German investment control: Just one piece of the puzzle

The 17th Amendment of the German Foreign Trade Ordinance (AWV in German) entered into force on 1 May 2021. It was preceded by a draft of the German Federal Ministry for Economic Affairs and Energy ("BMWi") that was published in late January 2021 (see our earlier post of 26 February 2021) and a public debate. While the Federal Government considerably tightens and expands the control of investments and the scope of its application, the final rules are not as far-reaching as the draft.

The amendment brings the German Foreign Trade Ordinance into line with the EU Screening Regulation and aims to protect technological sovereignty in Germany's most important industries.

I. Cross-sectoral examination expanded

The Ordinance introduces new case groups under the cross-sectoral audit rules that apply to non-EU or EFTA investors. The legislator specifies numerous further case groups in the field of emerging technologies in which an impairment of public order or security is particularly likely. These new case groups include, for example:

Future and key technologies, such as artificial intelligence, autonomous driving, robotics or cybersecurity, as well as aircraft and aerospace, quantum and nuclear technology (see sections 4 para. 1 No. 4 and 5 para. 2 AWG and sections 55 to 59 AWV).

Companies from these designated sectors were included in the selection because investments in these areas have a potential risk concerning public safety and order. Artificial intelligence, for example, is at risk of misuse. This could manifest itself in cyber-attacks or targeted disinformation.

The catalogue of newly included technologies goes beyond those covered by the EU Screen-ing Regulation. For example, automated vehicles and aerial systems are now covered following the amendment, while they are not mentioned in the EU Screening Regulation. In addition to emerging technologies, the new reporting requirements also affect companies that extract critical raw materials and ores (No. 25), as well as companies relevant to food security that cultivate an agricultural area of more than 10,000 hectares (No. 27).

II. Changed Thresholds

Compared to the draft and earlier rules, the amendment only contains partly raised thresholds for voting rights shares in the target companies. The relevant thresholds for a filing obligation where the target company belongs to one of the new case groups No. 8 to No. 27 have been set at 20 percentage. For companies that fall under one of the existing case groups of No. 1 to No. 7 (which concern critical infrastructure, in particular), the threshold remains at 10%.

A filing obligation exists

(a) with respect to critical infrastructures and the defence sector if the acquirer holds, directly or indirectly, 10 percentage of the shares in the relevant company after the acquisition.

(b) with respect to the other case groups, if the acquirer holds, directly or indirectly, 20 percentage of the shares in the relevant company after the acquisition.

With respect to any other companies, there will be no filing obligation where the acquirer holds, directly or indirectly, 25 percentage of the shares in the relevant company after the acquisition; however, the BMWi is entitled to initiate an FDI review where it deems that such an acquisition may impair public order or safety.

Filing obligation (or the FDI review initiated by BMWi) also applies in the event of an acquisition of further shares, if certain percentage thresholds are met or exceeded in total after the relevant acquisition:

20, 25, 40, 50 or 75 percentage in the cases of (a);

25, 40, 50 or 75 percentage in the cases of (b); and

40, 50 or 75 percentage in all other cases.

III. Sector-specific control is expanded

Another change to the draft and earlier rules is the extension of the sector-specific review to cover acquisitions by companies that develop, manufacture, modify or have effective control over defence sector equipment. Every company that is identified as such must now report foreign investments, regardless of whether the acquirer is from an EU Member State or third country. That is in those cases, where a voting share of at least 10 percentage or more is acquired.

This change may lead to a doubling of relevant cases in the defence sector.

IV. Acquisition of control and management rights

A new provision has been introduced which, for the first time, initiates the mechanisms of investment control through something other than the acquisition of voting rights. If an acquirer obtains a share of voting rights below the threshold, but these rights are accompanied by "additional seats on or majorities in supervisory bodies or management", the "granting of veto rights in strategic business or personnel decisions", or the granting of rights over certain information will also sufficient to trigger the investment control procedure.

V. Summary

Overall, this Amendment significantly broadens the scope of transactions that can be reviewed by the BMWi. It will have an impact on target companies active in the mentioned areas of emerging technologies and will also affect private equity and venture capital transactions.

The Amendment is just one piece of the puzzle, with numerous new or amended FDI regimes adopted in Europe as the EU Member States implement the EU Screening Regulation. Non-EU states such as the UK or Norway have also introduced new national FDI screening mechanisms.

In practice, navigating FDI in Europe will add complexity and time to an increasing proportion of M&A transactions, especially but not only for investors from outside of the EU.

Dr. Rainer Bierwagen, Dr. Christian von Wistinghausen