Law and policyPolicies and practices
What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?
The German approach to foreign investment control has been liberal to date. Germany is among the states attempting to defend and even to extend the free trade of goods and capital. Currency or exchange restrictions are neither imposed on EU residents nor on non-EU residents. However, the increasing number of investments from non-EU states, in particular recent acquisitions in sensitive and high-technology industries by Chinese investors, have led to a slight rethinking of the liberal approach to foreign investment control. This development has resulted in an amendments of the applicable law in 2017 and 2019. Under the current law, the Federal Ministry for Economic Affairs and Energy (BMWi) must be notified of any planned non-EU investment in critical infrastructure and any non-German investment in security-related technologies whereby the investor directly or indirectly acquires 10 per cent or more of the company’s voting rights. If the following review procedure reveals that the investment constitutes a threat to the German ‘public order or security’ or ‘essential security interests’, the BMWi may prohibit the investment or issue approval conditions. The German government has justified this approach by referring to article XIV GATS, which allows for the adoption of measures to maintain the public order.
In conclusion, lower thresholds and longer review periods lead towards a stricter approach to foreign investment control. We expect the government to examine the cases more in-depth than it has done in the past. An example of the recent, more interventionist strategy is the prohibition of Chinese Yantai Taihai Corporation’s attempted acquisition of the German company Leifeld in 2018 (see question 23).Main laws
What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?
The German Foreign Trade and Payments Act (AWG) and the German Foreign Trade and Payments Ordinance (AWV) provide the legal basis for the control of foreign investments in Germany. The latest amendment of the AWV dates from 27 February 2019.
The Administrative Procedure Act governs the investment review procedure. The Code of Administrative Court Procedure contains the remedies for administrative investment control measures.Scope of application
Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?
The relevant industry sector is decisive as to the level of scrutiny applied in the review. The sector-specific review sets out a strict review procedure for the acquisition of companies that operate in sensitive security areas such as defence and cryptotechnology. This includes manufacturers and developers of war weapons, ammunition, military equipment such as tank motors and gears, and any technology used for processing classified government information.
Under the cross-sectoral review, the BMWi may examine whether the respective acquisition poses a threat to the ‘public order or security’ of the Federal Republic of Germany. Acquisitions may in particular constitute such threat if the target:
- operates critical infrastructure such as energy, water, information technology and telecommunications, infrastructure used for finance or insurance, healthcare, transport or food;
- develops and modifies software that is used for operating such critical infrastructure;
- has been authorised to carry out organisational measures in the telecommunications sector or produces the technical equipment used for implementing statutory measures to monitor telecommunications and has knowledge about this technology;
- provides cloud computing services if certain thresholds are reached; or
- holds a licence for providing telematics infrastructure components or services.
For the sector-specific review, a threshold of 10 percent of the target’s voting rights applies to all acquisitions of German companies. The same is true for acquisitions within the scope of the cross-sectoral review if the target falls into one of the above mentioned categories of critical infrastructures set out in section 55, paragraph 1, sentence 2, AWV.
Furthermore, the BMWi is entitled to review all acquisitions of German companies whereby investors acquire ownership of at least 25 per cent of the company’s voting rights.
The review applies to asset deals as well as share deals, including both direct and indirect shares, and - in principle - irrespective of the relevant industry sector and of both nature and origin of the investor. The target must be ‘domestic’, meaning:
- legal persons and partnerships based or headquartered in Germany;
- branches of foreign legal persons or partnerships headquartered in Germany; or
- permanent establishments of foreign legal persons or partnerships in Germany.
How is a foreign investor or foreign investment defined in the applicable law?
The AWV applies the cross-sectoral review to any non-EU or non-EFTA-based investor. In addition, investors located within EU and EFTA territories may be subject to foreign investment control where it seems necessary to prevent abuse or circumvention of the foreign investment control rules. This might be the case where an investor does not pursue any significant independent economic activity or does not maintain a permanent establishment within the European Union in the form of business premises, personnel or equipment. The BMWi tends to read the term ‘circumvention’ very broadly and thus substantially widens its review authority.
