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Foreign Direct Investment Screening Expanded and Amended

  • Germany
  • Global
  • Competition, EU and Trade
  • Competition, EU and Trade - Foreign investment regimes
  • Corporate

25-05-2021

On 27 April 2021, the German Federal Government has enacted an ordinance to amend the Foreign Trade Ordinance (Außenwirtschaftsverordnung, AWV) and thereby to expand the regime for foreign direct investment screening (FDI) substantially1.  The new regime has entered into force on 1 May 2021.

The new rules significantly expand the scope of application of German FDI in terms of industries and activities concerned, and to some extent regarding the types of transactions caught.  In an effort to balance security interests against proportionality and incentives for investment, the Government has made the regime more complex than ever.  Without claiming to be exhaustive, we would like to explain some key features of the new regime:

Outline to the Existing German FDI Regime

Cross-Sector Review

The German Federal Ministry of Economy and Energy (Bundesministerium für Wirtschaft und Energie, BMWi) may review whether the acquisition of a business or of voting rights in a company situated in Germany by an acquirer from outside the European Union is likely to affect public order or security of Germany, another member state of the European Union, or specific projects of European Union interest (“cross-sector review”).  Such an effect may “in particular” occur when the target company engages in a number of sensitive activities defined in the AWV. These sensitive activities include, among others,

-      operation of critical infrastructures, or development or modification of software for such infrastructure operation,

-      some activities in relation to telecommunications surveillance and cloud computing,

-      broadcasting, tele-media and printing of up-to-date news to a large audience and

-      various activities in the health sector (§ 55 of the AWV).

If the target engages in such activities, a review may be performed if only 10 % of the voting rights in the target are to be acquired.  The acquirer is obliged to give notice to the BMWi that an agreement for transaction, i.e. for purchasing or otherwise acquiring assets or shares of a sensitive target, has been concluded.  As a result of the review, the BMWi may block a transaction or impose obligations on the parties.

Acquirers from Member States of the European Free Trade Association are exempted from the review, like acquirers from the EU. Acquirers from the United States may arguably avail themselves of the most-favoured nation clause in the Treaty of Friendship of 1954 and therefore should not be subject to cross-sector review, but the BMWi has not followed this position yet, and it probably has to be asserted in court.

Sector-Specific Review

Any foreign acquirer of a company or 10 % or more of the voting rights in a company which develops or manufactures weapons of war, engages in specific activities related to defense or in IT security for classified objects has to notify a proposed acquisition to the BMWi before closing a transaction agreement (“sector-specific review”).  The BMWi may block the transaction or impose obligations in order to safeguard essential security interests of the Federal Republic of Germany.

Expansion of cross-sector FDI Screening to Additional Activities

The new rules expand the right for the BMWi to review acquisitions of shareholdings and businesses by non-EU and non-EFTA purchasers to a large number of further industries and activities.  These additional activities have been selected considering Art. 4 par. 1 of the FDI Screening Regulation of the European Union (Reg. 2019/452).  Whereas that Regulation just states industries and technologies in broad terms, the new German provisions list a number of narrowly-defined activities in such industries:

-      operation of a sophisticated satellite system

-      developing or producing items which are able, by use of artificial intelligence, to cause serious harm, for example to perform automated cyber-attacks, to imitate persons or to allow surveillance of persons

-      developing or manufacturing vehicles for autonomous driving and unmanned aircraft, or essential components or software necessary for such functions

-      developing or manufacturing robots for use in extreme situations, such as handling explosives, operating in heights above 30,000 metres or 200 metres or more below the water surface

-      developing, manufacturing or refining nanotechnology, nano- or micro-electronic circuits and tools for producing or processing such circuits

-      developing or producing IT security products or essential components thereof, unless for captive use only

-      operating an air carrier with an operating license, or developing or producing certain avionics items and components for aircraft, and items or technology for use in space flight and space flight infrastructure

-      development, production, modification and use of nuclear materials, facilities, and equipment, and of certain chemicals as defined in EU Reg. 428/2009 on dual use goods.

-      developing or manufacturing of items and essential components for quantum IT, quantum communication and quantum-based and quantum metrology

-      developing or manufacturing items for additive production/3D printing using metal or ceramic materials, essential components of such items and powder for producing such items

-      developing or manufacturing products specifically made for operation of data networks

-      manufacturing smart-meter gateways or safety modules for smart-meter gateways

-      employing individuals who work in “vital facilities” (“lebenswichtige Einrichtungen”) in the meaning of the German Safety Screening Act (“Sicherheitsüberprüfungs­gesetz”)

-      excavation, processing or refining of raw materials or ores which have been declared “critical raw materials” by a notice of the European Commission and which the BMWi has published in the Federal Gazette (Bundesanzeiger)

-      development or production of goods which are covered by patents declared secret or utility models declared secret

-      exploitation, direct or indirect, of agricultural land of more than 10,000 hectares

Acquisitions of businesses or stakes in businesses engaged in these “additional” activities have to be notified before closing only if the acquirer will have, after the transaction, 20 % or more of the voting rights of the target.  For acquisitions pertaining to sensitive activities which were subject to FDI screening already, namely critical infrastructures, the threshold of 10 % of the voting rights is still applicable.

