Further Tightening of German Investment Screening Rules

The 17th Amendment is the most recent in a series of amendments to the German investment screening rules (see our May 2020 Update and July 2020 Update) and reflects a general trend of European Union (EU) Member States adopting new, or expanding on their existing, investment screening regimes to comply with the EU Investment Screening Regulation (see our March 2019 Update and May 2020 Update).

Earlier expansions to investment screening rules in Germany have already led to a significant increase in the number of transactions subject to investment screening, and the 17th Amendment is expected to accelerate this trend. As such, investment screening has become a crucial part of German merger-and-acquisition (M&A) transactions.

Amendments to AWV with effect from May 1, 2021

The following key amendments to the AWV entered into force on May 1, 2021.

Amendments relevant for the cross-sectoral (i.e., non-defense-related) screening regime:

• Additional sensitive businesses subject to mandatory notification: The list of sensitive businesses – investment in which requires mandatory preclosing approval – has been expanded from 11 to 27. The primary focus is on businesses that manufacture, develop, or operate new technologies or IT infrastructure (e.g., satellite systems, artificial intelligence, autonomous/unmanned driving or aviation, robotics, cybersecurity, semiconductors, smart metering as well as goods related to nuclear technology, for additive manufacturing/3D printing or based on quantum technologies or state classified intellectual property rights).
  
  Further, the description of certain sensitive businesses already on the list has been expanded to catch additional related activities. For example, now any company operating in the media industry that appears to have a critical role in contributing to the formation of public opinion is covered, whereas previously the AWV explicitly addressed only radio, telemedia, and print operators.
  
  Note: The list of sensitive businesses is expected to expand even further through an upcoming amendment of the German Federal Office for Information Security Act (Gesetz über das Bundesamt für Sicherheit in der Informationstechnik, BSIG), which is cross-referenced in the AWV.
  
• New thresholds for qualifying investments: The prior cross-sectoral screening regime applied to (a) the acquisition of at least 10% of voting rights in a listed sensitive business, which was subject to mandatory preclosing approval, and (b) the acquisition of at least 25% of voting rights in any other business, which was subject to a voluntary/call-in screening mechanism (i.e., investors may, but are not required to, notify, whilst the authority has power to call in a transaction for review even post-closing). The 17th Amendment introduces new investment thresholds. Investments in the newly introduced sensitive businesses, and in sensitive businesses in the healthcare industry, are subject to mandatory preclosing approval if they result in the acquisition of at least 20% of voting rights (rather than 10%).
  
• Additional thresholds for subsequent acquisitions by the same investor: The 17th Amendment clarifies that screening rules apply not only to the initial investment by which a new investor meets or exceeds the thresholds mentioned above, but also to subsequent investments that meet or exceed certain additional thresholds. For instance, investments in sensitive businesses subject to the initial 10% threshold require additional preclosing approval if subsequent acquisitions result in the investment reaching or exceeding 20%, 25%, 40%, 50%, or 75% of voting rights in the target company.
  
• Extension of screening to atypical changes of control: The 17th Amendment extends screening rules to acquisitions of (additional) voting rights even below the relevant thresholds in the case of a so-called “atypical change of control.” Such a change of control is assumed if the acquisition of voting rights is accompanied by other circumstances that indicate relevant influence over the target company, such as additional seats or majorities in supervisory or management bodies, veto rights in certain strategic decisions, or information rights with regard to certain sensitive business information.
  
• Attribution of voting rights and noncircumvention: The AWV already provided for cross-attribution of voting rights between different shareholders for the purposes of calculating the relevant thresholds, especially in the case of voting rights agreements or factual coordination in the exercise of voting rights (acting in concert). The 17th Amendment expands these rules, provides additional powers to investigate and monitor compliance (e.g., by imposing recurring post-closing reporting obligations), and expressly tackles circumvention of the screening rules.
  
• Newly introduced “release certificate”: The AWV used to permit investors to combine a mandatory filing to the German authority responsible for investment screening (Bundeswirtschaftsministerium, BMWi) with a voluntary application for a nonobjection certificate (Unbedenklichkeitsbescheinigung). The 17th Amendment clarifies that the nonobjection certificate can no longer be requested for listed sensitive businesses, but only for those subject to the voluntary screening mechanism. Acquisitions of sensitive businesses (subject to mandatory preclosing approval) will now be subject to a newly introduced release mechanism. Notifiable transactions will be deemed cleared if the BMWi does not initiate an in-depth investigation within two months from becoming aware of the signing.

Amendments relevant for the sector-specific (i.e., defense related) screening regime:

• Lower standard for restricting investments: Investments may now be blocked or subjected to conditions if they probably impair (i.e., are “likely to affect”) essential security interests of the Federal Republic of Germany. Previously, the test looked at whether the investment endangered such essential interests. Hence, based on the new standard, BMWi may more easily block or condition investments.
  
• Broadened scope for screening: The sector-specific regime covers military/defense-related businesses. Covered businesses have been expanded to now include, among others, all defense goods for which export controls or secret intellectual property rights exist. Not only companies that currently manufacture such goods are subject to this regime, but also those that are still in possession of relevant knowledge or otherwise have access to the underlying technologies.
  
• New and additional thresholds for qualifying investments: The rules noted above for the cross-sectoral screening regime concerning subsequent acquisitions by the same investor, atypical change of control, and attribution of voting rights apply also to the sector-specific regime.
  

Key Takeaways

The 17th Amendment confirms that investment screening is a crucial part of German M&A transactions. Investors should be ready to assess investment screening risks upfront and adopt strategies to mitigate such risks in Germany, as well as in other EU Member States. In particular, investors should:

• Rigorously review all aspects of a transaction to assess the investment screening risks.
• Consider the implications of investment screening on the transaction timeline. This is particularly important in view of the multi-level (i.e., national and EU) notification obligations and review processes under the EU Investment Screening Regulation (No 2019/452).
• Take investment screening into account in contractual language, including (a) a sign-and-close mechanism, (b) cooperation obligations to ensure that all parties cooperate in obtaining required regulatory approvals, and (c) careful allocation of rights and obligations pending approval (including possible “hell or high water” provisions).

It is possible to manage remaining uncertainties with careful transaction review and management practices. Sidley continues to follow closely and advise on developments in German and global investment screening.