Navigating the Vast Sea of Foreign Investment Control in Germany: A Retrospective and Prognosis

The German Federal Ministry for Economic Affairs and Climate Action recently released its annual report on the German foreign investment screening regime. Following a year-on-year growth in the number of cases since 2015, the report highlights a modest decrease in the number of foreign investment reviews - with a 15% reduction from 306 to 257 proceedings in 2023, consistent with an overall slowdown in merger and acquisition (M&A) activity. 

But given that the decrease in foreign investment reviews is smaller than the overall c.20% decrease in German M&A activity, the reduction in foreign investment reviews does not mean that the Ministry has become less active - rather an uplift should be expected once M&A activity recovers. The number of cases scrutinised by the Ministry under the European Union's Screening Regulation has seen a slight uptick from 264 to 280 cases (despite the M&A downturn) - demonstrating the increasing coverage of EU FI regimes, which is a function of further regimes coming into force and the continued expansion of existing ones. 

Developments in 2023

1. Trends

Over the past year, the proportion of cases requiring remedies or culminating in prohibitions has remained relatively constant at 4%. But it is noteworthy that 26 foreign investment cases were still under examination when the Ministry's report was made public. Past trends suggest that the number of remedy or prohibition cases might therefore slightly increase once these pending cases are completed. Factoring in these unresolved cases, we anticipate that the proportion of transactions prompting remedies or prohibitions could marginally increase to about 5%, when compared to the prior year.

Not included in these stats are one-sided concessions which are used slightly more regularly to complete sensitive cases in Phase I. While such concessions are less formal than a mitigation order or a public-law agreement, they allow the Ministry to revoke a clearance decision where an investor does not comply with certain promised behaviour, or if elements that were decisive to the decision prove to be incorrect.

The consistently low percentage of intervention cases overall (which has seen a decline from around 12% to around 5% over the last five years) suggests that the reforms over the last couple of years have resulted in a material “over-screening” of cases. To some extent, such over-screening is also a feature of other German regulatory regimes - as can e.g. be seen in the practice of the German Federal Cartel Office in merger control, where the rate of phase II investigations is even lower at less than 1% (despite reforms in 2021 resulting in a c.25% decrease in the number of cases notified - see annual report of the German Federal Cartel Office 2022/2023, p. 33).

However, the Ministry commands far fewer resources for case handling than the German Federal Cartel Office. Instead, it is dependent on intra-governmental alignment and coordination with other involved ministries, which puts a very material burden on its case handlers. It is therefore unsurprising that there is increasing recognition that – following a period of continuous expansion – the regime needs some adjustment to achieve a greater focus on cases that have a more pronounced likelihood of triggering public security or public order concerns.

This is a finding that the German regime shares with other EU Member State regimes such as Italy or Spain and – very notably – the EU Screening Regulation. During the first three years of the Regulation around 1,200 cases were processed - with only c.10%-15% triggering comments or opinions by other European regulators or the European Commission, and an even lower percentage ultimately resulting in intervention.

2. Origin of investors

The annual report shows that, despite heightened scrutiny over Chinese investments - as frequently reported in the press - a good number of transactions involving Chinese investors were still approved without conditions. This finding is in line with recent statements by the Ministry affirming that Chinese investors are not intrinsically problematic. Rather, investments in sensitive target companies are viewed very critically, while investments in other fields are still reasonably straightforward.

However, it appears that past high-profile and widely reported prohibitions linked to China-backed investments have had a chilling effect on overall Chinese investment into Germany; the number of foreign investment processes concerning Chinese investors reached a five-year low in 2023, with just 21 proceedings. This trend is reflective of a broader decrease in Chinese investments in Europe, which declined from 200 in 2016 to roughly 120 in 2023.

The dip in investments may also be influenced by a strategic pivot by Chinese investors from M&A transactions to other forms of business engagement. This is the case, for instance, with licensing agreements and greenfield joint ventures, which currently fall outside the notification requirements of the German regulatory framework - as well as the framework of most other EU Member States.

Meanwhile, investors from the United States continue to represent the largest share of foreign investment proceedings in Germany, with close to 100 transactions involving U.S. investors undergoing review. The country experiencing the most significant surge in the number of filings is the United Arab Emirates.

Finally, the data available on the origin of investors also indicates that a substantial share of sector-specific reviews (the regime for particularly sensitive defence-related activities) is attributable to investors from the EU/EFTA, who accounted for 57% of such reviews. The remaining 43% is attributable to non-EU/non-EFTA investors.

3. Sectors in focus

The composition and relative importance of sectors subject to foreign investment screening in Germany has shown little change over the last few years. The information and communication technology sector continues to lead in terms of foreign investment reviews, followed by the health & biotechnology and energy sectors - a trend consistent with previous years.

Pivotal sectors such as artificial intelligence and quantum technologies account for a very small share of cases - which is, in part, reflective of the narrow approach taken by Germany in defining core sensitive activities, when compared to the much broader approach in e.g. the EU Screening Regulation. However, the EU’s Economic Security Package and the proposed adjusted list of sensitive sectors for a recast EU Screening Regulation suggest that the sectoral approach in high- and future-tech activities may become much broader, which will likely boost case numbers in these fields. 

