areas, especially technologies relating to artificial intelligence, robotics, semiconductors, cyber security, nano and biotechnologies.