Germany strengthens foreign investment controls

The German Ministry of Economics and Energy (Bundesministerium für Wirtschaft und Energie/BMWi) has published a draft bill to change the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung/AWV).  New business areas will be added to the list of sectors in which acquisitions by foreign investors have to undergo a security screening. The list will be extended from 11 to 27 security-relevant areas. Foreign direct investments (FDIs) in these areas will then have to be notified to the BMWi and may not be conducted until the ministry has finished the review.

Dr Markus J. Friedl, an M&A expert at Pinsent Masons, the law firm behind Out-Law, said: "Areas and technologies such as quantum technology, robotics, 3D printing, autonomous driving or artificial intelligence are to be subject to notification. According to the draft law, buyers from states outside the European Free Trade Association will in future have to inform the Ministry of Economics and Energy if they want to buy more than 10 % of a firm’s shareholding, as well as in certain other exceptional cases."

Through several changes to German foreign trade law, the country’s investment control was already  extended and tightened last year. The planned amendment to the AWV would be the last step to implement the EU Screening Regulation into German law. The regulation, which came into force in October last year, is the result of a joint initiative by Germany, France and Italy. Since 2017, the three countries had been pushing for the EU’s legal framework for FDI screening to be revised.

"Due to the extension of investment screening to a wide range of additional sectors and technologies, many investors will face difficulties", said Dr Sandra Schuh, M&A transactions expert at Pinsent Masons. "It also demonstrates the government's political will to increase significantly the level of control over foreign investors ."

In addition, all producers of military equipment on the German export list will be covered by FDI screening in future.

The amendment also clarifies that whenever an investor acquires additional voting rights and thus exceeds the thresholds of 10 % or 25 % of the voting rights, the purchase is subject to FDI screening. Accordingly, under certain circumstances, even minor share acquisitions will have to be notified to the BMWi.

In addition to the purchase of voting rights, the acquisition of other control rights will also be covered by the new law: So far, a transaction was only subject to FDI screening, in the case voting rights were acquired. In future, the acquisition of so-called "control and management rights" will also trigger the duty to notify the BMWi. Such an "atypical acquisition of control″ can for example be the case when the acquirer is granted special veto or information rights or can choose the members of the supervisory bodies. In these cases, the amount of the voting rights acquired would be irrelevant.

"Due to the significant expansion of sensitive areas, foreign investors should check whether a planned transaction will have to be notified to the BMWi", said Arkadius Strohoff, M&A expert at Pinsent Masons. "As the draft does not provide for a transition phase, the new regulations could also be applied to transactions already in progress. Therefore, companies seeking to enter into a transaction with parties outside the European Free Trade Association should take the envisaged new rules into account."

German business associations can comment on the draft law until 26 February. Experts expect the legislative process to progress quickly. The new law could already enter into force in the first quarter of 2021, as the amendment and implementation were originally planned for October 2020.