Germany – together with Italy and France – has been at the forefront of the wider European trend to intensify the screening of the acquisition of domestic companies by foreign investors, particularly by those from outside the EU/EFTA.
Over the past four years, the review of foreign investments by the German Ministry for Economic Affairs and Energy (BMWi) has developed from a niche topic to one of the key considerations in Germany-related M&A. In 2020, approximately 160 acquisitions by investors from outside of Germany were subject to national interest review by the BMWi.
This number is likely to increase further. After last year’s reforms led to a significant extension of the mandatory filing requirement in the health sector and the introduction of a standstill obligation backed by fines and criminal sanctions, the BMWi adopted another reform of the relevant regulation (Außenwirtschaftsverordnung) on 27 April 2021. The core elements of the reform are:
- the extension of suspensory filing requirements to the acquisition of businesses with activities in so-called critical technologies and critical inputs (see section 1 below);
- the extension of the existing filing requirements in the defence sector (see section 2); and
- the extension of the types of transaction that are within the scope of the German foreign investment control regime (see section 3).
The revised regulation will enter into force in the coming days and will apply to all transactions signed thereafter.
1. Extension of filing requirements to critical technologies and critical inputs
The previous regulation defined 11 activities that trigger a mandatory filing, such as the operation of critical infrastructure or certain activities in the health sector. The new regulation adds 16 further activities, which are mostly related to the manufacturing and development of 'critical technologies', but also include other areas such as the extraction and processing of 'critical inputs'.
The amendment is based on the blueprint of the EU regulation on the screening of foreign investments and is in line with Germany’s broader industrial strategy to protect its domestic high-tech industry.
The EU screening regulation lists several broad categories of technology that are regarded as critical for public order and security, such as artificial intelligence, robotics and semiconductors. Instead of stipulating mandatory filing requirements for the acquisition of companies that are active in these broadly defined fields, the German regulation takes a selective approach by further defining each of the categories:
- the operation of satellite systems;
- the manufacturing or development of goods related to artificial intelligence;
- the manufacturing or development of automated/autonomous vehicles or unmanned drones;
- the manufacturing or development of certain types of industrial robots;
- the manufacturing, development and processing of semiconductors and optoelectronics (including equipment for their production);
- the non-captive manufacturing or development of certain types of IT-security equipment/systems;
- the operation of air carriers or the manufacturing/development of aerospace goods or technologies;
- the manufacturing, development, modification or use of certain goods related to nuclear technology;
- the manufacturing or development of certain types of goods based on quantum technologies;
- the manufacturing or development of goods for additive manufacturing (3D printing);
- the manufacturing or development of goods designed for the operation of wireless or wireline data networks;
- the manufacturing of smart meter gateways; and
- the manufacturing or development of goods based on secret IP rights.
Most of these activities are defined in more detail either in the new regulation or in sector-specific regulations already in place.
In addition to critical technologies, mandatory filings will also be required for the acquisition of companies active in the extraction or processing of certain resources (critical inputs), large agricultural producers and companies that deliver IT or communication services for certain government bodies.
Unlike the filing requirements that were already in place, the new filing requirements will apply to acquisitions of 20 per cent or more of the voting rights in any relevant German company (as opposed to 10 per cent or more of the voting rights). This approach excludes many minority investments in the tech sector from the mandatory filing requirement and thus ensures the quick access to capital for start-ups and other rapidly growing companies.
The new 20 per cent threshold also applies to transactions in the healthcare sector that are subject to a filing requirement following the recent reforms in the context of COVID-19. However, the acquisition of companies in very sensitive sectors, such as the operation of critical infrastructure, remains subject to the previous 10 per cent threshold.
2. Extension of existing filing requirements in the defence sector
An increasing number of mandatory filings will be required for acquisitions of companies active in the defence sector. Up to now, a filing requirement is only triggered if the German target manufactures or develops certain specific export-controlled defence goods. In the future, the filing requirement will be extended to all defence goods that are either export controlled or based on secret IP rights. This applies where the German target develops, modifies or is in the possession of such goods. In addition, the acquisition of so-called 'defence-important' facilities will also be notifiable.
3. Extension of the type of transactions subject to foreign investment control
The new regulation addresses a number of transaction types and constellations that frequently occur in practice but were previously not explicitly addressed by the German foreign investment rules.
Review of acquisitions below the applicable voting rights threshold (10, 20 or 25 per cent)
Under the previous rules, a foreign investment review was only triggered if the acquisition reached the applicable voting rights thresholds (10 or 25 per cent). The new regulation extends the power of review to acquisitions below the applicable thresholds (now 10, 20 or 25 per cent) if the foreign investor acquires other means of influence, such as board seats in corporate bodies, veto rights or information rights. Such an acquisition of 'atypical control' is not subject to a mandatory filing requirement, but still carries the risk of a call-in for review by the BMWi.
Cross-attribution of voting rights between different investors
The regulation extends the concept of the cross-attribution of voting rights between several different investors. While voting rights are so far only attributed in the case of voting rights agreements, other circumstances that point to a factual co-ordination of voting rights between different investors will prospectively also lead to an attribution. Such a factual co-ordination will be presumed in case two state-controlled investors from the same jurisdiction invest in the same German target company.
While such a scenario of the factual co-ordination of voting rights can establish a review right for the BMWi and thus might warrant a voluntary filing, it does not trigger a mandatory filing requirement.
Acquisitions of voting rights by existing shareholders
The new regulation codifies the BMWi’s understanding that the acquisition of additional voting shares above the applicable thresholds can trigger a new filing requirement. If, for example, the acquirer previously filed the acquisition of 10 per cent of the voting rights in a German entity that operates critical infrastructure, further filings will be required once additional acquisitions result in an increase of the shareholding to 20, 25, 40, 50 or 75 per cent.
4. Outlook on further developments
According to the BMWi, the amendment of the German regulation is the final step of the reform process that was initiated with a view to the EU framework regulation in 2020. This is good news for investors, who will benefit from increased legal certainty following a series of amendments.
However, investors should be aware that the government is already working on an amendment to the extensive regulation that defines 'critical infrastructure' in Germany, which is also subject to a mandatory filing requirement.
Furthermore, the government is working on a set of exemptions from the foreign investment rules for acquisitions of voting rights in stock-listed companies. Thus, there will be a continuous need for investors to closely monitor the further evolution of the German foreign investment screening mechanism.