Foreign investment regime
The foreign investment regime in Germany is bifurcated into a 'sector-specific' and a 'cross-sectoral' control regime.i Sector-specific regime
There are specific rules that apply to the acquisition of companies that operate in areas that are relevant to national defence or other similarly sensitive security areas (the sector-specific control regime). In particular, if a company is to be acquired that produces certain goods that are listed in the war weapons control list, specially constructed engines or gears for tanks or military tracked armored vehicles, products with IT security features that are used to process classified government information or certain goods with a specific military use listed in the export list, a notification of such investment pursuant to Section 60, Paragraph 2 of the Foreign Trade and Payments Ordinance (AWV) must be submitted by any non-German investor. The relevant threshold of ownership that triggers such notification obligation is 10 per cent of the voting rights of the company (or the acquisition of a business through an asset deal by a company in which an investor holds at least 10 per cent of the voting rights). Prior to clearance by the Federal Ministry for Economic Affairs and Energy (BMWi) the underlying contracts are invalid and the transaction is therefore provisionally suspended. In its review, the BMWi considers whether the respective acquisition poses a threat to essential security interest of the Federal Republic of Germany. Similar rules also apply to the acquisition of a company operating certain high-grade earth-remote sensing systems (Section 10 of the Act of Satellite Data Security). The sector-specific investment review is not covered in this chapter in further detail, as it is rare in practice because of the narrow focus on military-use technology.ii Cross-sectoral regime
Outside the sector-specific review, a cross-sectoral review system applies pursuant to Section 55 et seq. of the AWV. This cross-sectional review applies to businesses of all sectors regardless of the size of the company involved in the acquisition. However, within the cross-sectoral review scheme, a distinction is made between the acquisition of entities or businesses active in critical infrastructures and other companies.iii Type of investors concerned
Under the cross-sectoral investment regime, acquisitions by any investor outside the EU or the European Free Trade Association (EFTA), or both, are covered. It is irrelevant in this context whether the investor is a private investor or state owned, and whether the investor actually is already operating within the EU or EFTA (e.g., through a branch). For the determination of whether an investor qualifies for the cross-sectoral investment review, its place of incorporation or factual place of management outside the EU or EFTA is decisive.
As will be discussed below, the cross-sectoral investment review also covers indirect acquisitions of voting rights and businesses. As a consequence, it is sufficient in principle if one entity within a corporate chain is incorporated in or managed from outside the EU or EFTA to trigger a foreign investment review. In particular, under the revised provisions of the AWV, it will generally not be relevant whether the direct acquisition occurs through a German or EU entity, if and as long as such entity is controlled (for purposes of the foreign investment regime) by non-EU or EFTA entities.
The AWV contains a further rule, pursuant to which even acquisitions by EU or EFTA-incorporated investors may be subject to review of the BMWi if there are reasons to believe that the use of the local entity is (at least in part) based on a scheme to circumvent the application of foreign investment rules, particularly because of the acquiring vehicle not having operative business or a local presence in the form of offices, personnel or production assets. Because of the broad definition of 'indirect acquisitions', further discussed below, it is unclear in which context these anti-circumvention rules will still be relevant in future, outside a scenario where an acquisition vehicle is held in trust.iv Type of investment
The AWV covers acquisitions of an existing 'domestic enterprise' or of a 'direct or indirect participation' in an existing domestic enterprise. Consequently, any acquisition of shares in a German company above the applicable threshold is subject to review, regardless of whether such shares are acquired through a share deal, through a capital increase, through a merger transaction or through a swap transaction. As the law links the acquisition of a participation in a company to certain voting rights thresholds (depending on the business sector concerned, either 10 per cent or 25 per cent, see subsection v, below) that are so acquired, the mere acquisition of non-voting shares or option or preemptive rights to acquire shares in future is, however, not subject to foreign investment review prior to the exercise of such rights.
In addition to the acquisition of voting shares through a share deal or similar transaction, the law also covers the acquisition of an enterprise through an asset deal. As long as the acquisition relates to an enterprise (i.e., a group of assets comprising a business undertaking that are used for a commercial purpose rather than individual assets that do not form an enterprise), any acquisition of such enterprise by an entity in which an investor holds voting rights above the applicable threshold will trigger the foreign investment review.
Contrary to the acquisition of existing enterprises, establishing a new company (greenfield investments) or the creation of commercial joint ventures (i.e., where there is no corporate participation in an existing German entity) will not be subject to restrictions under the foreign investment control regime.v Applicable voting rights thresholds
Acquisition of voting shares or of a business through an asset deal are only subject to review if certain thresholds of voting rights are reached or surpassed. By contrast, the value of shares or assets acquired is irrelevant for the purposes of foreign investment review.General rule
First, there is a general threshold of 25 per cent of voting rights covering acquisition of any domestic enterprise irrespective of the business segment it operates in. The review will be triggered at the time the investor 'reaches or surpasses' this threshold of 25 per cent of voting rights.Critical infrastructures
In contrast, the relevant control threshold is significantly lowered if the enterprise in question operates in certain specific business sectors of particular relevance to security within the meaning of Section 55(1), Sentence 2, Nos 1–6 of the AWV. If businesses active in these areas are concerned, an acquisition of 10 per cent of voting rights already suffices to trigger the foreign investment review process (and, as will be explained below, in case of acquisitions of companies active in these business segments, a mandatory notification obligation applies). At the same time, the law stipulates that in case of acquisitions in these sectors, a threat to public order or security may be considered particularly likely.