Comprehensive Screening of Acquisitions in the Defence Sector under the sector-specific regime

The “sector-specific review” now applies to acquisitions whose target

-      “develops, produces, modifies or actually possesses” defence goods, as defined in Part 1 Chapter A of the export list, attached to the AWV (“Ausfuhrliste”), or if that target has done such in the past and still has knowledge of, or access to, the underlying technology;

-      develops, produces, modifies or actually possesses defence goods which are covered by a patent declared secret, or a utility model declared secret, or, again, if that target has done so and still has knowledge of, or access to, the underlying technology;

-      as before, which manufactures, or has manufactured and still has the technology, for products with IT security functionalities for processing classified objects, or essential components of such products, provided the products have been authorized by the Federal Office for Security in IT Technology (“Bundesamt für Sicherheit in der Informationstechnik”);

-      is a facility important for national defence (“verteidigungswichtige Einrichtung”) in the meaning of the German Safety Screening Act.

Review of Acquisition of Further Shares

It was in dispute whether the cross-sector and the sector-specific FDI screening regimes caught transactions for increasing the existing share of a (non-EU, non-EFTA) shareholder in a “sensitive” business, e.g. when the shareholder  acquired additional shares.

Now, if the purchaser reaches or exceeds shares of 20, 25, 40, 50 and 75 % of the voting rights in the “sensitive” business, the BMWi is entitled to review again, and the purchaser is held to notify the acquisition of additional shares to the BMWi.

While review of an increase in shares, which is likely to enhance shareholder’s rights, is legitimate and the previous situation was unsatisfactory, the scale which applies now may cause some additional filings and reviews.

Scrutiny of “Atypical Acquisition of Control”

German FDI screening was previously triggered when a purchaser intended to acquire a sensitive business completely or to acquire a certain share of voting rights in a company engaging in sensitive activities.  Pursuant to the new provisions, the BMWi also has a right to review cases where an “acquirer” obtains “participation in the control” of a company, or increases such participation, by means other than acquiring voting rights (“atypical” means for “effectively participating in control” of a domestic business), for instance, when the acquirer, in addition to the rights which her/his stake in the company confers

-      is granted the right to appoint members of the board or supervisory board of the target,

-      is afforded a right to veto strategic decisions on business or personnel of the target,

-      if she or he is “given rights over information” on the sensitive activities of the target – that would be to have a right to access to such information.

The “acquisition” of such rights, e.g. by concluding a shareholder agreement or voting a resolution to change the articles of association or the by-laws of a company, need not be notified to the BMWi.  However, if the BMWi becomes aware of such circumstances, it may open an investigation and call in such “transactions”.  The deadline for such investigations is five years starting by the conclusion of the agreement by which the “acquirer” and other parties commit to create such “atypical” rights.

6. Certificate of non-objection only in non-reportable cases

An acquirer still has a right to apply for, and to be granted, a certificate of non-objection (“Unbedenklichkeitsbescheinigung”) for a transaction by the BMWi.  However, this does not apply any more:

-      when the BMWi has already opened an investigation into that transaction or

-      when the transaction is subject to prior notification under the FDI screening rules.

Thereby, an acquirer has no more a route to address the BMWi and obtain clearance, or at least guidance, before concluding a share or asset purchase agreement.  As a consequence, in a possibly sensitive case, the parties must engage in due diligence reviews, negotiate and conclude a purchase agreement, even if they anticipate that the transaction may give rise to concerns or would be reviewed in a long procedure.  This is in contrast to the practice in merger control, where a proposed concentration may be filed to the Federal Cartel Office or the European Commission even before the parties have concluded binding agreements.

A certificate of non-objection should be available for guidance whether specific shareholder rights or coordination with other shareholders could amount to “participation in the control” of a company, as mentioned under 5 above, and be subject to scrutiny by the BMWi.

The changes now in force have made the German FDI screening regime stricter and far more complex than before.  It has to be seen whether this regime will actually help to protect the security interests and “technological sovereignty” of Germany, without unduly deterring investment and restricting free movement of capital, and whether, as the Government has indicated, the series of amendments and extensions to German FDI screening rules will now come to an end.


1. 17th Ordinance for Amending the Foreign Trade Ordinance of 27 April 2021, Federal Gazette (“Bundesanzeiger”,) BAnz AT 30 April 2021 V1.