Germany's foreign investment regime

Out-Law Guide | 13 Nov 2019 | 12:44 pm | 4 min. read

Germany has had a governmental foreign investment control (FIC) screening system in place since 2004.

In recent years FIC rules have been constantly amended to significantly extend the government's screening rights. The latest development occurred in December 2018 when the threshold for governmental review was reduced to 10% for acquisitions of voting rights in companies active in critical infrastructure. Legal amendments have been fuelled by public discussion over national security concerns and the protection of domestic technology resulting from high volumes of investments from China and general trade policy considerations. In recent years a large number of foreign investments were made into German companies with leading sector technology or linked to infrastructure, which raised concerns in particular regarding transfer of know-how outside of Germany and the level of dependence on foreign shareholders regarding important infrastructure.

On 19 March 2019 an EU Regulation establishing a European screening mechanism for foreign direct investment was adopted (Regulation (EU) 2019/452) which will be fully applicable in Germany from 11 October 2020.

Germany's FIC rules

In Germany, FIC rules as set out in the Foreign Trade and Payments Law (Außenwirtschaftsgesetz) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung) stipulate two different sets of screening competencies with respect to acquisitions in German companies: a sector-specific screening for acquisitions of companies active in the military sector or in IT security technology, and a cross-sector screening for all other types of companies. Depending on the set of rules, the addressee of the foreign investment screening (foreign investor or non-EU/EEA investor), the thresholds and screening procedures differ. In either case, the FIC rules apply to any direct investment as well as any indirect investment in a German company. Furthermore, acquisitions by a German acquirer, whose predominant shareholder is a foreign investor, may trigger governmental screening. Finally, an acquisition of a German company by way of an asset deal may also be subject to FIC, for example in case such acquisition is implemented by acquiring a company's business assets.

Sector-specific investment control

The sector-specific FIC encompasses companies active for example in the production of weapons, military equipment and IT security products. An investment in these specific sectors may become subject to governmental screening, if a foreign investor acquires 10% or more of the voting rights of a target company operating in this sector.

Legal amendments have been fuelled by public discussion over national security concerns and the protection of domestic technology.

Any transaction fulfilling the sector-specific screening requirements must be notified to the German government, i.e. the German Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie). Following this notification the government has three months to open an investigation procedure. If the government does not start the investigation procedure within that time period, the transaction is deemed to be approved (de-facto governmental clearance). In that case the government cannot prohibit the transaction any more. The government after investigating the transaction may challenge it on the grounds of being a material risk for national security interests.

Cross-sector investment control

With respect to the cross-sector control, the FIC rules provide for two thresholds at which an acquisition of a foreign investor from a non-EU/EEA jurisdiction may be subject to a governmental screening. In the event a non-EU/EEA investor acquires 10% or more of the voting rights of a target operating in particular in a critical infrastructure, the government may initiate a screening. Critical infrastructure industries encompass the following areas:

  • energy;
  • information technology;
  • telecommunications;
  • transport and traffic;
  • health;
  • water and food supply;
  • finance; and
  • insurance.

Such acquisitions must be notified by the investor to the German government already with execution of the related purchase agreement. For the acquisition of companies which do not operate in one or more of the mentioned infrastructure sectors or another statutorily defined sector a threshold of 25% remains applicable for possible governmental screening.

Irrespective of a notification, if required, the government may investigate any cross-sector investment, provided it has formally opened an investigation proceeding within three months after it has become aware of the conclusion of the purchase agreement concerning the transaction. The government may challenge the transaction in an investigation proceeding on the grounds of it being a risk to national security and order. However, the government is prohibited from challenging the transaction if it does not open an investigation procedure within five years of the purchase agreement being concluded.

To be on the safe side and to shorten the governmental screening period, an investor may apply for governmental clearance of the transaction. A transaction is deemed to be cleared if the government does not open an investigation procedure within two months of receiving the clearance request (de-facto governmental clearance) or a clearance certificate is issued by the government.

Legal consequences

The legal effectiveness of any investment into a target company subject to FIC is suspended until either a clearance certificate (cross-sector investment control) or a de-facto governmental clearance has been obtained or the time limit for the respective governmental investigation, depending on the applicable rules for the transaction, has elapsed, irrespective of whether the relevant purchase or transfer has been completed. In terms of cross-sector investment we usually recommend to file for a clearance certificate to avoid any uncertainties about the transaction in the future.

If governmental investigation proceedings are conducted and the government decides that the transaction is a risk to national security and order (in case of a cross-sector investment screening) or a risk to material national security interests (in case of a sector-specific investment screening), the government may prohibit the transaction or demand the investor to restructure the transaction, e.g. by making divestments. In 2018 the government came very close for the first time to issuing a prohibition order for the acquisition of a company called Leifeld Metal Spinning and refrained from it only because the foreign investor had at the end withdrawn the offer.