The future of German foreign investment control is here… Part III: Coping with the rising tide
On 1 May 2021, the amended German foreign investment control rules entered into force. They will apply to all transactions which have signed since then. Our three-part series gives an overview of all key changes and discusses their implications for future deals and practical relevance.
Part I covered the extensively expanded scope of the regime which has introduced 16 new sectors for which mandatory and suspensory filing requirements apply.
In Part II we explored the new safe harbours on restructurings introduced by the amended rules, the new rules on add-on acquisitions and the attribution of voting rights amongst investors.
In this Part III, we consider how Germany intends to keep up with the significantly growing number of filings resulting from this year’s reform, as well as the three prior reforms from 2020, and consider a few final elements resulting from the changes. Over the past few years, the German FI landscape has shown itself to be highly dynamic and we forecast that it is set to remain so in the near future.
The rising tide
The many recent reforms of German foreign investment control have led to a strong increase in the number of cases:
- The total number of cases has nearly tripled since 2017.
- Last year alone brought a new record high of 159 cases, alongside an additional 31 reviews through the European co-ordination mechanism.
- Following the regime’s further expansion – and notification becoming mandatory for transactions in the 16 newly-added sectors – we expect the number of cases to continue to grow substantially.
As a result of this rising tide, German foreign investment control may well already be considered to be the “timeline driver” for many M&A-transactions.
The Ministry for Economic Affairs and Energy (MoE), which leads the process and coordinates the various governmental bodies involved, has successfully brought down the average review period over the past three years. However, the duration of Phase I reviews – up to two months – is at the longer end of the spectrum, compared with other foreign investment regimes. The process is further complicated when a Phase II investigation is opened – after compliance with substantial additional disclosure, a further four month review period starts, which may be extended by an additional four months and may be suspended as a result of remedy negotiations, further information requests or by agreement with the parties. This means that the duration of German foreign investment control could, in theory, take almost a year – and cases like Addsino/IMST have shown that this may actually happen in exceptional circumstances. However, even for Phase II cases, our practical experience is that such proceedings can often be concluded in substantially less time, provided that both investor and target take a proactive and transparent approach.
The sheer number of additional cases which have now become subject to review – coupled with the substantial additional burden resulting from the EU screening mechanism – will test Germany’s ability to maintain its efficient and timely review of foreign investment cases. The current team of approximately 30 people – half of whom are at the MoE, with the rest scattered across various other ministries – will not be enough to handle the additional workload. The new reform acknowledges this shortcoming and provides for substantial additional staffing at all relevant governmental bodies – in some instances even doubling the number of available case handlers.
Cutting red tape
In addition to the substantial changes our series has outlined, the reform also reduces the regulatory burden on parties:
- Previously, investors had a choice between two different types of notification (either applying for a certificate of non-objection or requesting a formal clearance). Now, these two tracks are mutually exclusive: parties must apply for clearance in cases requiring mandatory filing, or a certificate of non-objection for voluntary filings.
- It was often difficult for investors to assess whether a target’s activities fell within the scope of the cross-sector or the sector-specific investment review. The MoE would, therefore, often conduct a “dual-track” review until sufficient clarity had been achieved. Under the new rules, the MoE may switch back and forth between the two regimes, avoiding the need to conduct a dual-track investigation.
Remedy monitoring – Trust but verify
Although there have only been three prohibition cases in Germany so far, remedies in the form of public law agreements are required for a more substantial number of cases. While the boilerplate provisions of these agreements are increasingly standardised, the key content is case-specific and may include assurances of supply, preservation of certain technology, technological abilities or knowhow within the Federal Republic of Germany, or ring fencing of critical information.
A common pattern of these remedy arrangements is that they are behavioural in nature – quite the opposite to the trend we observe in merger control where authorities have a strong preference for clear-cut structural measures to avoid the need for ongoing monitoring. However, being behavioural, foreign investment remedies are often easier for investors to accept (although an early risk assessment as regards the implications on the deal rationale is still required). Since arrangements are typically in place for a longer period of time (often until the investor’s stake falls below the foreign investment filing threshold, e.g. to less than 10% of voting rights), the MoE will have to supervise a growing number of such agreements.
Finally, the reform has introduced clearer rules on the supervision of remedies and now allows for the appointment of trustees to monitor compliance. The new legislation also allows for reporting obligations to be imposed on the acquirer or the target. Typically, these obligations are already included as standard provisions in public law contracts – but the reform has now codified this standard.
Outlook: the increasing number of foreign investment regimes – a global trend
The next reform of the German foreign investment rules is already on the horizon – a draft bill to amend the Foreign Trade and Payments Act is currently pending before Parliament. It is set to introduce the same safe harbour as regards the gun-jumping prohibition that already applies in a merger control context (although further implementing legislation will be required even after the law comes into force). This further reform represents a very welcome alignment of the two regimes. Other pending amendments are more technical in nature, in particular a further alignment with provisions of the EU Screening Regulation. The reform is expected to clear Parliament soon (also in view of the upcoming Federal elections in September). The implementing ordinance is also expected to be passed before summer, as part of the alignment with the Dual-Use Regulation.
Further, in the coming weeks, we expect the MoE to issue new guidance on information to be provided in the initial filing and at later stages of the review process. This will update the current disclosure requirements which date from March 2019.
Looking a bit further into the future, it might only be a matter of time before yet another reform is introduced. The impact of the current foreign investment rules will be evaluated by July 2022 and – depending on the outcome of the German Federal elections in September, which will put an end to Angela Merkel’s 16-year Chancellorship – a new government may well alter its approach to foreign investment review.
In spite of its tightened rules, Germany remains open to foreign investment. Investors do, however, face a highly complex regime and must:
- carefully assess foreign investment filing requirements early on, as well as the implications for transaction rationale and deal timetable;
- thoughtfully prepare for the foreign investment review process in Germany; and
- pursue a pro-active approach and maintain a trustful and cooperative working relationship with the MoE.
In addition, investors must keep an eye on the wider picture, as foreign investment rules around the world are changing fast. New or updated foreign investment rules are imminent in several countries. In the UK, the National Security Regime cleared Parliament at the end of April. In the same week, a foreign investment control regime came into effect in the Czech Republic. Additionally, new rules will apply in Hungary from 30 June 2021. In several other countries, such as Denmark, South Africa, the Netherlands and Sweden, draft bills are pending and are likely to come into force this year.
We will keep you posted on these developments – please get in touch if you have any questions.