Like other European countries, Germany has been working on tightening its foreign direct investment (FDI) controls. Recently, the German government proposed a number of amendments to the existing setup of FDI controls.
- Current Situation: In general, every transaction in which a foreign (i.e., non-EU) investor obtains 25 percent or more of the voting rights in a German entity may be reviewed by German authorities. However, where the German entity is engaged in a certain business (e.g., critical infrastructure, development of software solutions for the operation of critical infrastructure, certain cloud-computing services, IT security, military and defense), a 10 percent threshold applies, and mandatory notification obligations are triggered.
- Proposed Changes to FDI Controls: In the context of the European Foreign Investment Screening Regulation (EU Regulation 2019/452, the EU Screening Regulation) entering into force in October 2020 and in light of the COVID-19 pandemic, the German government proposed certain amendments to the existing setup of FDI controls. The proposed amendments include
- expanding the list of sensitive businesses triggering mandatory notification obligations
- introducing a prohibition on closing transactions, including a prohibition on sharing certain sensitive information (e.g., know-how) before a necessary clearing is obtained, coupled with severe penalties and criminal prosecution in case of violations of the mandatory notification obligation
- introducing a (non-exhaustive) list of criteria for competent authorities to take into account when reviewing a transaction
- lowering the standard for restrictions and prohibitions to apply to FDI
Expansion of Sensitive Businesses List
In light of supply shortages of certain goods during the COVID-19 pandemic, the amendments to the list of businesses triggering mandatory notification obligations clearly focus on the healthcare sector. Mandatory notification obligations shall apply where the German entity is engaged in, inter alia,
- development and manufacturing of personal protective equipment (PPE), as defined in the European Personal Protective Equipment Regulation ((EU) 2016/425), or the supply of primary products and components for those products (e.g., FFP2 and FFP3 masks, protective gloves and suits)
- development, manufacturing and placing on the market of pharmaceuticals essential for ensuring healthcare of the general public, including primary products and active substances (e.g., vaccines)
- development, manufacturing and distributing of medical devices intended for the diagnosis, prevention, monitoring, prediction, prognosis, treatment and alleviation of life-threatening and highly infectious diseases, including primary products and components (e.g., respirators)
- development, manufacturing and distribution of in-vitro diagnostics intended to provide information about physiological and pathological processes and conditions or to determine or monitor therapies in connection with life-threatening and highly infectious diseases, including primary products and components (e.g., diagnostic testing)
Furthermore, certain services in connection with state communication infrastructure, as well as extraction and processing of certain raw materials and ores (e.g., magnesium, heavy rare earth elements) shall be protected to a higher degree. Future amendments of the list may include further technologies such as artificial intelligence, robotics, semiconductors, cybersecurity, nanotechnologies and biotechnologies, all of which are already mentioned in the EU Screening Regulation.
Prohibition on Closing
In the future, all transactions subject to mandatory notification obligations shall be subject to a prohibition on closing, including those German entities that are active in any of the sensitive businesses. To prevent circumvention of the prohibition on consummating the transaction, the sharing of certain sensitive information with the (potential) acquirer shall be prohibited before obtaining the necessary clearance. The draft bill, however, explicitly clarifies that this shall not cover commercial and company-related information typically shared in a transaction process. Violators shall be subject to imprisonment and fines.
In line with the EU Screening Regulation, the authorities may explicitly take into account certain criteria when reviewing a proposed transaction. These shall include, but not be limited to, the following:
- direct or indirect control over the acquirer by a non-EU government, including other governmental entities or armed forces of a non-EU country
- previous involvement of the acquirer in activities with negative effect for the public order/security of Germany or another EU member state
- significant risk that the acquirer or any of its representatives have been or are involved in activities that would constitute a violation of Section 123 of the German Restriction of Competition Act (white-collar crime) or of the German Foreign Trade Act or of the German War Weapons Control Act
Lower Standard for Restrictions and Prohibitions
While the restrictions and prohibitions in relation to FDI currently require a threat to public order/security (cross-sector controls) or essential security interests of Germany (sector-specific controls), the suggested amendments to the FDI controls shift the focus toward a more forward-looking approach: A potential impairment (“is likely to affect”) of the public order/security in Germany or another EU member state or essential security interests of Germany shall be sufficient for German authorities to take action.
- Further Timing and Impact: The parliamentary debate about the suggested amendments to the existing FDI controls is ongoing and further changes are not unlikely. Once the amendments enter into force, it is possible that the new rules might also be applied to existing transactions that have not yet closed at that time.
The large number of unspecific legal terms requiring interpretation that are used throughout the existing FDI controls, as well as and the proposed amendments to those provisions, create a significant gray area. Often enough it will be difficult to predict with certainty whether a transaction will be subject to mandatory notification obligations. Given the severe consequences in case of violations of the notification obligations, parties seeking transaction security will need to undertake a thorough analysis at an early stage of the transaction process to avoid significant delays at a later stage. Subject to the outcome of the analysis, the parties to a potential transaction should consider including relevant conditions precedent and covenants in the transaction documents.
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