The sector-specific review applies to any non-German (ie, also EU-based) investor. German investors may also be subject to foreign investment control where this seems necessary to prevent abuse or circumvention of the foreign investment control rules.Special rules for SOEs and SWFs
Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?
The AWV does not contain specific provisions for SOEs or SWFs. However, the recent developments towards stricter foreign investment control (see question 1) were in part a reaction to the increased economic activity of foreign SOEs and SWFs in Germany. Thus, a foreign investor’s affiliation with the public sector may play a role for the BMWi’s assessment of whether the public order or security of Germany is endangered.Relevant authorities
Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?
The BMWi is the authority responsible for conducting the review of mergers or acquisitions on national interest grounds. Within the ministry, the department for foreign trade policy (department V) conducts the review. The BMWi regularly consults other federal ministries or agencies such as the Federal Ministry of Foreign Affairs or the Federal Ministry of Defence (see question 18).
The BMWi may only prohibit an acquisition with the approval of the German federal government. Conversely, the German federal government is not entitled to prohibit an acquisition if the BMWi has not issued a negative assessment.
Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?
The AWV affords the BMWi discretion in regard to both the decision whether to intervene at all and potential measures (ranging from conditional approval to prohibition). Since 2017, the AWV has listed possible threats to the German public order or security to support the BMWi in exercising its discretion (see question 3). EU and German fundamental rights, including the principles of equality and proportionality limit the BMWi’s discretion. The BMWi must take into account the interests of both the acquirer and the seller, and is obliged to state its reasons as well as the standard of review applied in each case. In practice, the BMWi has a very broad margin of discretion, which is hardly ever challenged in court.
What jurisdictional thresholds trigger a review or application of the law? Is filing mandatory?
The BMWi is entitled to review all acquisitions of German companies where the investors acquire ownership of at least 25 per cent of the voting rights. A threshold of 10 per cent applies to acquisitions that are subject to sector-specific review and to acquisitions within the scope of the cross-sectoral review if the target falls into one of the categories set out in section 55, paragraph 1, sentence 2, AWV. The type of review depends on the sector concerned (see question 3).
Notification of an acquisition to the BMWi is mandatory if:
- an investment is subject to the sector-specific review; or
- an investment is subject to cross-sector review and falls within the category of a threat to the German public order or security (laid out in section 55, paragraph, 1 sentence 2, AWV).
In contrast to merger control, other elements such as turnover, purchase price or enterprise value do not trigger a notification or filing obligation.
Investors who are not subject to a notification obligation are nevertheless advised to either notify the BMWi of the acquisition or to apply for a certificate of non-objection in cases where it is conceivable that the BMWi could see a threat to the public order or security.
Voluntary notification to the BMWi sets in motion a time limit of three months for the BMWi to initiate a cross-sectoral review procedure (section 55, paragraph 3, sentence 1, AWV). This creates legal certainty for the investor who might otherwise be subject to a review procedure for up to five years after the acquisition - provided that the BMWi learns of the transaction.
Investors who are not subject to a notification obligation may also apply for a certificate of non-objection according to section 58 AWV. Such certificate confirms that the BMWi does not object as regards Germany’s public order and security. The certificate is deemed issued if the BMWi does not open a cross-sectoral review procedure within two months of receipt of the application (section 58, paragraph 2, sentence 1, AWV).National interest clearance
What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees? Is filing mandatory?
The AWV provides for three ways to start a review procedure:
- the investor applies for a certificate of non-objection;
- the investor applies for clearance; or
- the BMWi initiates a review procedure.
Notification of an acquisition to the BMWi is mandatory if:
- an investment is subject to the sector-specific review; or
- an investment is subject to cross-sector review and the target falls into one of the categories set out in section 55, paragraph 1, sentence 2, AWV.
For investments that are subject to the cross-sectoral review, the investor may apply for a certificate of non-objection. The certificate provides legal certainty that the transaction does not pose a threat to German public order or security (section 58, AWV - see question 8).
