FDI screening in Germany dropped slightly in 2023 but trends are stable

The extraordinary economic consequences of the Covid-19 pandemic and the war in Ukraine reinforced the understanding of exposure and importance of economic security in terms of cross-border investments.

Recently released figures (13 pages / 1.3 MB) from the competent authority for FDI screening in Germany, the Federal Ministry of Economic Affairs and Climate Action (BMWK), revealed a slight drop in German FDI cases notified to the ministry in 2023. This decrease can be explained with the fall in deal making, resulting from the economic slowdown, and rising costs of financing due to higher interest rates. The trend towards further tightening of FDI scrutiny will continue unabated.

FDI screening figures from 2023 follow the same trends of previous years. The top three non-EU investors remain the USA, UK, and China; UAE is catching up. In terms of sectorial focus, the figures reveal similarities to 2022, identifying information and communication technology, health and biotech, energy and engineering as the main subjects.

The figures also reveal that cases with restricting measure, such as prohibitions, side conditions, public-legal contracts, and administrative orders, are at a constant level. As a novel development, we see investors litigating such measures. Indeed, instructions or prohibitions are administrative acts, against which the remedies provided for in the Code of Administrative Court Procedure are available. The German courts can provide helpful guidance, including clarity on certain legal questions which would be of great interest in transaction practice.

In this context please note, BMWK continues to be of the opinion that investments made by EU companies that are ultimately owned or controlled by non-EU investors are covered by the German investment screening regime. However, the European Court of Justice in its 2023 judgment in Xella was surprisingly clear to hold that in principle, the FCA screening regulation does not apply to investments made by EU companies that are ultimately owned or controlled by non-EU investors. An exception to this rule is made for situations involving artificial agreements that do not reflect economic reality and are intended to circumvent the screening mechanism.

German FDI legal framework and potential expansion of existing regimes

In 2020, Germany comprehensively overhauled the legal framework for investment screening, including the implementation of apparently tougher time-limits. We see now, in practice, that BMWK asks the parties to “voluntarily” consent to extend the two-month period of phase I. These parties have an incentive to agree in order for cases to avoid moving to an in depth review (phase II). In 2023, 28 cases involved a consensual extension of the deadline in phase I with the procedure then concluded within this first phase.

Further expansion of existing regimes is very likely. The federal government is currently working on a stand-alone Investment Screening Act (ISA) as currently the provisions of FDI screening are scattered across several pieces of legislation. The upcoming ISA in Germany aims to strengthen economic security and will most likely broaden the scope of FDI screening to include acquisitions of intellection property rights, research cooperations, and greenfield investments in sensitive areas such as quantum technology and critical infrastructure.

As part of the economy security package, the European Commission has proposed a revision of the FDI Screening Regulation.

The growth of economic security requirements in Germany and beyond

The concept of economic security has gained ground in both Germany and the EU at large. Russia’s war of aggression against Ukraine and uncertainties in relation to geopolitical developments have brought even more into focus the criticality of key industries.

In light of the trend towards broadening issues which may raise national security concerns, businesses increasingly face multiple reviews of transactions both within and across separate jurisdictions. Such multiple reviews present significant challenges to the interest of deal certainty. Against this background, allocation of attention and resources to the screening process is vital. It is essential for parties involved in cross-border transactions to consider the scope of implications of FDI screening.