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Investors from the United States may in some cases avoid Foreign Direct Investment Screening under the Foreign Trade Ordinance (“Außenwirtschaftsverordnung”)

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


The German regime for foreign direct investment (FDI) screening has been significantly tightened in the last years. Investors from the United States, however, may arguably be exempted in part from that regime pursuant to the Treaty of Friendship, Commerce and Navigation between the United States of America and the Federal Republic of Germany of 29 October 1954 . As acquirers from member states of the European Free Trade Association, namely Switzerland, are relieved from the so-called “cross-sector review”, and the Treaty grants U. S. investors “most-favoured nation” treatment in such cases, they should be exempted from that review, too.

1. Outline to the German Cross-Sector Foreign Direct Investment Regime

Cross-Sector Review

The German Ministry for the Economy and Energy (Bundesministerium für Wirtschaft und Energie, BMWi) may review whether an acquisition of more than 25 %, in some case 10 %, of the shares in a company (or of its essential assets) situated in Germany by an acquirer from outside the European Union may affect public order or security in Germany or another Member State of the European Union, and block a transaction or impose obligations following that scrutiny (cross-sector review). The Foreign Trade and Payments Act (“Außenwirtschaftsgesetz”, AWG), voted by Parliament, sets the basic standards, the Foreign Trade Ordinance (“Außenwirtschaftsverordnung”, AWV), enacted by the Federal Government, the executive power, provides for the rules of procedure.

Concerns for public order or security may arise “in particular” if the target company engages in sensitive activities as defined in the AWV. These include, among others,

  • operation of critical infrastructures, and development or modification of software for such infrastructure operation; “critical infrastructures” comprise e.g. facilities for energy and water supply, sewage disposal, for production, treatment or distribution of food, for telecommunications and data processing, hospitals, laboratories, each of a specific minimum size,
  • 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, including production of personal protective equipment, drugs essential for public health care as well as medical devices and in-vitro diagnostics for detecting or treating life-threatening and highly-infectious diseases (§ 55 of the AWV).

If the target engages in such activities,

  • the BMWi will be entitled to review if the acquirer intends to acquire only 10 % of the votes in the target, instead of 25 %,
  • the acquirer will be obliged to give notice to the BMWi that a transaction agreement, e.g. an agreement for purchasing or otherwise acquiring assets or shares of a sensitive target, has been concluded,
  • seller and acquirer may not implement a transaction, and seller may not disclose information related to the sensitive activities, as long as the BMWi has not approved the transaction or missed the deadlines for review. Infringements against that obligation may even be a criminal offence.

The deadlines are

  • two months after the BMWi has learned of the transaction, or
  • four months after the acquirer has submitted complete information, if the BMWi has opened an investigation within the first two months.

Acquirers from Member States of the European Free Trade Association are exempted from this cross-sector review, like acquirers from the EU (for simplification, the “exempted countries”). Several amendments to the AWV and one to the AWG have significantly extended the “cross-sector” review since 2017. The BMWi prepares another amendment to the AWV to catch further industries, namely in order to prevent that acquirers from outside the exempted countries take over businesses engaged in key technologies.

Sector-specific Review

Any foreign acquirer of a company or 10 % or more of the shares in a company which

  • develops or manufactures weapons of war, or
  • engages in specific activities related to defense and IT security for classified objects

has to notify a proposed acquisition to the BMWi before closing a transaction agreement (§ 60 of the AWV, 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.

This sector-specific review affects any investor from outside Germany alike.

If the BMWi blocks a transaction or imposes obligations as a result of its review, a party aggrieved, e.g. an acquirer or a seller, may file suit to the administrative courts (“Verwaltungsgerichte”). Authors agree that the BMWi has a wide margin for assessing whether and for what reasons ownership of an acquirer may affect public order or security. Apparently, never has a party sued German Government in a foreign direct investment case yet, although the current regime has been in effect since 2009 and rules have become ever stricter since 2017. Rather, parties have abandoned transactions altogether when the BMWi has raised concerns; some have concluded agreements with the BMWi to mitigate the latter’s concerns.

2. Direct Investment under the Treaty of Friendship of 1954

The Treaty of Friendship between Germany and the United States provides that “nationals and companies of either Party shall be accorded national treatment with respect to engaging in all types of commercial, industrial, financial and other activity for gain” (Art. VII). Therefore, such nationals and companies are permitted, within the territory of the other Party, among others, to “acquire majority interests in companies of the other Party”. “Companies of the other Party” means corporations, partnerships, companies and other associations constituted under the applicable laws and regulations within the territory of that Party. If there is a right to acquire majority interests, there should be even more no obstacles for minority stakes.

Both the United States and Germany have reserved the right to limit “the extent to which aliens may … acquire interests in enterprises engaged in communications, air or water transport, taking and administering trusts, banking or the exploitation of land or other natural resources”. However, nationals and companies of the other Party, as well as enterprises controlled by such nationals or companies, shall “in any event” be accorded most-favoured nation treatment with reference to the matters treated in that Art. VII.

