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Siltronic and beyond: FDI regulation in Germany

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



On 1 February 2022, GlobalWafers, a Taiwanese semiconductor manufacturer, announced that its tender offer for the outstanding shares of Siltronic, a Munich based chip supplier, had reached the longstop date and had therefore expired. At the time of the longstop date, the transaction had obtained all required regulatory approvals – except foreign direct investment approval by the German Ministry of Economics and Climate Protection (Bundesministerium für Wirtschaft und Klimaschutz, “BMWi”). The BMWi’s review was ongoing for over 14 months. According to the BMWi, these 14 months were not sufficient to complete the review of the transaction.

The case underlines what has become increasingly obvious over the last month: investment control and regulation is today a key factor for transaction planning. This development is not limited to Germany, but Germany currently appears to operate one of the strictest and, from the perspective of transaction stakeholders, most burdensome regulatory systems. It is therefore worth taking a closer look at the process of German investment control.

1. Introduction

Foreign investment control in Germany is governed by the Foreign Trade and Payments Act (Außenwirtschaftsgesetz, "AWG") and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, "AWV"), with the AWG setting out the legal framework and general principles, and the AWV specifying the details of the relevant sectors as well as the procedure.

During the course of 2020, the AWG and AWV have been significantly amended following the adoption of the European Union's Foreign Direct Investment ("FDI") Screening Regulation in March 2019. The AWV underwent another substantial reform in May 2021, which significantly increased the number of sectors subject to screening.

Apart from the FDI Screening Regulation, two cases that were covered broadly by German media may have accelerated these reforms. In 2018, a state-controlled Chinese company attempted to acquire 50Hertz, an electricity grid operator. And in March 2020, at the start of the COVID-19 pandemic, the then US-President Donald Trump is reported to have suggested the acquisition of CureVac, a German biopharmaceutical company specializing in vaccine development.

The new rules significantly expand the scope of FDI control in Germany and strengthen the powers of the competent authority, the BMWi. In essence, the regime is now both broader and stricter.

2. Types of transactions subject to German foreign investment control

2.1 Sector-specific assessment

The "sector-specific assessment” applies to acquisitions by non-German investors (including EU investors) who acquire at least 10% of the voting rights in a German company operating in one of the sectors considered particularly sensitive. These include, inter alia, the manufacture of weapons, military equipment and encryption technology. The contracting parties must notify the BMWi of the transaction. Additionally, the closing is subject to the BMWi's approval. In the assessment, the BMWi assesses whether the foreign investment “is likely to impair essential security interests” of Germany.

2.2 Cross-sectoral assessment

The "cross-sectoral assessment" applies to any acquisition of voting rights in a German company above a certain threshold by non-EU residents, regardless of the industrial sector concerned. Three different thresholds need to be distinguished:

- Acquisition of at least 10% of voting rights: triggers notification and prior approval requirement in seven sectors, such as critical infrastructure operators, critical infrastructure software developers, cloud computing providers and media and telecom companies.

- Acquisition of at least 20% or more of voting rights: triggers notification and prior approval requirements in 19 sectors, such as manufacture of certain pharmaceuticals and medical products, advanced technologies (satellites, tracking, IT security, artificial intelligence, quantum computing, vehicles capable of autonomous driving, robots, microchip production and additive manufacturing processes) as well as companies that require specific types of security clearances.

- Acquisition of 25% or more of voting rights: no notification or prior approval requirements irrespective of the sector, but the BMWi may decide "ex officio" to initiate a review. If the parties want to ensure that the BMWi will not initiate proceedings, they can apply for a "confirmation of non-objection".

The BMWi assesses cross-sectoral foreign investment according to whether the investment is "likely to affect public order or security" in Germany or any other EU Member State. Additionally, further increases of shareholdings to or above 20%, 25%, 40%, 50% and 75% require further notifications and approvals.

3. Procedure

Within two months after having received the notification (or, absent a notification, two month after becoming aware of the transaction), the BMWi must decide whether to open a formal assessment (“Phase 2”). If the BMWi opens Phase 2, it has to take a final decision within four months after receiving all the required information. Any request for additional information made by the BMWi suspends the four-month period. The BMWi may also extend the deadline by another three months for especially complex assessments. Overall, the procedure may last several months, and, as exemplified by the Siltronic-case, even extend beyond a one-year review period.

4. Prohibition of implementation, provisional measures and conditions

If the BMWi has a right to review a transaction, the underlying purchase agreement or other legal transactions are subject to a condition subsequent (auflösende Bedingung). Thus, a transaction prohibited by the BMWi within the applicable deadlines becomes retroactively null and void.

In addition, the parties to an acquisition that has to be notified to the BMWi may not implement the transaction (“Gun Jumping”). The Gun Jumping prohibition is of significant practical relevance, as it may have a significant impact on the parties transaction timetable. In addition, violations of the Gun Jumping prohibition carry severe criminal sanctions such as a prison sentences of up to 5 years. This system resembles the gun jumping prohibition under merger control regulations practiced by most competition authorities.

Prior to a final decision, the BMWi is authorised to impose interim measures (regarding, for example, the exercise of voting rights, the distribution of profits or the exchange of sensitive information). In addition, the BMWi can decide to approve a transaction only subject to certain conditions. To ensure compliance with and monitor the implementation of the provisional measures, conditions and obligations, the BMWi can appoint administrators.

5. Key issues in practice

As a result of the recent reforms, Germany is experiencing a sharp increase in transactions subject to FDI control. As in many other jurisdictions, FDI control is now a key issue to be taken into account by any investor directly or indirectly investing in German companies.

The experience with the current German FDI regime shows that transaction parties often encounter a number of practical difficulties:

- The main issue in practice is timing of the process. It is very difficult to assess and predict in advance whether the BMWi will initiate Phase 2 proceedings (which significantly extend the length of the proceedings). Experience shows that even transactions that appear to be straightforward cases not raising potential issues may end up in Phase 2. In addition, it is essentially not possible to predict the overall length of the proceedings. In a worst case-scenario like the Siltronic-case, this may result in the longstop-date being triggered and the transaction collapsing.

- While the legislator significantly increased the number of sensitive sectors, it did not provide much guidance as to what specifically is covered by these sectors. In many cases, investors, target companies and their advisors find it difficult to clearly establish whether a German target company operates in a sensitive sector or not. It does not help that the BMWi does not publish its decision, and that transaction parties therefore do not have any case law they can rely on.

- The BMWi has been adopting a very broad understanding of transactions covered by the German FDI regime. This has an impact notably on transactions involving indirect acquisitions of German companies or shares in Germany companies. For example, a 10% shareholding in a German company by the (non-German) target company may trigger a German FDI filing- even if the commercial relevance of the minority shareholding is negligible.

Overall, all parties involved in the German FDI process – notably the BMWi as regulator and the transaction parties – are still on a steep learning curve. We expect that, with more time passing and cases being dealt with, the process will become more established and predicable. We expect that the Siltronic-case – and its outcome - will be discussed broadly by interested stakeholders. It remains to be seen whether these discussions will lead to procedural improvements. We do hope so.