For investments that are subject to sector-specific review, the investor must apply for clearance (sections 60 and 61, AWV) and initiate the review procedure by notifying the BMWi of the planned acquisition (section 60, paragraph 3, sentence 1, AWV). The BMWi will issue clearance where the review procedure reveals no threat to essential security interests (section 61, AWV).
In addition to the foregoing, the BMWi may initiate the review procedure in regard to any investment it learns of and that raises concerns with regard to the AWV. In this case, the BMWi will officially inform the parties involved and require further statements and data (section 55, paragraph 3, AWV).
The review procedure consists of two stages: a preliminary examination and an examination in detail, including an investigation. In most cases, the review procedure is concluded within the first phase. The BMWi will only enter into the second stage, a formal investigation, if the preliminary examination gives rise to concerns about the transaction’s compliance with investment control rules.
There are no standard application forms. Pursuant to a decree dating from 22 March 2019, the application should include the following information:
- the name and place of business of investor and target;
- the investor’s share of voting rights before and after the transaction;
- an explanation of the business of investor and target;
- the shareholder structure of investor and target;
- all shares of investor and target in third-party companies;
- an explanation of the target’s critical infrastructure activities;
- any obligation of the target to protect government classified information;
- business contacts with public sector and defence customers of the past five years;
- the acquisition agreement and financing of the acquisition;
- any consortium agreement regarding the target;
- information on the short-, medium- and long-term strategy post-completion; and
- power of attorney for the investor.
This list is non-exhaustive, and the BMWi may request any further documents it deems necessary to reach a decision. The documents must be in German. The annexes of the SPA do not necessarily need to be translated. In consultation with the case handler a translation of the headings of the annexes can suffice.
The application must be submitted to the BMWi. The BMWi does not charge any fees or expenses, the applicants must bear their own expenses.
Which party is responsible for securing approval?
Both investor and target are legally obliged to comply with the foreign investment rules. The notification obligations, however, depend on the type of review applicable: investments subject to cross-sectoral review may be notified to the BMWi either by the investor or by the target. For investments subject to the sector-specific review, it is the investor who must apply for clearance.Review process
How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?
The timeline for the review process is highly dependent on the procedure applied.Cross-sectoral review procedure
The BMWi may initiate the review procedure within three months of acquiring knowledge of the conclusion of the investment contract. A review procedure is legally precluded if more than five years have passed since the conclusion of the investment contract.
The BMWi may furthermore only prohibit an investment or impose conditions on the investment within the first four months since the investor provided complete information on the transaction. Ongoing negotiations between the BMWi and the investor suspend the limitation period. The law does not limit the duration of such negotiation periods.
In the event of an application for a certificate of non-objection, the certificate will be deemed issued if the BMWi did not formally initiate an examination procedure within two months after the application was filed.Sector-specific review procedure
The BMWi may initiate the procedure within three months after the submission of the application. Clearance will be deemed granted if the BMWi does not react within the three-month period.
The authorities do not publish data regarding the duration of the procedure. Experience indicates that clearance for cross-sectoral investments takes two to three months. The preliminary assessment of sector-specific investments usually takes one to three months. The process may be lengthened considerably where the BMWi launches the second stage of the review procedure (in-depth examination).
Regardless of the legal time limits, the investor may try to accelerate the procedure by cooperating with the authorities and by providing the necessary information as early as possible.
Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?
In principle, nothing prevents the parties from closing the transaction before obtaining the approval of the BMWi. However, the validity of both the transaction and the underlying transaction contract may be affected by the BMWi’s decision.Transactions subject to cross-sectoral review
The lack of approval does not affect the legal validity of the actual transaction nor of the transaction contract. However, if the BMWi prohibits the investment, the prohibition renders both the actual transaction and the underlying transaction contract invalid. Consequently, the parties are advised to obtain clearance before concluding the transaction, or to conclude the contract under the condition that the BMWi approves the investment.Transactions subject to sector-specific review
In contrast to the above, contracts that include a notification obligation under the sector-specific review remain provisionally invalid until the approval of the BMWi has been obtained.Involvement of authorities
Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?
