Despite significant criticism from German economy and industry leaders, the German Federal Government currently plans to enlarge the possibilities of controlling and prohibiting foreign investments in German companies in order to protect “public security and order.” The present legal situation in Germany allows restrictions of transactions, especially in the arms industry and the field of encryption technology. A foreign investor that wishes to acquire more than 25 percent of the shares in an arms or encryption manufacturer is obliged to notify the German Federal Ministry of Economics and Technology (FME) of the intended investment. The FME may interdict the proposed transaction within one month.

Pursuant to the recent German Federal Government’s proposal to amend the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz) as well as the related directive (Verordnung zur Durchführung des Außenwirtschaftsgesetzes), the FME may examine any investment leading to a shareholding of at least 25 percent in a German company by a foreigner or a foreign company, or by a company with a foreign shareholding of at least 25 percent. Contrary to the origin of the discussion, the FME’s right to examine or prohibit such transactions shall not be limited to investments by public funds, but extend to all foreign investors and all sectors. After having examined the proposed investment, the FME may authorize it, authorize it under conditions or even prohibit it, provided that that “public security and order” require such measures. The period of time in which the FME may commence its examinations shall be limited to three months from signing or the publication of the resolution concerning the offer, or the acquisition of control.

Under the proposed amendment, however, the foreign investor shall no longer be obliged to notify the FME of the intended investment. The draft act does not yet establish criteria for when “public security and order” shall be deemed to be in danger of being breached. Also, by equally extending to foreign investors resident in the European Union, the draft act raises concerns regarding compliance with European law and is currently being reviewed by the European Commission.

As a result, future share purchase or swap agreements concerning a shareholding being possibly precarious with respect to the (amended) German Foreign Trade and Payments Act may be concluded on the condition subsequent of an interdiction by the FME. Thus, such agreements may become retroactively invalid upon interdiction by the FME. This provision shall motivate foreign investors to notify the FME of their intended investments—even if they are not obliged to do so—in order to abbreviate the time of legal insecurity from three months to only one month. If an investment is prohibited by the FME, the transaction will need to be reprocessed. If this is not possible, as in the case of a stock market transaction, the shares shall be sold by force. Because of the legal insecurity, it will be advisable to ask the FME at an early stage of the transaction, at least before signing, to provide a document of compliance of the intended transaction with the provisions of the (amended) German Foreign Trade and Payments Act.