In the recent past, Germany’s foreign investment control law has been continuously subject to discussions and amendments. Most recently, on 18 June 2020, the Deutscher Bundestag (German parliament) passed another amendment act of the German Foreign Trade and Payments Act (AWG) that came into effect on 17 July 2020 (“Amendment Act”). The purpose of the Amendment Act is to adapt the German legal framework to the requirements of the European Foreign Direct Investment (FDI) Screening Regulation (Regulation (EU) 2019/452 of 19 March 2019) and to further tighten the investigation and control regime for foreign investments in German target companies. In addition to this scheduled adjustment, the Covid-19 pandemic led to unscheduled adjustments to the AWG, and furthermore, the Foreign Trade and Payments Ordinance (AWV). Some of the changes are so short-lived that an amendment to the AWV that was only passed in June 2020 (based on the draft Amendment Act dating from April) had to be adapted again on 17 July 2020 when the Amendment Act had undergone the parliamentary process and thus had reached its final content.
The following summary provides and overview of the latest changes from 2020.
2. Mandatory adaptations of the German investment control regime due to the FDI Screening Regulation: cooperation mechanism
As a member state of the European Union with investment control provisions in the sense of AWG and the AWV, Germany is obliged to adapt its legal framework to the requirements of the FDI Screening Regulation. To this end, Germany introduced the cooperation mechanism provided for under EU law in order to enable other member states and the European Commission to submit comments with regard to foreign investments that are subject to investment control in Germany. According to the new regulations, it is from now on not only necessary to examine whether foreign direct investments could impair security or public order in Germany; instead the situation in and the views of other member states and the Commission must also be taken into account. The German Federal Ministry of Economics and Energy (BMWi) is the national contact point in accordance with the FDI Screening Regulation. The main task of such contact point is the administration and management of the planned exchange between the EU member states regarding their national investment control procedures. Within the scope of investment screening, the BMWi receives requests for information, statements and documents from the member states and the European Commission, initiates audits, transmits German statements and coordinates departments.
3. AWG: stricter review standards, pending invalidity of notifiable transactions, gun-jumping, new review periods, stricter sanctions
In addition to adapting the AWG to the requirements of European law, the new regulations aim to strengthen national investment control law in order to ensure even more effective protection of public safety or order in the Federal Republic of Germany in the event of critical company acquisitions by non-EU citizens or foreigners.
Threshold for intervention. The threshold for the adoption of measures restricting investments has been lowered significantly. Prior to the Amendment Act it was necessary for the issuing of orders or even the prohibition of a transaction that the foreign investment posed an “actual and sufficiently serious threat” to public order or security. Since the Amendment Act it suffices – in line with the approach of the FDI Screening Regulation – that the investment is “likely to affect” public order or security. This means that measures restricting investments will be permissible even at a significantly lower degree of risk. An impairment which has not yet occurred but which may occur in future as a result of a critical investment should and can be prevented.
Scope of sector specific audit. In the context of the sector-specific audit, i.e., in the case of investments in companies in the field of war weapons and military equipment, the type of companies covered has been extended. From now on, not only investment in companies that produce and develop such goods are covered but also investment in companies that „modify or are in possession of“ such goods. Acquisition constellations in which the production, development, modification or possession of corresponding security-relevant goods has occurred in the past, but the target company still has knowledge of or access to the security-critical technology, are also covered.
Standstill orders. A further significant amendment concerns the extension of standstill orders (i.e., pending invalidity of transactions) for a wider range of transactions. Prior to the Amendment Act, only those contracts that concerned investments in the area of sector-specific auditing were (temporarily) invalid until the conclusion of the auditing process. From now on, all notifiable legal transactions will (temporarily) be ineffective from the time they are executed until the conclusion of the review proceedings. This also means that transactions in areas of cross-sector review, which concern, i.a., critical infrastructure, specific software for critical infrastructure, media companies essential for the formation of public opinion and certain newly added categories in the healthcare sector (see Section 4 below) will only become valid if the transaction is cleared at the conclusion of the review process (or deemed cleared).
Gun-jumping. The extension of the standstill provisions is accompanied by the introduction of various criminal and regulatory offences, similar to the ban on gun-jumping under cartel law. These are intended to ensure that the purpose of the investment review is not thwarted by the completion of the transaction prior to clearance or by any premature exchange of security-relevant information. In summary, it is forbidden until clearance (or until deemed cleared because of failure to clear in due time) to:
- Enable the acquirer to exercise any voting rights;
- Grant any rights to dividends (associated with the investment) or any equivalents to the rights to dividends to the acquirer;
- Provide or otherwise disclose to the acquirer any information relating to the company, which triggers the investment control or which is to be taken into account specifically in the assessment of an impairment of the public order or security; or
- Provide or otherwise disclose company-related information that is designated as significant according to certain criteria in an order issued by the BMWi.
The broad formulation of the prohibitions and the severe sanctions for disregarding them will pose considerable challenges for both sellers and buyers in the course of the due diligence process.
