The threshold for foreign direct investment screening has been lowered to 10% for the defence sector and critical infrastructure. From now on, critical infrastructure also includes media businesses. More review procedures and (probably) a longer duration of reviews are to be expected.

Introduction

In 2004, Germany enacted a regime empowering the German government to assess and prohibit the acquisition of German businesses active in the defence and encryption sector by Non-German investors. This regime, known as sector-specific review procedure, was broadened in 2009 to cover acquisitions of any German company irrespective of industry sector, provided that such acquisition may endanger German public order or security. This cross-sector review applied to Non-EU/Non-EFTA investors acquiring 25 % or more of the voting rights in a German company. An amendment of the regime in 2017 introduced specific regulations applicable to businesses active in industries that qualify as critical infrastructure.

Lower threshold for certain industries

Today, the German government decided to lower the FDI screening threshold from 25 % to 10 % for acquisitions by Non-German investors of German businesses active in the defence and encryption sector and for acquisitions by Non-European investors of businesses active in industries that qualify as critical infrastructure.

The decision marks a further tightening of the German FDI rule after “Leifeld”, the first ever precautionary order issued by the German government prohibiting the acquisition of a German business.

Broadening of list of critical infrastructures

Apart from lowering the threshold, the new legislation also broadens the list of businesses which qualify as critical infrastructure: businesses active in the media have been added. According to the new legislation this includes broadcasting, television and print media that are relevant for the public debate and which are characterized by a specific relevance to the present and a certain wide-spread impact.

One needs to note that already in accordance with provisions such as the German Broadcasting Treaty (Rundfunkstaatsvertrag) notifications are required in cases where a change in the ownership structure or a change of other (factual) influence in a private broadcasting company are envisaged. Those procedures will now run in parallel and it will be interesting to see whether there will be any direct interaction taking place between the competent authorities.

The German government argued that such amendments are necessary to protect media businesses and to avoid misinformation in the German media. The future will show how the German Ministry of Economic Affairs will develop objective criteria based on which it can be measured whether a potential buyer will promote misinformation.

Conclusion and outlook

Germany remains an investor friendly country: Even though the threshold is now even lower than initially discussed, Germany remains an investor friendly country. According to the Ministry of Economic Affairs, there are currently 80 to 100 cases per year and no formal prohibition has taken place so far (Leifeld was precautionary in nature).

Impact on the German M&A market will be limited: Against the background of the German M&A market, the impact of the new legislation should be limited. The majority of transactions is still aiming at the acquisition of a controlling interest; for those transactions, the amendments mean no change in substance. However, transactions like the sale of a 20% stake in 50Hertz or acquisitions of minority stakes by sovereign wealth funds are now subject to FDI screenings.

Nevertheless, an increased number of reviews and prolonged duration of reviews to be expected: It is to be expected that the amended regime will increase the number of applications that will be filed with the German Ministry of Economic Affairs. Given that the duration of reviews has been already rather on the long end in 2018, it is to be expected that with an increased number of cases, the reviews will in practice take even longer.

New businesses qualified as critical infrastructure: Transactions involving media businesses are certainly not day-to-day transactions in the current German M&A market. Certain aspects of such transactions are covered also by the German Broadcasting Treaty. The future will show how the German Ministry of Economic Affairs will develop objective criteria based on which can measured whether a potential buyer will promote misinformation.

Harmonization on EU level: In the near future, further developments are to be expected at EU level. The European Commission proposed a EU Framework for screening foreign direct investments. The framework will allow Member States and the Commission to cooperate and exchange information on investments from third countries that may affect security or public order. On 20 November 2018, the European Parliament, the Council and the Commission reached a political agreement on the new EU Framework which now remains to be adopted by the European Parliament and by the Council before becoming effective. The envisaged harmonization at EU level will increase the complexity of FDI procedures. This complexity needs to be taken into account when structuring M&A transactions in the future.