Regulators are becoming increasingly active in imposing measures on deals or prohibiting them altogether under FDI rules – with prohibitions happening in the EU’s largest economies Germany, France, and Italy in the past months. Against this backdrop, Germany is moving forward on its plans for stricter foreign investment control laws. On 27 April, the German government voted on a revised regulation, following a draft that was presented in January for public consultation. Amongst the key results of this consultation are a couple of changes to the draft that should be welcomed. Firstly, the revised regulation makes it clear that intra-group restructurings do not fall into the scope of the German FDI rules anymore. Moreover, concerning the additional areas of target activities which require a mandatory filing, the voting share threshold has been increased from the initially suggested 10 to 20 percent.
In Germany, the implementation of additional target activities within the scope of foreign investment control, as set out in the EU FDI Screening Regulation (EU) 2019/452, was delayed last year. Coordination between the different ministries of the German Federal Government (Bundesregierung) proved to be more difficult than expected. After the Federal Government finally presented a compromise in the form of the draft bill for the 17th reform of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV) in January, the final bill has now been approved by the Federal Government.
Before entering into force, the reform is now pending approval by the Federal Council (Bundesrat) and publication in the Federal Gazette (Bundesanzeiger). We expect approval of the bill by the Federal Council in one of the next plenary sessions on 7 or 28 May and its publication shortly thereafter. The new rules will apply to all transactions signed after the reform enters into force.
Below is a summary of the key amendments of the proposed reform and newly covered target activities:
For M&A transactions involving German target companies directly or indirectly via the acquisition of a foreign group, the bill contains some good and bad news:
The draft introduces 16 additional groups of activities in the area of cross-sectoral screenings, i.e. outside of defence technology. Together with the five new case groups (four of them from the health and biotechnology sectors) already added with last year’s amendment, the number of covered activities increases more than fourfold compared to the status one year ago.
Activities covered up to now, such as critical infrastructure and specially developed software for such critical infrastructure or the media sector, remain subject to control.
The 16 new groups of activities will in future be subject to notification if a non-EU acquirer acquires at least 10 percent of the voting rights or comparable management or control rights (see 3. below) over a German company. This concerns companies in the following areas:
The new categories stem largely from the EU FDI Screening Regulation. The regulation defines the category of “critical technologies and dual use items” as “including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies”.
In the area of sector-specific review - i.e. in particular affecting targets in the field of defence technology - reference is to be made in future to all military equipment as defined in Part I Section A of the German Export List (Ausfuhrliste). Up to now, only a few individually listed items in the field of armaments were covered.
In addition, the Federal Government intends to apply last year's broadened substantive review standard from the cross-sectoral investment assessment also for sector-specific activities. This lowers the standard of review to “probable threat” - a concrete impairment is no longer required.
The different assessment criteria of sector-specific (essential security interests) and cross-sectoral investment assessment (public order or security) remain unaffected by this amendment.
According to the wording of the AWV, foreign investment control applied only if an investor acquires 10 percent or 25 percent (in the future also 20 percent) of the voting rights of a German target enterprise. The amendment intends to clarify that, in accordance with the previous practice of the BMWi, incremental share acquisitions above these thresholds also fall within the scope of application of foreign investment control because such increases in voting rights can give an investor additional influence over the target. The government has set specific thresholds which would individually trigger a notification (20, 25, 40, 50, or 75 percent of the voting rights), even if the initial transaction was already approved. Additionally, the BMWi can now condition the clearance of acquisitions on a notification obligation regarding any further share increases independent of the thresholds.
Particularly relevant in practice is also that control rights outside of formal voting rights will, going forward, also trigger a review. This concerns investor or shareholder agreements which can give the acquirer a disproportionate influence in comparison to the actual share of voting rights and, therefore, influence comparable to a higher share of voting rights. The Federal Government refers to the appointment of supervisory bodies or management as well as to veto rights in strategic business decisions or extensive information rights. For the interpretation of these terms, a comparison with merger control law can help where the assessment of (co-)control rights has always been standard practice.
The existence of a mandatory notification obligation in the area of cross-sectoral review (i.e. according to one of the specifically regulated case groups of the new Section 55a (1) AWV) and a parallel voluntary application for the granting of a clearance certificate for activities not specifically mentioned are mutually exclusive in the future. The new regulation serves to clarify that an application for a clearance certificate is excluded in the case of a reportable acquisition and in the case of an examination procedure already initiated ex officio.
In addition, the new regulations clarify that the BMWi can switch from the cross-sectoral to the sector-specific examination and vice versa. The practice of the last few years shows that for more and more cases it is difficult to conclude whether the cross-sectoral or sector-specific investment assessment applies. Sometimes the authorities can only determine in the review procedure, after receipt and examination of detailed information, which procedure is actually applicable in the case at hand.
If the government has significant concerns regarding a transaction and imposes conditions or requires a mitigation agreement, the revised law provides for more concrete rules on the supervision of such measures. It will be possible for BMWi to instruct a qualified third party to take over the monitoring role on behalf of the government. So far, the role of a trustee was limited to the supervision of the disintegration of prohibited deals. This takes into account that more and more deals are only cleared subject to a mitigation agreement and the BMWi’s resources for supervising such agreements are limited. The Regulation also enshrines certain reporting obligations of the parties in such case which have already been standard in most mitigation agreements concluded.
With the vastly expanded catalogue of covered activities, it will be important for acquirers, sellers, and target companies to jointly identify at an early stage whether the target company meets one of the newly introduced criteria. Involving experts from the company as well as legal (and possibly technical experts) will be indispensable for this exercise. For M&A transactions currently in preparation, parties need to consider early signing of transaction agreements to avoid a mandatory filing and connected stand-still obligation if the target’s activities are covered by the expanded catalogue of activities, but not by the current catalogue.
It is also of practical significance that the German government is already sharing notifications for investment assessment with the European Commission in order to enable coordination with other Member States that may be affected. The Commission, in turn, makes use of its right to comment on procedures and has already shared adverse opinions regarding deals with the Federal Government. As a result, not only will more procedures be subject to scrutiny in the future, but the review procedures will also take longer due to several European authorities being involved.
While 2021 promises to be a year with a particularly large number of M&A transactions after the COVID-19 shock of the past year, and while the review of transactions under antitrust law in Germany has just been considerably simplified by higher thresholds, the German government is keen to scrutinise foreign investments even more thoroughly with the help of investment control instruments.