New review periods. The most significant change that the draft Amendment Act has undergone in the parliamentary procedure concerns the review periods. Parliament eventually decided to standardise the different time limits for cross-sectoral and sector-specific investment review and to put them on a legal basis by shifting the respective provisions from the Foreign Trade and Payments Ordinance to the Foreign Trade and Payments Act. The three-month period for preliminary review in cases where the Ministry acts ex officio (and during which preliminary review period it is decided if a review shall be initiated) is now reduced to two months. The length of the review period within which restrictions can be ordered is now uniformly set at four months from the receipt of complete documents.
Furthermore, the Amendment Act seeks to prevent the current practice of the BMWi to extend the review period any number of times by requesting additional information. The Amendment Act in that context provides that the review period is suspended during the time, in which subsequently requested information or documents is being put together. In addition, the BMWi may unilaterally extend the review period by up to three months if the individual case is particularly complex, and by a further month (than by a total of four months) if the acquisition affects defence interests to a significant extent. Lastly, with the consent of the direct acquirer and seller, the review period may also be extended as often and as long as desired.
In case of a negotiation of a public-law contract, the expiry of the review period is suspended. The suspension terminates and the period continues to run when negotiations have been terminated.
Procedure. From a procedural point of view, the Amendment Act finally brings greater standardisation of the responsibilities that have so far been structured differently in cross-sectoral and sector-specific examination. In addition, the BMWi is explicitly assigned competences for the comprehensive monitoring of compliance with obligations on the part of the parties involved in the investment arising from orders or public law contracts.
4. AWV: new categories of notifiable transactions, asset deals, investor-related screening criteria
New categories of notifiable transactions within the area of cross-sector review. The “Covid-19” induced amendment of the AWV dated 3 June 2020 introduced further types of transactions that now fall within the scope of notifiable transactions and hence are subject to the new standstill regime. This concerns, in particular, transactions in the area of certain personal protective equipment, essential pharmaceuticals, medical devices and in vitro diagnostics. In line with the previous concept of the law, the notification requirement for transactions in these areas comes with the applicability of the 10% threshold for reviewing transactions (instead of the 25% threshold applicable to other transactions in the area of cross-sector review).
Asset deals and investor-related screening criteria. The amended AWV explicitly clarifies that German investment control is not limited to share deals but equally applies to asset deals. In line with the FDI Screening Regulation, the AWV dating from June 2020 now explicitly introduces certain screening factors relating to the background and activities of the individual investor and which the BMWi shall take into account when making its assessment of a transaction. Investor-related factors concern, i.a., the following scenarios: if (i) an investor is directly or indirectly controlled by a government of a third country; (ii) the acquirer has already been involved in activities affecting public order or security; or (iii) if there is a serious threat that the acquirer or a person acting for it were or are involved in activities that under specific German laws qualify as a criminal or administrative offence.
SatDSiG. In addition to the above-mentioned regulations, the special investment review provisions previously contained in the Satellite Data Security Act (SatDSiG) concerning the acquisition of domestic operators of high-quality remote earth sensing systems by foreign investors were repealed. In order to e stablish an equivalent level of protection, since the Amendment Act, such acquisitions are reviewed in accordance with the general provisions of the AWG and AWV.
5. Assessment and outlook
The latest amendments of the legal framework of Germany’s foreign investment control regime continue the trend of the recent years of a progressive tightening of investment control. A trend that can be observed internationally.
The changes adopted will undoubtedly lead to a further increase in the number of investment reviews. With this in mind, the German legislator increased personnel and material resources. Whether this will ultimately be sufficient remains to be seen.
In addition, it is to be expected that the duration of review procedures will be extended, not least because of the cooperation mechanism provided for under EU law, which will have to be taken into account when drafting contracts and planning the timing of mergers and acquisitions (M&A) transactions. With the new provisions on review timelines, as introduced late in the parliamentary procedure, the German legislator is however endeavouring to somewhat shorten review periods and to give investors more planning security by making the end of deadlines more predictable.
A major challenge for transaction support is certainly the new, sharply sanctioned regulations on gun-jumping, which must be taken into account when setting up and conducting due diligence processes.
Lastly, it remains to be seen what effect the lowering of the risk threshold for measures restricting investments will have in practice for the screening procedure, also taking into account constitutional considerations.
The Amendment Act applies to transactions of which the BMWi gains knowledge after the entry into force of the act, i.e., after 17 July 2020. Transactions of which it has gained knowledge before (or which have been notified prior to such date) are subject to the previous legal regime.
The BMWi will evaluate the effectiveness of the new regulations and the associated efforts and expenses for both enterprises and authorities within a period of two years after the Amendment Act has come into effect. It is most unlikely that we will have to wait that long to see at least the next changes to the Foreign Trade and Payments Ordinance. The next amendment of such ordinance is in preparation; it will presumably focus on determining those critical technologies that are to be covered by the national investment review, based on the requirements of the FDI Screening Regulation.