In addition, the Treaty grants national treatment or at least most-favoured nation treatment to nationals or companies of the other Party with respect to leasing land and real property, and acquiring and possessing personal property of all kinds (Art. IX). These rights may be restricted only with respect to dangerous materials or activities for which Art. VII allows restrictions to foreign ownership.

Last, the Treaty does not preclude the U.S. and Germany from measures “necessary to fulfil its obligations for the maintenance or restoration of international peace and security, or necessary to protect [their] essential security interests” (Art. XXIV par. 1 lit. d).

3. The Most-Favoured Nation Clause is Immediately Applicable

The most-favoured nation treatment under the Treaty of Friendship applies directly and, according to existing case law, confers individual rights and a cause of action to a U.S. investor.

No exclusion of most-favoured nation treatment under applicable international law

Most-favoured nation treatment under a treaty between two nations does not extend to benefits which one of these parties affords nationals of a third country in the framework of a supra-national community, a customs union or a free-trade association. The rationale is that such benefits are part of a specific bundle of rights and obligations which such a union provides its members.

The German FDI screening regime results from autonomous German legislation. The choice not to subject investors from the member states (!) of the EFTA to cross-sector review under the Foreign Trade Ordinance does not derive from European Union law or policies. While EU Regulation 2019/452 provides for a framework for coordination of foreign direct investment screening, the Member States are still responsible for enacting and applying their respective own FDI regimes. On the level of the European Economic Area and the European Free Trade Association, there is no common foreign trade policy and no framework for dealing with foreign direct investment.

Immediate Application and Cause of Action under the Treaty of Friendship

The Treaty of Friendship has the rank of a statute enacted by German Parliament, which prevails over an ordinance enacted by the executive, like the Foreign Trade Ordinance. A treaty with a specific other country and its nationals is typically the more specific rule (lex specialis) and therefore prevails over general rules which apply in relation to any other country.

Cases of several highest courts in Germany suggests that the provisions of the Treaty of Friendship are self-executing and apply without further implementation by the legislative in Germany, and that they confer individual rights, a cause of action, to individuals and companies. Case law in the United States pertaining to treaties of friendship between the United States and several countries apparently also confirms that these treaties provide for immediately applicable, actionable rights.

Last, German Government may wish to invoke protection of German “essential security interests” (Art. XXIV par. 1 lit. d of the Treaty of Friendship). However, this is questionable since it would frustrate the rights under Articles VII and IX of the Treaty and the balancing of interests in these provisions altogether.

Provisions in the AWV for Abusive Practices and Indirect Acquisitions Likely to Apply

The German regime for review of foreign direct investment has intricate rules for determining whether an acquirer may be deemed “resident” in Germany, in the European Union or in an EFTA country. An acquirer which is formally resident in an exempted country may be considered as “foreign” and therefore be subject to the review if there are indications that this residence is abusive or evasive, namely if the acquirer does not have material activities or an actual presence in an exempted country. Second, the regime catches “indirect” acquisitions by way of highly complex and extensive rules, too.

In these cases, the most-favoured nation treatment of a U.S. acquirer will not be more favourable than that of an acquirer resident in an exempted country. Consequently, an investor whose “residence” in the United States is abusive or evasive in the meaning of these provisions, or to which the provisions on indirect acquisitions would apply, will not escape from cross-sector review.

The provisions on foreign direct investment screening, which may catch companies holding or acquiring stakes of 10 % of the votes in a target, are not aligned to those of the Treaty of Friendship. The Treaty, in any case, allows both the United States and Germany to deny “to any company in the ownership or direction of which nationals of any third country or countries have directly or indirectly the controlling interest the advantages of the present Treaty” (Art. XXIV).

4. Practical Implications

There is apparently no public information whether the Treaty of Friendship and its most-favoured-nation clauses have been raised by investors from the United States and their advisers when dealing with the BMWi and German cross-sector review. The procedures of the BMWi are not very transparent; parties to transactions are interested in getting through these transactions quickly and without media attention.

It is not advisable to conclude and close transactions subject to the cross-sector review without notice the BMWi, given

  • the obligation to suspend transactions, which entered into force this July,
  • the sanctions for violating that obligation and
  • the right of the BMWi to act against a transaction up to five years after the parties have concluded the transaction agreement.

In addition, the BMWi is convinced that German businesses, infrastructures and technology should not be “sold away” to non-German or non-EU parties. In the aftermath of rumours that the United States would like to take over the German company CureVac and reserve COVID-19 vaccines for its own citizens, the BMWi is likely to examine acquisitions by U. S. investors critically – unless prevented by the Treaty of Friendship. It should be expected that the BMWi will accept the point of view on FDI screening expressed in this article only upon a court ruling.

However, it will be worthwhile for a U.S. investor, the case being, to give notice of a transaction to the BMWi, refer to the Treaty of Friendship and to explain that acquisitions by U.S. investors are exempted from the cross-sector review by the BMWi, and to use this as an argument when dealing with the BMWi.