The BMWi is open to discuss with the investor the possible hurdles and concerns involving the acquisition contemplated. Where the investor is able to provide comprehensive information on the planned acquisition, such discussions might facilitate the subsequent investigation and examination procedures. The transaction, however, needs to be rather advanced. In some cases, meetings with the BMWi are possible - for example, to explain the business activity or the business strategy of the target. However, whether such meetings take place is at the discretion of the BMWi.
When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?
The AWV alone governs the two-stage foreign investment review procedure described in question 9. However, investors are free to rely on the assistance of public relations and political advisers before and throughout the review procedure. This will especially be useful in difficult cases, such as investments of SOEs in critical infrastructure.
What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?
In cases where voluntary notification applies and the investor has abstained from making that notification, the BMWi is authorised to initiate a review procedure within five years of the transaction. Such review might result in a retroactive conditional approval or prohibition of the foreign investment. In cases of voluntary notification in which the investor did notify the BMWi, any review procedure is precluded if the BMWi has not initiated a procedure within three months of the notification. In cases of mandatory notification, any review procedure is precluded if the BMWi has not initiated a review procedure within three months after the investor has produced complete information on the planned acquisition.
Therefore, investors are strongly advised to notify the BMWi of a planned investment in case of the slightest doubt. It is the fastest way to obtain legal certainty as to the admissibility of the planned investment and minimises the risk of the BMWi’s retroactive interference with the transaction.
Where the BMWi blocks an investment, it is authorised to prohibit the exercise of the voting rights of the target or to appoint a trustee assigned to rescind the investment. In addition, the authorities may take further measures in order to execute the prohibition.
Substantive assessmentSubstantive test
What is the substantive test for clearance and on whom is the onus for showing the transaction does or does not satisfy the test?
The substantive test for clearance depends on the applicable type of review. The cross-sectoral review requires an examination as to whether the investment will endanger the German ‘public order or security’. Under the sector-specific review, the BMWi assesses whether the investment will endanger ‘essential security interests’ of Germany. Both terms are subject to interpretation. Since they stem from EU law, the case law of the Court of Justice of the European Union has served as primary source for interpretation.Cross-sectoral review: threat to the ‘public order and security’.
The ‘public order and security’ test balances the imperatives of maintaining an attractive investment climate and protecting targets of strategic importance to the member states. A threat to the public order and security may arise where the existence or functioning of the state, of governmental institutions or public services is endangered. The ‘public order and security’ test also encompasses the maintenance of foreign relations, national military interests and the survival of the population. The BMWi’s case practice shows that a danger to public order or security is primarily seen in the possible access of non-EU companies to German security-relevant technologies and infrastructures as well as security-relevant technology transfer to foreign countries. Negative impacts on economic or financial interests or on the labour market do not constitute a threat to the public order and security. Thus, an investment may not be blocked to preserve jobs in Germany.
The 2017 AWV reform has introduced a - non-exhaustive - list of strategic industries and sectors (section 55, paragraph 1, sentence 2 - see question 3). Foreign investments in the listed sectors indicate a threat to the public order and security. The list serves as a guideline for the BMWi’s assessment.Sector-specific review: threat to ‘essential security interests’.
The ‘essential security interests’ test aims at protecting the key industries and technologies related to military defence. For example, essential security interests would be endangered where the investment compromises the core capability of the German defence industry. In the sector of cryptotechnology, essential security interests might be threatened where the reliability of such technology used by the government is in doubt. The provision also intends to secure the existence of German firms supplying the government with cryptotechnology and other defence equipment. The assessment requires the consideration of future foreign, security and economic policy that might conflict with the foreign investment.
Although concerns have been raised that aspects such as net benefit or reciprocity should be considered in the substantive test, they have not yet been incorporated in the AWV.
