The future of German foreign investment control is here… Part I: More transactions subject to mandatory filing requirements
Yesterday, the German government adopted another far-reaching amendment to German foreign investment control rules. The amendment significantly expands the number of transactions in scope but also provides for some welcome “safe harbours” compared to the status quo. It focuses on high-tech and next generation technologies and is expected to triple the number of foreign investment filings in Germany. We anticipate that the law will come into effect this Saturday, 1 May 2021 and will apply to all transactions which have not been signed prior to this date.
In a series of three blog posts over the coming weeks, we will explore the key changes brought about by the new law and the implications for companies engaged in M&A. This post provides some background on recent developments in Germany and focuses on the expansion of the mandatory regime for foreign investors as a result of more sectors being classified as particularly sensitive.
Germany has one of the most established and active foreign investment control regimes in Europe and is at the forefront of foreign investment controls within the EU. Together with France and Italy, Germany pushed strongly for more control and a “level playing field” at EU level. These efforts resulted in the EU Screening Regulation which, in 2019, established a framework for the screening of foreign investments in the EU. The Regulation has been adopted by national laws in all relevant EU Member States and the EU Commission started screening inbound investments into the EU in October 2020.
Germany is also one of the most dynamic jurisdictions in terms of legal framework. In 2020, it underwent three significant reforms. In parallel, the number of cases reviewed reached a record high and a third prohibition decision was adopted at the end of last year.
The regime essentially has two prongs: (a) the “cross sector” process for non-EU/EFTA investors which applies a 25% filing threshold for all sectors and a reduced 10% filing threshold for transactions in sensitive industries and (b) the “sector specific” process for non-German investors, which applies a 10% filing threshold for transactions in the wider military sector. All transactions that meet the 10% mandatory filing thresholds are subject to a far-reaching gun-jumping prohibition which carries severe criminal penalties for non-compliance.
Key changes of the current reform
The most notable changes brought about by the reform are:
- 16 new sectors added to the 11 sectors for which the mandatory and suspensory filing requirement currently applies. However, for the newly added sectors, a new third filing threshold of 20% will apply.
- All products subject to export control added to the sector-specific process. The 10% filing threshold will continue to apply.
- New thresholds introduced for add-on acquisitions where the total voting rights of the acquirer reach or exceed 20%, 25%, 40%, 50% or 75%. This is a welcome reduction compared to the status quo under which every additional acquisition of voting rights may trigger a mandatory filing requirement, even if a pre-existing participation was cleared by the Federal Ministry of Economic Affairs and Energy.
- Ex officio review introduced for acquisitions below the voting rights thresholds in case of atypical “control” acquisitions, e.g. through obtaining board representation in addition to voting rights, veto rights for certain strategic decision or certain information rights.
- A very narrow exemption for intra-group restructurings. This applies to transactions between two 100%-owned subsidiaries within a company group if the subsidiaries are incorporated in the same country. All other intra-group transactions continue to remain in scope of German foreign investment rules.
Additional sensitive sectors for non-EU investors
A staggering 16 new sectors triggering a mandatory filing requirement were added to the 11 pre-existing sectors, which continue to apply. For investments in these newly added sectors, a mandatory and suspensory filing requirement applies for the acquisition of 20% of voting rights or more (a welcome increase compared to the 10% threshold which was still included in the draft law earlier this year).
The newly introduced sectors are:
- Satellite systems: Operation of certain high-quality remote sensing systems.
- Artificial intelligence: This sector is limited to artificial intelligence that could be used for abusive purposes conflicting with the fundamental values of the free democratic basic order and with fundamental rights in Germany. This includes the development and manufacture of goods that solve concrete application problems by means of AI and are capable of autonomous optimisation of their algorithms and can be used to automate specific actions such as (i) conducting cyber-attacks, (ii) imitating people to spread targeted disinformation, (iii) analysing voice communication or biometric remote identification or movement, location, traffic or event data which are objectively suitable for internal repression.
- Automated and autonomous driving: Including motor vehicles or unmanned aerial vehicles with automated and autonomous driving functions as well as essential components and required software. The purpose of including this sector is mainly to ensure traffic safety in relation to the IT security of vehicles and infrastructure as well as monitoring transaction related to military applications.
