On December 19, 2018, the German government decided to further tighten the rules of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV). The amendment broadens the scope of foreign investment control by the German Ministry for Economic Affairs and Energy by lowering the threshold for reviews from 25 percent to 10 percent of the voting rights for direct or indirect acquisitions of German companies. The amendment applies to sector-specific reviews (e.g., military products acquisitions and security-sensitive IT products) by foreign investors as well as cross-sector reviews (e.g., critical infrastructure) by investors from outside the EU (or EFTA). As regards companies in other areas whose business activities do not affect sensitive industries or critical infrastructure, the 25 percent threshold will remain. Furthermore, the scope of application of the AWV was extended by incorporating media companies as critical infrastructure. The amendment of the AWV entered into force on December 29, 2018.
I. Legal framework for foreign investment control
The AWV and the Foreign Trade and Payment Act (Außenwirtschaftsgesetz – AWG) provide the legal basis for foreign investment control in Germany.
The AWV differentiates between cross-sector reviews pursuant to sections 55-59 of the AWV and sector-specific reviews pursuant to sections 60-62 of the AWV.
1. Amendment of rules governing sector-specific reviews
Prior to the entry into force of the amendment, the German Ministry for Economic Affairs and Energy could commence a sector-specific review where:
- a non-German purchaser (including from another EU Member State) acquired at least 25 percent of the shares and voting rights in a domestic company; and
- the target company develops or produces:
- goods that are listed in a detailed annex to the Military Weapons Control Act (Kriegswaffenkontrollgesetz – KWG);
- products with IT security features that are used to process government-classified information; or
- certain products that fall within the scope of specific foreign trade regulations.
With the entry into force of the twelfth amendment of the AWV, the acquisition is subject to review by the German Ministry for Economic Affairs and Energy once the foreign investor acquires a share of 10 percent or more of the voting rights in a domestic company.
2. Amendment of rules governing cross-sector reviews
Before the twelfth amendment of the AWV came into effect, acquisitions of more than 25 percent of the shares and voting rights in a domestic company active in a security-critical industry by a purchaser from outside the EU (or EFTA) could be subject to a review.
This applied to the following types of companies:
|• operators of critical infrastructure;
• developers of software for the operation of critical infrastructure;
• companies active in the telecommunications and surveillance technology sectors;
|• providers of certain cloud computing services; and
• companies active in the area of telematics.
The twelfth amendment of the AWV now authorises the German Ministry for Economic Affairs and Energy to review acquisitions by any purchaser from outside the EU (or EFTA) of 10 percent of the voting rights in a domestic company of the type mentioned above.
The threshold of 25 percent is still applicable to acquisitions of companies in the public sector that do not fall under section 55 paragraph 1 sentence 2 of the AWV but whose activities relate to public safety or order.
II. Extension of the definition of critical infrastructure
In addition, the definition of critical infrastructure was extended pursuant to the twelfth amendment of the AWV to include media companies that are in a position to influence public opinion through broadcasting, other media services or print products that provide news and services of a topical nature and have a broad social impact.
The threshold of 10 percent therefore also applies to acquisitions of German media companies. According to the explanatory memorandum accompanying the AWV, the media industry was characterized as a critical infrastructure in order to guarantee the independence of media companies. The German government wants to prevent German media being used by foreign investors for disinformation purposes.
Prior to the entry into force of the twelfth amendment, critical infrastructure encompassed traffic and transport, insurance and financial services, energy, food, water, health care and information technology.
III. Background to the twelfth amendment of the AWV
A catalyst for accelerating the implementation of the twelfth amendment was the bid by Chinese investor State Grid Corporation of China to acquire 20 percent of the shares of the German transmission system operator 50Hertz in July 2018.
Due to the 25 percent threshold, German investment control regulations were not applicable. The German Ministry for Economic Affairs and Energy was therefore unable to intervene. In the end, state-owned bank Kreditanstalt für Wiederaufbau (KfW) acted for the German government by stepping in and acquiring 20 percent of the shares.
Initially, the Minister for Economic Affairs and Energy, Peter Altmaier, suggested lowering the threshold for reviews from 25 percent to 15 percent. Ultimately, however, the OECD benchmark definition of foreign direct investments was chosen as the new threshold under the AWV. In accordance with the OECD definition, a “lasting interest” is evidenced when a direct investor owns at least 10 percent of the voting rights of the direct investment enterprise (OECD Benchmark Definition of Foreign Direct Investment, fourth edition, 2008, p. 17).