Status of foreign direct investment control law in Germany
According to the “2018 A.T. Kearney Foreign Direct Investment Confidence Index” (the “FDI Index”), an annual survey which tracks a country’s attractiveness for FDI, Germany is 3rd globally and tops the list of European countries. Despite tightening regulations, Germany remains appealing to foreign investors due to its increasing GDP growth rate and diverse economy.
FDI in Germany is, in particular, governed by the Foreign Trade Regulation (Außenwirtschaftsverordnung -AWV) issued by the German Ministry for Economic Affairs and Energy in accordance with the authorisations under the German Foreign Trade Act (Außenwirtschaftsgesetz-AWG). The AWV provides for a general foreign investment control regime and a sector specific foreign investment control regime.
Further, in March 2019, the Ministry passed two general rulings on the documentation to be provided for the sector specific and the general review proceedings, respectively.
The sector specific control regime applies if a foreign investor acquires, directly or indirectly, at least 10% of the voting rights in a target operating in the sector of war weapons, IT security or producing certain goods subject to export control. Such transaction may be blocked if it constitutes a danger for important national security interests of the Federal Republic of Germany. Relevant transactions need to be notified to the Ministry and cannot be closed prior to any approval.
The general investment control regime, in principle, applies if an investor does not come from a state within the European Union (EU) or the European Free Trade Association (EFTA) and acquires, directly or indirectly, 25% of voting rights. Such transaction may be blocked if it constitutes a threat to public order or national security of the Federal Republic of Germany. Although, in general, there is no obligation to notify relevant transactions to the Ministry and relevant transactions can be closed without the Ministry’s approval, the Ministry has a right to review and prohibit the transaction within three months after becoming aware thereof and within five years after signing of the transaction. In practice, parties usually file for a certificate of non-objection from the Ministry in order to gain transaction certainty and only close their transaction after having received such clearance.
As an exception from this general principle, but still within the general investment control regime, a stronger scrutiny applies if the investment relates to:
- an operation in a so-called critical infrastructure in the sectors energy, water, IT, finance and insurance, health, transportation and traffic, nutrition or media;
- the development of software specific for such critical infrastructures;
- the implementation of measures to supervise and monitor telecommunication;
- the provision of certain cloud computing services; and
- the holder of permission to produce components or provide services relating to telematics infrastructure (German statutory health funds regime being a network within different medical facilities holding patient records).
(i to v being a “Critical Business”).
In such transactions, the threshold for review is only 10% of voting rights, the transaction needs to be notified to the Ministry and it is more likely that the transaction will constitute a threat to public order and national security.
Therefore, a prudent and timely analysis of the foreign investment control situation should form an integral part of any plans to acquire a German business. Additionally, non EU/EFTA-investors face an additional procedural layer which they should discuss with a potential seller in good time in order to be able to keep their offers competitive. Recent developments will likely mean that sellers will increasingly ask for appropriate protection from the risks which are related to the potential failure of the foreign investment control procedure, mostly in form of long stop dates and indemnification claims and penalty payments/break fees.
Hot topics: intended changes
Although the regime has been subject to recent changes both in July 2017 and December 2018, the investment control regime is still subject to review. Further changes are to be expected, particularly given the newly adopted European FDI Regulation, which considers a wider scope of transactions as critical (e.g. covering not only critical infrastructures but also critical technologies, security of supply of critical inputs, access to and control of sensitive information and extent of control or funding by non-EU government), it is likely that the competent Ministry will amend the AWV again reflecting the additional limitations set out in the FDI Regulation.
Consequences for FDI
To put this into perspective: according to the statistics provided by the Ministry, between January 2016 and October 2018, the Ministry reviewed 171 investments including 68 investments from China. Only in one case, the German Government intended not to grant an approval that had been applied for, which resulted in the investor withdrawing its application for approval and cancelling the project. In some cases, the German Government has entered into public law contracts with investors to implement certain obligations that the Ministry considers necessary to make sure that the investment is no threat to public order or security.
While at first glance burdensome and potentially having a discouraging effect, essentially these are procedural items which should remain manageable.
As set out above, most investments receive investment control approval in Germany, quietly and without media coverage. Notwithstanding, unpredictability of the decisions of the Ministry is the greatest concern and results in competitive disadvantages for non-EU/EFTA investors in Germany.
Therefore, a prudent preparation of a transaction and a clear and concise communication plan vis-à-vis the sellers and the Ministry is key and will enable foreign investors to implement the clear majority of their investment plans as intended and within an acceptable time period.
This article is excerpted from “Accessing Europe and the Middle East: Foreign Direct Investment Control Considerations”. For the full publication, please scan QR code to read.