Updated Regulations on Foreign Direct Investment in Germany – Focus on High-Tech Sectors
Introduction of the new Rules
The revised rules of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung or AWV) further extend the competences of the Federal Ministry for Economic Affairs and Energy, which is the governmental body responsible for FDI control. The new rules can be traced back to the joint initiative of Germany, France and Italy who championed amendments to the European legal framework for FDI to protect its key industries from controversial acquisitions by foreign-backed investors. The new amendment further implements the EU-Screening Regulation (Regulation (EU) 2019/452). The new rules entered into force shortly after its adoption, on 1 May 2021.
In essence, there are three material additions to the Government’s toolbox to block transactions that may harm national interests:
- extended notification requirements, qualifying 27 sectors and industries to be subject to pre-closing notification and cross-sectoral examination, empowering the Government to pre-emptively scrutinize such M&A deals;
- additional notification requirements for staggered acquisitions even if FDI-clearance has already been obtained; and
- review of the acquisition of control rights outside of formal voting rights (although there is no requirement to file such transactions).
The new Rules
1. Relevant Sectors and Industries
Previously, notification requirements for the cross-sectoral review were limited to critical infrastructure and related software, specific telecommunications equipment, cloud-computing, telematics, media, medical care and personal protective equipment. Acquisitions in these categories had to be notified to the Federal Ministry for Economic Affairs and Energy, if 10% or more of the voting shares were acquired.
The new Section 55a AWV adds additional categories to the relevant sectors and industries. At the same time, it increases the notification thresholds for some of these (i.e. slightly relaxing the corresponding notification requirements):
- The new Section 55a AWV now includes the previous categories (No. 1 to 11) as well as additional future key technologies such as artificial intelligence, autonomous driving, robotics, semiconductors, optoelectronics, nanotechnology, industrial 3d-printing, quantum technologies and others (No. 12 to 27).
- Only for some categories (Section 55a para. 1 No. 1 to 7 AWV), e.g. including critical infrastructure, the notification requirement is triggered by the lower threshold of 10% or more of the voting shares.
- For the remaining categories (Section 55a para. 1 No. 8 to 27), the new rules increase the notification thresholds to the acquisition of 20% or more of the voting shares.
The notification is mandatory for all sectors and industries listed in the new Section 55a para. 1 AWV.
The new rules do not change the threshold of 25% or more of the voting shares for acquisitions of undertakings not active in one of these areas, for which a clearance decision may voluntarily be requested. But the new Section 58 para. 3 AWV now clarifies that such voluntary request is excluded for cases where the notification is mandatory.
For the sector-specific review (defense sector), the notification requirement remains to be triggered if 10% or more of the voting shares are acquired. Furthermore, the sector-specific review will now cover an enhanced list of military goods, as defined in Part 1 Section A of the Export List.
2. Staggered Acquisitions / Incremental Share Acquisitions
The new Section 55a para. 2 AWV now explicitly states that additional notification requirements apply in staggered acquisitions, even if an FDI clearance has already been granted at a prior stage. The AWV includes thresholds, though, that make a new notification unnecessary if a shareholding is increased only marginally. This provides clarity the previous rules lacked.
3. No Notification Requirements in so-called Atypical Acquisitions of Control
The former drafts of the amendment provided for mandatory notification requirement for so-called atypical acquisitions of control, without requiring a specific threshold of voting shares. For example, a notification would have been necessary if a foreign party obtained control over additional seats or majorities in corporate bodies or the management, veto-powers or information rights, irrespective of its shares. The current amendment refrains from such additional notification requirements. The preparatory works explain that an acquirer cannot be expected to assess whether or not a transaction below a relevant threshold fulfills the conditions of such atypical acquisitions of control. However, the Federal Ministry for Economic Affairs and Energy may screen foreign direct investments and has discretion to nevertheless investigate atypical acquisitions if e.g. a foreign investor acquires influence by a shareholder agreement that grants him more rights than the shares acquired would.
Implications for Sellers and Investors
The significantly expanded catalogue of covered activities makes it even more important to check whether a German deal may be effected by the rules covering FDI. It is interesting that the Government has recently massively increased its merger control thresholds thereby cutting merger control notifications by approx. 30-40% (see our previous briefing) while simultaneously doubling-down its efforts to scrutinize FDI in Germany.
It is good news that “atypical acquisitions of control”-notification requirement did not make it into the final amendment, so not every such acquisition must be filed. Nevertheless, the new rules add complexity to many transaction-processes. The extension of the cross-sectoral examination to a large number of previously uncovered sectors and industries and the extension of the sector-specific examination to a more comprehensive list of military goods, results in more notifications, and the risk of having atypical acquisitions reviewed by the Government remains even without the need to file.Even if there will often be no material concerns, the need for legal guidance and the more often necessary notification process will extend many transaction timelines. Thus, the implications of the expanded FDI regime should be considered at an early stage every deal planning involving non-EU investors.