Foreign direct investment in Germany

Below, we reflect on the trend of increasing FDI scrutiny – in Germany and in the EU more broadly – and what it might mean for future regulation, as well as examine how Germany’s investment screening regime currently operates – and the actions foreign investors should consider when planning investment in Germany.

The context

Germany’s FDI screening regime exists across several pieces of legislation. The country’s restrictive approach is provided for under the EU’s own Screening Regulation, which was introduced in 2019.

The introduction of a standalone German Investment Screening Act does not appear to be on the legislative agenda currently, but reform of the country’s FDI screening regime is anticipated with the EU’s Screening Regulation envisaged for overhaul.

A legislative proposal for reform of the EU Screening Regulation was published by the European Commission in January 2024. It aims to further strengthen the protection of EU security and public order. Contentious issues that are expected to arise during negotiations over the revised regulation include the powers of the European Commission and what kind of business activities are to be subject to mandatory screening.

The backdrop to the anticipated reform is a changing geopolitical environment, with a drive across Europe to build up domestic industrial capabilities – to make economies more resilient and achieve energy and national security.

These developments together suggest that the trend towards further tightening of FDI scrutiny will continue unabated.  

The current framework

German FDI rules are set out in the Foreign Trade and Payments Law (Außenwirtschaftsgesetz) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV). The rules 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 defence or IT security sector, and a cross-sector screening for all other types of companies.

Depending on the set of rules, the legal test – a essential security interests versus public order and security; addressee of the screening – foreign investor or non-EU/EEA investor; and the thresholds differ. In either case, the FDI rules apply to any direct investment as well as any indirect investment in a German company.

Acquisitions by a German acquirer can also trigger screening in Germany where the predominant shareholder in those companies is a foreign investor. An acquisition of a German company by way of an asset deal may also be subject to FDI controls. Greenfield investments are not currently subject to controls.  

Sector-specific investment controls 

The more stringent sector-specific screening rules cover all acquisitions where a foreign investor – including persons and/or companies from other EU member states or European Free Trade Association (EFTA) countries – gains direct or indirect control of at least 10% of the voting rights in a German company active in the defence and IT security sector. Among others, manufacturers and developers of war weapons and other military technologies are listed as sensitive targets. Acquisitions subject to the sector-specific investment review must be notified to the BMWE. The Ministry then considers whether the respective acquisition is likely to impair essential security interests of the Federal Republic of Germany. 

Cross-sector investment controls 

In principle, any acquisition of a company based in Germany in which a non-EU/EEA investor acquires ownership of at least 25% of the voting rights can be subject to review. The legal test is whether there will be a likely effect on the public order or security of the Federal Republic of Germany, of another EU member state, or in relation to projects or programmes of Union interest. In determining whether an investment is likely to affect security or public order, the Ministry will also take into account whether the foreign investor is directly or indirectly controlled by the government of a third country – including through state bodies or armed force – including through significant funding. 

Mandatory filing is triggered when the target is active in certain sectors. Depending on the case group, mandatory filing is triggered where the acquisition would lead to the foreign investor obtaining either 10% or 20% of the voting rights. 

Our tables below highlight what sector investments are covered by the 10% and 20% thresholds, respectively. The numbering convention reflects the numbering used in the AWV.

Subsequent ‘add-on’ investments may also require notification if the total share of voting rights of the investor amounts to or exceeds certain thresholds – 20, 25, 40, 50 or 75%, as the case may be. 

In all other cases, filing is voluntary. Investors unsure of whether their acquisitions are subject to screening in Germany can apply for a certificate of non-objection (Unbedenklichkeitsbescheinigung).  

Atypical acquisition of control 

Screening is also possible if the respective threshold is not reached but where the acquired shareholding entails further rights – so-called atypical acquisition of control. However, there is no mandatory notification requirement attributed to such cases.

An atypical acquisition of control occurs when additional seats or majorities are guaranteed in supervisory bodies or in management, the granting of veto rights in strategic business or personnel decisions, or the granting of rights over information.

Overview of the review procedure

The procedure is divided into two phases.

In the first phase, which may take up to two months beginning with when BMWE acquires knowledge of the transaction, the Ministry assesses whether an in-depth screening is warranted in a second phase, for which additional time is available. If the BMWE does not start the investigation procedure within that time period, the transaction is deemed to be approved. In practice, BMWE issues a formal decision. BMWE frequently asks the parties to “voluntarily” consent to extend the two-month period of phase one. The parties have an incentive to agree in order for cases to avoid moving to phase two. 

If the BMWE decides to open the second phase, it will demand further information about the transaction. On receipt of such information, the BMWE has four months to come to a final decision. This period can be extended by three months if difficulties of a factual or legal nature arise. Furthermore, the period can be extended by another month if the acquisition particularly affects the defence interests of the Federal Republic of Germany. 

Regardless of any notification, the BMWE is authorised to introduce an investigation on their own initiative up to five years after conclusion of the purchase agreement. 

Outcome of the procedure

The Ministry can exercise powers to prohibit the transaction. If a transaction is blocked, BMWE may unwind it. Recent figures by the Ministry confirm that blocking a transaction remains a tool of last resort. However, as media reporting shows, that risk is not merely theoretical. Most times, the Ministry tries to mitigate an identified risk by concluding a public-law contract in lieu of any administrative orders or side-conditions. Recently, we are seeing investors challenging the Ministry’s decisions before the courts. The review and control powers of the BMWK are time-barred after five years have passed since signing.  

Impact of ongoing procedure on the transaction

Legal agreements that provide for the completion of acquisitions that are subject to mandatory filing but have not yet been approved are considered provisionally invalid. There are specific – punishable – prohibitions on closing actions, including requirements around not exercising voting rights or exchanging certain company-related sensitive information. These aim to prevent the investor from acting like the owner or shareholder before the review procedure is completed. The legal transaction is effective from the outset if BMWE – explicitly or implicitly – clears the transaction.  

Sanctions for non-compliance with FDI rules 

Non-compliance with the prohibition on certain closing actions constitutes a criminal offence, punishable by imprisonment of up to five years or a fine, where undertaken intentionally. Negligent breaches can result in an administrative fine of up to €500,000 per breach. Breaches of supervisory duties in this regard are considered an administrative offence, with fines of up to €1 million for individuals and up to €10m for companies.  

Likewise, intentional violations of a prohibition or an order can also be punished by imprisonment of up to five years or a fine. A negligent violation constitutes an administrative offence. 

Takeaways and implications for deal planning

As we experience in our daily practice at Pinsent Masons, the trend of expanding review of FDI does not appear to be going away. Those contemplating investments in sensitive target companies need to allocate sufficient time, attention and resources to the screening process; otherwise, deal security is at stake. Pre-deal considerations should include:

• Know your business – and the one you are investing in: foreign investors, sellers and target companies must have a thorough understanding of whether the target company falls among the listed case groups considered by the German Government as sensitive or strategic or bears any other relevance for security. In cases of doubt, investors should apply for a clearance certificate (comfort letter). It provides legal certainty to the investor, the seller and the target. Otherwise, there is a risk that BMWE screens the transaction up to five years after signing;  
• State-driven takeovers: consideration should be given to whether the transaction involves a country of special concern that has demonstrated or declared a strategic goal of acquiring a type of critical technology or critical infrastructure that would affect issues related to national or public security; 
• It is not only about control: foreign investors, sellers and target companies must be aware of the types of transactions that, while not conferring the potential for control of the business on a foreign investor, are still subject to review; 
• Contract-drafting considerations: if the transaction triggers mandatory filing or otherwise gives rise to security concerns, suitable closing conditions should be included in the transaction documents.