In principle, the onus for showing the transaction does or does not satisfy the test is on the BMWi. The applicant, however, is obliged to actively participate in the review procedure, in particular by providing sufficient information on the planned transaction. Because of the authorities’ wide margin of discretion, in practice the onus lies more on the applicants’ side.
To what extent will the authorities consult or cooperate with officials in other countries during the substantive assessment?
The BMWi has typically not consulted or cooperated with officials in other countries during the substantive foreign investment assessment. Reviews regarding national security interests have by nature been limited to the respective state. Given that such review procedures often concern companies in possession of sensitive technology and know-how, authorities are reluctant to share information cross-border.
However, in light of the new EU-wide cooperation mechanism under Regulation (EU) 2019/452 entering into force on 11 October 2020 (see question 24), it is expected that the cooperation and exchange of information on investments between the European Commission and member states will be enhanced significantly.Other relevant parties
What other parties may become involved in the review process? What rights and standing do complainants have?
Although the AWV does not provide for the formal involvement of third parties in the investment control procedure, third parties may voice their concerns with respect to a particular transaction. It might be of strategic advantage for competitors to provide the BMWi with additional information on the investment. However, competitors have no legal right to be heard by the BMWi.
Where the BMWi is unable to decide an investment case based on the currently available information, it consults other federal ministries or agencies. The BMWi regularly relies on the expertise of the Federal Ministry of Foreign Affairs, the Federal Ministry of Defence, the Federal Ministry of Finance, the Federal Ministry of the Interior and the Federal Office for Export Control.Prohibition and objections to transaction
What powers do the authorities have to prohibit or otherwise interfere with a transaction?
Where an investment subject to cross-sectoral review endangers Germany’s public order or security, the BMWi may either issue a prohibition or conditions for approval. The same applies to investments subject to sector-specific review where such investments endanger Germany’s essential security interests. In addition, any investment falling under the sector-specific review is subject to clearance by the BMWi. For the respective requirements and procedures, see questions 3 and 9.
Is it possible to remedy or avoid the authorities’ objections to a transaction, for example, by giving undertakings or agreeing to other mitigation arrangements?
Investors have two options where the BMWi concludes that the investment might affect the public order or security or essential security interests.
First, the investor may negotiate approval conditions with the BMWi. The BMWi is authorised to either prohibit a transaction or attach its approval to certain conditions. In light of the principle of proportionality, the BMWi is obliged to apply the least restrictive measures possible while protecting the German public order and security interests. If possible, it will debate approval conditions with the investor before prohibiting a transaction. It may, for example, require that the merger excludes a certain, critical division or component of the target. To this end, the investor may submit a statement guaranteeing its compliance with the conditions to the BMWi.
Second, the investor and the BMWi may negotiate an agreement under public law that includes statements of commitment from both sides. Such an agreement allows for the parties to find a workable solution, such as approval conditions. However, the agreement has to respect the limits set by the AWV, in particular the substantive tests for clearance set out in sections 55 and 60 (see question 16).Challenge and appeal
Can a negative decision be challenged or appealed?
The BMWi’s decision can be appealed before the Administrative Court of Berlin. The foreign investment rules do not provide for a review procedure within the BMWi.
Judicial review of the BMWi’s decisions is limited. As mentioned in question 7, the BMWi is granted considerable discretion in the assessment of investments. Judicial review therefore mainly examines whether the BMWi has correctly applied the procedural rules, and whether it has taken into consideration all information provided for by the investor.
Since a negative decision affects both investor and target, both parties may bring an action against the BMWi.Confidential information
What safeguards are in place to protect confidential information from being disseminated and what are the consequences if confidentiality is breached?
The BMWi is obliged to treat the information received as strictly confidential and does also do so. Any breach of confidentiality may result in disciplinary measures as well as in criminal liability. Information on a transaction submitted to the BMWi is exempted from the right to access official information granted by the Freedom of Information Act. In principle, this Act entitles anyone to access official information from the authorities of the federal government. However, section 3 No. 1 lit f) provides for an exception where the disclosure of the information may have detrimental effects on measures to prevent illicit foreign trade. Pursuant to this provision, any transaction in violation of the AWG or AWV is considered ‘illicit’.
