As expected, Germany’s extended foreign direct investment control regime (FDI regime) took effect with the 17th Amendment of the Foreign Trade and Payments Act on 1 May 2021. Already the latest amendments (16th Amendment of the Foreign Trade and Payments Ordinance [AWV] and the first Amendment of the Foreign Trade and Payments Act [AWG], please refer here) had completely changed the system of investment control by prohibiting and criminalizing certain closing acts (including the transfer of critical information) without previous clearing by the Federal Ministry of Economic Affairs and Energy (BMWi).

The Amendment now in force widely broadens the scope of industries covered by the notification requirements both for non-EU/non-EFTA investments in critical industries and infrastructures (so-called non-sectorial review) and for non-German investments in the armament and security sector (so called sectorial review).

Another important aspect are the newly defined thresholds for additional investments. While so far any increase of shareholdings above the notification thresholds required another notification, the amendment now clarifies that additional notifications are only required in case of crossing additional thresholds now defined by law.

Also, the amendment clarifies that intragroup restructurings do not require notification under certain conditions.

‘Non-sectorial’ FDI Control Regime

Broadened scope

In the range of the ‘non-sectorial’ review, the scope of concerned industries has been broadly extended. So far, the (direct or indirect) acquisition of 10% or more of the voting rights especially in operators of critical infrastructure (and developers/manufacturers of software for such operators) as well as life sciences industries (and some other businesses) by non-EU/non-EFTA investors required notification immediately after signing and clearing by the BMWi before transferring voting rights, dividends and critical information to the purchaser.

From now on, the relevant threshold value for the critical industries is set to be 20% instead of 10% of the voting rights. However the 10% threshold stays in place with regard to critical infrastructures.

The scope of as critical defined industries has been significantly expanded and among others now encompasses:

  • Operators of a high-quality remote sensing systems under the Satellite Data Security Act;
  • air carriers with an operating license;
  • employers of employees working at security-sensitive posts in vital facilities;
  • raw materials extractors, processors and refiners;
  • entities of fundamental importance for food safety and directly or indirectly covering or culturing an agricultural area of more than 10,000 hectares;
  • developers or manufacturers of
    • goods which, by means of artificial intelligence procedures are capable of independently optimizing their algorithms usable for cyber-attacks, identity fraud, surveillance & repression;
    • autonomous motor vehicles or unmanned aerial vehicles and components;
    • robots specially designed for handling explosive agents, specially designed or rated as radiation-hardened to withstand, without loss of function, a radiation dose exceeding 5 x 103 Gy (silicon), specially designed to operate at altitudes exceeding 30 000 metres, or specially designed to operate in water depths of 200 meters or greater;
    • semiconductors;
    • IT products and components for the protection of IT systems, defence against cyber-attacks or IT technology for the investigation of criminal offences and the preservation of evidence by law enforcement authorities;
    • certain dual-use goods in the aviation and space industry area;
    • dual-use nuclear technology; o quantum technologies;
    • industrial 3D printers;
    • goods specifically designed for the operation of wireless or wireline data networks;
    • smart-meter gateways and security modules for these goods;
    • goods which are protected as secret patents by law.

Thresholds for additional investments

According to BMWi’s former interpretation, any investment above the thresholds required a new notification and therefore was subject to review and clearing by the BMWi. The new rules now clearly state investment threshold values which require additional notification and thus are subject to clearing by the BMWi (and to criminal prosecution in case certain closing acts occur without such previous clearing).

For critical infrastructures, the investment thresholds requiring notification are 10%, 20%, 25%, 40%, 50% and 75%. For critical industries, the threshold values are 20%, 25%, 40%, 50% and 75%. Within the scope of applicability of the general clause, ex-officio investigations by the BMWi can be triggered (and applications for certificates of non-objection are thus recommendable) in case of crossing the 25%, 40%, 50% and 75% thresholds.

Even if some of these thresholds may be disputable, they give investors more security.

Intragroup privilege

The BMWi from now on cannot review transactions concerning German entities if the shares in purchaser(s) and vendor(s) are owned by the identical shareholding company and if all contractual parties have their executive function in the same jurisdiction.

Calculation of shareholdings

One important amendment concerns the calculation of shareholdings. In the future, the BMWi may consider separate entities as one entity when it comes to the calculation of shareholdings. The prerequisite is that a foreign state or foreign state organisations of the same country have in any way control over these different entities.

Also, the amended regulation explicitly equates voting agreements and situations in which shareholders receive voting privileges in any controlling board or the executive board (in excess of their actual shareholding) with actual voting rights.

Administrative clarifications

The amended regulation also clarifies certain procedural questions such as no applications for certificates of non-objection in case of notification requirements.

“Sectorial” FDI Control Regime

In the range of the ‘sectorial’ review, the scope of concerned industries has been broadly extended, too: So far, only the (direct or indirect) acquisition of 10 % or more of the voting rights in manufacturers/developers of war weapons, tank engines and gearboxes, certain other military goods as well as security products for the processing of classified information by non-German investors required notification immediately after signing and clearing by the BMWi before transferring voting rights and dividends to the purchaser.

The scope now applies to

  • manufacturers and developers of all armament goods that require export licences under Germany’s export control list;
  • manufacturers, modifiers and developers of goods in the field of defence technology to which the scope of protection of a secret patent applies;
  • entities which are defence-important facilities as defined by law.

The extension of the scope of application is accompanied by a harmonisation of certain procedural rules. Thus the thresholds for additional investments between the non-sectoral and sectoral areas were harmonized.

Clarification on Measures by BMWi

So far the BMWi could – after the AWV - in event of a potential impairment of public order or safety prohibit acquisitions or impose conditions on the purchaser (and the target), which had to be complied with. However it was unclear by what measures the BMWi could execute its prohibition, especially when closing had occurred already. The new amendment clarifies that the BMWi may prohibit or restrict the exercise of voting rights in the acquired enterprise which belong to or are attributable to a non-EU/non-EFTA investor. In a worst case scenario the BMWi can even appoint, at the expense of the purchaser, a trustee to reverse an already completed acquisition.

With regard to other measures, the BMWi may order the transaction parties to submit at specified intervals written reports on compliance. This report needs to be prepared by an independent competent person. The BMWi can also impose obligations on the parties or conclude a public law contract with the purchaser.

Next steps

It is strongly recommendable for any future non-EU/non-EFTA investor in Germany to be aware of the German FDI regime and therefore check the applicability of the broadened review scope as early in the transaction process as possible. Such an approach is also recommendable with regard to asset deals on acquisition of businesses. The same applies to sellers interested in non-EU/non-EFTA investors.

Investors should also take the new rules into account for their investment strategies in Germany. Generally, there could be a risk of a ‘chilling effect’ on non-EU foreign investments in Germany.