1. Third reform within less than 3 years
On 30 January 2020, the German Federal Ministry for Economic Affairs and Energy (“Ministry”) published its Draft Act amending the Foreign Trade and Payments Act. Minister Peter Altmaier stated: "We want to protect our security interests in a more forward-looking and comprehensive manner." The trade associations concerned are invited to comment on the Draft Act now. The first critical voices from the Federation of German Industries (BDI) are already raised. BDI President Dieter Kempf stated: “Great uncertainties arise for investors and companies.”
This is the beginning of the third significant reform of the German foreign direct investment rules within less than 3 years. Germany already tightened restrictions on foreign direct investments in July 2017 by expanding the competences of the Ministry to review whether a foreign direct investment jeopardizes public order or security of the Federal Republic of Germany and by significantly extending the review periods. Further restrictions followed in December 2018 when the pick-up threshold for review by the Ministry and for the notification obligation towards the Ministry was lowered from 25 percent voting rights in a German company to 10 percent for certain sensitive industries, in particular for the defence sector but also for critical infrastructures and the media industry. For more detailed information about the past reforms see our previous Client Alerts on this topic: „Germany tightens restrictions on foreign investment from outside the EU”, August 2017 and „Foreign Direct Investments in Germany. Germany significantly lowers threshold to veto deals; FDI screening mechanism at the European level is coming soon”, December 2018.
In addition, a new EU Regulation establishing a framework for the screening of foreign direct investments by the Commission and the Member States (“EU Investment Screening Regulation”) came into force on 11 April 2019. The Member States are in the course of putting in place the necessary arrangements for the implementation of the EU Investment Screening Regulation so that it can fully apply as of 11 October 2020. These arrangements relate, in particular, to the setting up of the new EU-wide mechanism for cooperation, enabling Member States and the Commission to exchange information and raise concerns related to specific foreign investments. For more detailed information about the EU Investment Screening Regulation see our Client Alert “European Parliament agrees on proposed EU measures to screen foreign direct investments”, February 2019.
The Draft Act amending the Foreign Trade and Payments Act reflects and implements the EU Investment Screening Regulation but it also contains additional changes going beyond this. Even if it is not yet entirely clear whether the German Parliament will ultimately accept the Draft Act in this form, it is already certain that the foreign investment review in Germany will become more extensive, time-consuming and stricter.
2. Key features of the proposed reform
The key features of the proposed reform are the following:
- The level of threat to public policy or security, which is required for restrictions of foreign investments, is lowered. In future, the subject of the review will be an "expected impairment" of public order or security rather than a “real threat” (as required at present). Accordingly, the scope for review and decision-making of the Ministry is significantly extended
- At present, the foreign investment review only refers to public order or security in Germany. In future, the foreign investment review may also include any threat to public policy or security of another Member State or in relation to projects or programs of European Union interest (e.g. Galileo & EGNOS, Copernicus, Horizon 2020 or European Defense Industrial Development Program). A so-called "National Contact Point" for the new EU-wide cooperation mechanism will be located at the Ministry.
- In addition, any foreign investment subject to notification requirements will be suspended for the duration of the review. Until now, this was only applicable to foreign investments in the defense and IT security sector (so-called sector specific review). The intention behind this is to prevent the parties involved in the acquisition from creating a fait accompli during the ongoing foreign investment review.
Furthermore, the Ministry has already announced that in a second separate step, the Foreign Trade and Payments Ordinance will also be amended. This amendment will be crucial as the Ministry intends to implement a notification requirement for foreign investments of at least 10 percent voting rights in “critical technologies”. Critical technologies are already defined in the EU Investment Screening Regulation as – inter alia – artificial intelligence, robotics, semiconductors, biotechnology and quantum technology. It is very likely that the Ministry will refer to this catalogue of critical technologies.
3. Impact on M&A transactions
The lowered level of threat to public policy or security, i.e. "expected impairment" instead of a “real threat”, opens up the possibility for the Ministry to review even more transactions than before. Ac-cordingly, the Ministry can – in consultation with other ministries or in some cases with the entire Government – restrict or even prohibit a foreign investment based on an impairment of the public policy or security which has not yet occurred but which may occur in future as a result of a critical investment.
Beyond that, more foreign acquisition projects will be in the scope of the Ministry’s review once the catalogue of “critical technologies” has been added to the “critical infrastructures” and to the other security relevant investments that trigger the notification obligation if they reach the 10 percent threshold.
Longer review periods and increased administrative effort must be taken into account by foreign investors for acquisitions in sensitive sectors, especially if another Member State is involved or if the acquisition relates to a project or program of EU interest.