However, information will be exchanged under the Regulation (EU) 2019/452 with both the European Commission and other member states (see question 24). The confidentiality of the information collected under the Regulation will be ensured in accordance with EU law and the law of the member state concerned.
Recent casesRelevant recent case law
Discuss in detail up to three recent cases that reflect how the foregoing laws and policies were applied and the outcome, including, where possible, examples of rejections.Aixtron
In May 2016, the Chinese company Fujian Grand Chip Investment (GCI) announced its intention to invest in the German electronics manufacturer Aixtron. Thereby, GCI would have acquired 50.1 per cent of the company’s voting rights. The Chinese investor had already successfully applied for a certificate of non-objection. Subsequently, the BMWi revoked the certificate in October 2016 and announced the resumption of the review procedure. The revocation was based on concerns raised by the United States regarding its national security interests. The acquisition subsequently failed owing to an American veto, so that the BMWi did not have to resume the review procedure.Kuka
In 2016, the Chinese Midea Group announced investment negotiations with the German company Kuka. Kuka develops and produces robots for various industries, such as automotives, electronics, energy or healthcare. The announcement triggered a public debate on the influence of foreign investors on German firms and on a potential transfer of technical know-how from Germany to China. However, the BMWi issued a certificate of non-objection after a preliminary examination, without even entering into the second stage of the review procedure. Subsequently, Midea took over 95 per cent of the voting rights of Kuka. This case - together with Aixtron and some other cases - led to the 2017 AWV reform introducing stricter rules on foreign investment control.Leifeld
In August 2018, the Leifeld case came to be known as the first formal prohibition of a foreign investment by the German government based on the 2017 AWV reform. The Chinese investor Yantai Taihai Corporation had aimed at taking over the German company Leifeld Metal Spinning. The target mainly produces sophisticated, seamless pipe-formed metal parts that are used in the aerospace, but also in the nuclear sector. Therefore, the investment qualified as subject to cross-sectoral review, on the basis that it ‘operates critical infrastructure’. The BMWi - with the approval of the other federal ministries - concluded that the takeover would endanger the German public order and security. This decision can be seen as a harbinger for a stricter review of foreign investments in the future in general and of Chinese investments in particular.
Updates & TrendsKey developments of the past year
Are there any developments, emerging trends or hot topics in foreign investment review regulation in your jurisdiction? Are there any current proposed changes in the law or policy that will have an impact on foreign investment and national interest review?Key developments of the past year24 Are there any developments, emerging trends or hot topics in foreign investment review regulation in your jurisdiction? Are there any current proposed changes in the law or policy that will have an impact on foreign investment and national interest review?
In general, we observe a trend towards a stricter approach in German foreign investment review. The extended review periods and lower voting rights thresholds illustrate this development. In addition, Federal Minister of Economy Peter Altmaier presented the final version of his National Industrial Strategy 2030 on 25 November 2019. His strategic guidelines stipulate, inter alia, that in very important cases, the federal government should consider to intervene as an acquirer through a national equity facility for a limited period of time in order to stop a foreign investment.
Furthermore, Altmaier indicated that manufacturers of ‘critical technologies’ may also be included in the list of particularly security-relevant companies. This concerns companies in the fields of artificial intelligence, robotics, semi-conductors, biotechnology and quantum technology. For these sectors, the review threshold of 10 per cent of the voting rights shall apply. The amendment is aimed for October 2020.
At the European level, the EU adopted the new Regulation (EU) 2019/452 on 19 March 2019 to support reciprocity between member states’ screening mechanisms. It establishes a common framework for the screening of foreign direct investments into the EU on grounds of public security or order. The Regulation lays down requirements that national rules have to comply with and introduces a new EU-wide cooperation mechanism for the exchange of information between member states. It will enter into force fully on 11 October 2020.