4. Duration of proceedings

For companies engaged in M&A, the timeframe of the review process is of high importance, particularly given high levels of over-screening. In 2023, a third of cases were concluded in less than 30 days (i.e. within a month) and approximately 54% of cases were finalised within 40 days, significantly shorter than the statutory two-month period for phase I review. This points to the efficient processing of straightforward cases.

However, there has been a slight increase in the number of cases extending beyond two months when compared to previous years, possibly due to a rise in mutually agreed extensions of the initial review period, which are becoming more commonplace in practice. Also, the very high case load which the Ministry faces, and the multi-stakeholder approach in foreign investment screening in Germany, means that there are limitations to the processing bandwidth and speed.

Outlook 2024

While Germany is certainly amongst the “grown-up” regimes in Europe and one that is often leading the pack amongst the block’s foreign investment regulators, it has proven to be highly dynamic in the past decade. Despite federal elections on the horizon, work is underway for another – potentially major – reform, which is expected to cut some red tape (and hopefully do away with filing requirements for many very straightforward types of cases) but may also add new filing requirements for certain types of transactions, potentially boosting filing numbers to new levels.

Amendments currently under consideration include:

Coverage of license agreements: The government has indicated plans to include licensing agreements within the foreign investment regime, broadening its remit beyond traditional M&A transactions. This is seemingly a reaction to media coverage of Chinese investments (in particular) in certain tech sectors and to these investors resorting to license agreements of sensitive technology, as opposed to equity investments (in light of more foreign investment control scrutiny and long review periods).

While it can be argued that license agreements should be dealt with under the framework of export controls, it is also clear that export controls can fail to capture some modern and future technologies and can be comparatively slow-moving in terms of broadening its scope. However, getting the scope  of any provision on licensing agreements right will be a very difficult line for the Ministry to tread - if it indeed decides to go in this direction.

There is a material risk that such a regime could capture hundreds of new cases, even though concerns are likely limited to a few high-end technologies which are not yet available outside of the EU. If this provision is introduced, it will hopefully be coupled with a very narrow definition of the type of technology that warrants such protection and include a much narrower sectoral scope than is currently featured in the German regime.

Coverage of greenfield joint ventures: Similarly, there are plans to incorporate greenfield joint ventures into the scope of the regime, which are also not currently covered. This is also an area that the European Commission (in its recently proposed recast Screening Regulation) signalled that Member States may want to consider incorporating in their regimes.

While these ventures don't involve the transfer of resources and are generally seen as desirable (as new resources are established in a country), there is some concern over indirect knowledge transfer. For example, due to the recruitment of key personnel, or the strategic importance of certain infrastructure projects structured as greenfield joint ventures - as exemplified by cases like COSCO’s involvement in Duisburg harbour.

Again, as Germany is in need of foreign capital inflows, and abides by WTO principles (in not discriminating between investor origins when it comes to the jurisdictional scope of its regimes), it will be challenging to define the scope of greenfield investments in a sufficiently narrow manner.

Acquisition of atypical control: The concept of “atypical control” is a fall-back instrument under which the Ministry can review acquisitions falling short of the filing thresholds, while not imposing a mandatory filing obligation on transaction parties, even for sensitive sectors. The government is now considering whether, in certain sensitive sectors, a mandatory filing obligation should also apply to such cases of “atypical control”.

The inherent problem with this plan is that the concept is still very unclear and only a handful of cases have been considered under this concept, with the Ministry not having given much guidance on its boundaries – an approach that has worked for a fall-back provision, but which will be hard to defend when triggering a mandatory filing.

R&D co-operations: The complexity of R&D co-operations pose challenges due to their varied forms and the intricate legal implications involved, including potential impacts on constitutional rights. There are ongoing discussions regarding the inclusion of R&D co-operations in the upcoming foreign investment regime. However, this has led to some opposition among R&D institutions and universities.

Sectoral amendments: It is hoped that particular sectoral definitions will be narrowed down further, and that there will be more specificity regarding the activities that are actually sensitive and warrant a mandatory filing. At the same time, there is a certain political perception that some other sector definitions, in particular in the field of artificial intelligence, may currently be too narrow and require some widening.

A complex comparison will also be needed against the definition of sensitive sectors as proposed by the European Commission in January. While this list is more targeted when compared to some other EU Member States’ rules, from a German perspective, it would result in a considerable widening.

Concluding Remarks

The latest statistics on the German foreign investment control regime reveal a persistently high number of notifications. With planned revisions to broaden the scope of relevant transactions that fall within the regime – including license agreements and potentially, greenfield joint ventures – the number of reviews may rise further.

The government will need to decide how it maintains control over the overall number of cases that may be subject to screening and remain focused on certain high-end technology and capabilities that are essential from a national security standpoint. Debate on these reforms is likely to intensify in the coming months. Watch this space for further developments.