- Robotics: Including the development and manufacture of highly specialised robots. In contrast to the EU Screening Regulation, the provision is limited to robots with specific functions.
- Semiconductors: Including the development, manufacture and refinement of specific semi-conductor products such as integrated circuits or processing tools such as etching equipment.
- IT Security: Including the development and manufacture of certain IT products (or essential components thereof) which serve a specific function such as protecting the availability or integrity of IT systems.
- Air carriers and aerospace: Including the operation of licensed air carriers as well as development and manufacturing of certain goods and technology for aerospace applications.
- Specified dual-use products: Including the development, manufacture, modification or use of specified dual-use goods.
- Quantum technologies: Including the development and manufacture of quantum information technology, quantum communication or quantum-based metrology products and components.
- Additive Manufacturing (3D): Including the development and manufacture of goods or components with which components of metallic or ceramic materials are made for industrial applications by means of additive manufacturing as well as relevant powder materials.
- Wireless or wireline data networks: Including the development and manufacture of goods specifically for the operation of wireless or wireline data networks.
- Smart meter gateways: Including the manufacture of certain smart meter gateways and certain security models for smart meter gateways.
- IT and communication services: Including certain IT and communication services relating to security-sensitive locations.
- Critical raw material: Including the extraction, processing or refinement of critical raw materials according to the European Commission’s list of critical raw materials.
- Secret patents and utility model goods: Including the development of certain secret patents and utility model goods.
- Agriculture: Cultivating an agricultural area of more than 10,000 hectares.
Notably, the German legislator did not add biotechnology, nanotechnology, energy storage or personal data to the mandatory regime, despite these being listed in the EU Screening Regulation. However, parts of these technologies, in particular biotechnology and energy storage, are already captured by the previous provisions relating to critical infrastructure and healthcare which remain in force.
Besides these newly added sensitive sectors, the pre-existing 11 sensitive sectors requiring a mandatory notification continue to apply and are subject to only minor adjustments. The threshold for the following sectors increased from 10% to 20% of voting rights:
- Personal protective equipment
- Essential medicinal products
- Certain medical devices
- In-vitro diagnostics
Additionally, the filing threshold for the following sectors remains at 10% of voting rights:
- Critical infrastructures (energy, water, food, IT and telecommunication, health, finance and insurance, transport and traffic)
- Software for operating critical infrastructure
- Surveillance measures under the German Telecommunications Act
- Cloud computing
- Telematics infrastructure
- State communication infrastructure
Key implications for investors from now on
As a result of the newly added sectors, we expect the number of mandatory filings under German foreign investment laws to grow considerably. The law does, however, provide for a significant number of additional staff to join the ministerial departments competent for foreign investment review. We therefore hope that the process – which can be relatively long compared to other foreign investment regimes – may actually become shorter and more efficient for straightforward cases.
With this reform, Germany has deviated from the approach taken by certain other EU foreign investment regulators. It has spent considerable effort refining the very broad terms provided for in the EU Screening Regulation and attempting to capture activities which are perceived as particularly sensitive in a relevant sector. While this approach is clearly positive as it is intended to provide more legal certainty, in practice, it will often be a very difficult exercise to clearly establish whether a target company conducts activities which exactly fall within the description provided for in law.
Federal Minister for Economic Affairs and Energy Peter Altmeier made it clear when announcing the law that Germany wants to remain open for foreign investment and that the newly added 20% threshold for the “new sensitive sectors” is intended to benefit start-ups and financial investors with a low participation in a German target company. It remains to be seen what the actual impact on in-bound foreign investment will be; this will also depend on the effectiveness of the review process and the speed with which straightforward cases will be handled. Recent experience shows that the Federal Ministry of Economic Affairs and Energy, which is fronting the process, is generally very effective but often dependent on input provided by other Federal ministries, which slows down the overall process. We are hopeful that the additional staff who will also be assigned to such other ministries will unblock this situation.
What else do investors need to know?
The German government has adopted a range of further significant amendments in addition to the expansion of the sectors requiring a mandatory notification, including some welcome reductions in the scope of foreign investment control compared to the status quo. We will report on these elements in our next post early next week. Subscribe to our blog so you don’t miss out on future updates on foreign investment control globally. In case of immediate questions, please do get in touch with the authors.