Germany's foreign investment regime

Out-Law Guide | 26 Nov 2020 | 11:31 am | 5 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 developments occurred on 17 July 2020 when new foreign trade regulations became effective to implement the EU Screening Regulation. The regulation provides for certain rules to unify the approach to investment screening throughout the European Union and a cooperation mechanism between the member states and the European Commission.

Based on the regulation, the German government widened the scope of companies potentially subject to foreign investment screening. Previously, investment screening was only possible when acquisitions of companies and company divisions by foreign investors could pose an "actual threat" to the public security and order of the Federal Republic of Germany. Now, a "probably impairment" of the public security and order of the Federal Republic of Germany or another EU member state provides sufficient cause for the German Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie orBmWi) to investigate an acquisition.

A further major change to the German foreign trade regulations is that transactions which have to be notified to the BmWi are subject to a comprehensive implementation prohibition: the foreign investor is prohibited from completing the transaction, in particular receiving information regarding the company, while it is under examination by the BmWi.

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.

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.

The latest amendments to German foreign trade law underline the general national and European trend to tighten investment control regulations.

Any transaction fulfilling the sector-specific screening requirements must be notified to the BmWi. Following this notification the BmWi has two 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 BmWi cannot prohibit the transaction any more.

Prior to the end of this deadline, the BmWi can open an investigation procedure to examine whether essential security interests of the Federal Republic of Germany are endangered. If the BmWi decides to open an investigation procedure, it will demand further information about the transaction from the investor. On receipt of such information, the BmWI has four months to come to a final decision.

Regardless of any notification, the BmWi is authorised to open an investigation procedure up to five years after the conclusion of the purchase agreement.

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 BmWi after the conclusion 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.

The BmWi has two months to open an investigation procedure after it becomes aware of the conclusion of the purchase agreement in a transaction - for example, due to notification by the investor. If the BmWi 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 BmWi cannot prohibit the transaction any more. Before the end of the deadline, the BmWi can open an investigation procedure to examine whether the acquisition of a domestic company by a non-EU/EEA investor or the direct or indirect acquisition of a stake in a domestic company by a non-EU/EEA investor poses a probable impairment to the public order or security of the Federal Republic of Germany. If the BmWi decides to open an investigation procedure, it will demand further information about the transaction from the investor. On receipt of such information, the BmWi has four months to come to a final decision. Regardless of any notification, the BmWi is authorised to open an investigation procedure up to five years after conclusion of the purchase agreement.

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 BmWi.

Legal consequences

The legal effectiveness of any purchase agreement of a target company that falls under any of the above screening rules is subject to a condition subsequent as long as:

  • the BmWi has not cleared it;
  • the transaction has not been de-facto cleared; or
  • the deadline for government examination has expired.

In the case of an investment in a target that falls under the cross-sector investment control and is subject to notification requirements, or the sector-specific investment control, any legal transaction to implement the purchase agreement is pending invalid as well. In this case, certain implementing actions are explicitly prohibited during the pending period - for example, to disclose to the foreign investor company-related information or to grant the acquirer any profit distribution rights. For this reason, we usually recommend to file for a clearance certificate to avoid any uncertainties about a transaction.

If the BmWi comes to the conclusion that a transaction impairs the public security and order of the Federal Republic of Germany or another EU member state, the government may prohibit the transaction or demand that the investor restructure the transaction, for example by making divestments.

Details about the foreign investment screening procedures in Germany are not publicly disclosed. However, the government explained that the number of screening procedures increased from 78 cases in 2018 to 106 cases in 2019. A further increase of 20% yearly is expected. So far, no transaction has been prohibited based on foreign investment regulations.