The critical infrastructures concerned that are subject to the lower 10 per cent control threshold are the following business areas:
German companies that:
- operate critical infrastructures within the meaning of the Act on the Federal Office for Information Security (e.g., facilities that (1) belong to the energy, information technology and telecommunications, transport, healthcare, water, food, finance or insurance sector, and (2) are vital to the functioning of the community);
- develop or modify certain sector-specific software for the operation of critical infrastructures within the meaning of the Act on the Federal Office for Information Security (e.g., software for (1) power plant or network control technology in the energy sector, (2) control and automation technology in the water sector, (3) cash supply, card-based payments or security transactions, (4) hospital information systems or the marketing of prescription drugs, (5) air, rail or road transport of passengers and goods, and (6) food supply);
- are entrusted with the operation of telecommunications surveillance measures according to the Telecommunication Act or manufacture technical equipment therefor;
- provide certain cloud computing services;
- have an authorisation for components or services related to the telematics infrastructure according to Volume V of the Social Insurance Code; or
- are active in the media sector and, with particular topicality and broad impact, contribute to forming public opinion via broadcasting, tele media or print media.
The AWV contains far-reaching rules on the attribution of voting rights to an investor.
According to Section 56(2), No. 1 AWV, voting rights of third parties in which the acquirer holds a participation corresponding to the relevant threshold applying to the direct acquisition are fully attributed to the investor. Therefore, if, for example, a non-EU or EFTA entity holds 10 per cent of an intermediary entity holding 6 per cent of the shares of a domestic German company operating a critical infrastructure business and the non-EU or EFTA entity acquires 4 per cent of the shares of such German company, this transaction triggers a potential review by the BMWi. Pursuant to Section 56(2), No. 2 AWV, shareholdings of a third party are also attributed if the acquirer and the third party have concluded an agreement on the joint exercise of voting rights (acting in concert).
Moreover, these attribution rules apply through the chain in the case of indirect acquisition. As a consequence, if, for example, a German company acquires a 10 per cent shareholding in a critical infrastructure business, such German company is majority held (or least 10 per cent thereof are held) by an EU company and such EU HoldCo in turn is held with a shareholding quota of at least 10 per cent by a non-EU investor, the investment will be subject to review.
As a consequence of these far-reaching attribution rules, which are not linked, in particular, to corporate control thresholds or the relevant control definition under antitrust law, transaction structures will have to be closely scrutinised. As it may be sufficient for one entity within the chain that is not located in the EU or EFTA to acquire, in the context of the transaction, a shareholding of at least 10 per cent or 25 per cent (indirectly) in a German entity, the full transaction structure must be assessed on a case-by-case basis to determine whether notification obligations (in case of critical infrastructures) or review rights (in case of acquisitions not concerning critical infrastructures) apply.vii Intra-group restructurings
It is debatable whether the attribution of voting rights (and the resulting need to subject an acquisition to foreign investment review) is warranted in case of merely restructuring an existing investment within a corporate group. For example, if a German entity that was indirectly held by a US HoldCo is moved within the corporate structure and thereby becomes the subsidiary of a Chinese interim HoldCo that itself is held by the preexisting ultimate parent US HoldCo, such transaction will, applying the wording of the AWV, be subject to review, although there is no change of control on the level of the ultimate parent. As the competent authority in our experience is not taking a clear position in these cases, the parties should consider an application for a certificate of non-objection at least in cases where it is questionable whether the subsidiary concerned may operate in a critical infrastructure or public order or security may otherwise be affected.viii Notification obligation and application for certificate of non-objection
Where the acquisition of a business active in critical infrastructures (as described in Section II.v) is concerned, the law requires a mandatory notification of the BMWi by the acquirer. The notification obligation is triggered by the conclusion of the contract obliging the parties to transact (regularly: the sale contract), not just at the time of transfer in rem or closing. The law only stipulates that the notification is to be made in writing, but does not contain further formal or substantive requirements for the notification as such. Regularly, it will be sufficient to describe the transaction and parties (in particular the investor and the applicable control structure through the corporate chain) and to provide a high-level description of the target's and the investor's business (explaining, in particular, why and to what extent the transaction relates to critical infrastructures). Upon such notification, the BMWi will decide upon the commencement of a formal review procedure (see Section II.vi).
Outside the acquisition of critical infrastructures, there is no obligation to notify. However, to avoid uncertainty with regard to a potential ex officio review, an investor may apply for a certificate of non-objection.
A certificate of non-objection confirms that the acquisition does not raise any concerns related to public order or security. To apply, the investor should submit basic information on the planned acquisition, the domestic enterprise that is the subject of the acquisition and the respective fields of business of the investor and the enterprise to be acquired to the BMWi. The BMWi will then decide within a time period of two months whether it will enter into a formal review process, failing which the certificate shall be deemed to have been issued (see Section II.vi).
While it is not mandatory to apply for a certificate of non-objection, in practice, it will in many cases be recommendable to do so. As will be explained below, an ex officio review by the BMWi will only be triggered by the BMWi obtaining positive knowledge of a transaction, with a statutory longstop date of only five years from conclusion of the sale contract. Absent an application for a certificate of non-objection, the investor will not be in a position to demonstrate that the BMWi obtained such positive knowledge, so that there will be a prolonged period of uncertainty and a possibility that the BMWi will retroactively seek to unwind the transaction. Therefore, if there is the possibility that the transaction may raise concerns with respect to public order or security, it will be recommendable to apply for a certificate of non-objection. Experience shows that such applications are handled in a pragmatic and time efficient way in most cases where concerns regarding public order or security can easily be ruled out and instances where the BMWi proceeds to a more comprehensive review (e.g., by requesting additional documents) are relatively rare.