On 12 July 2017, Germany significantly broadened the scope of its foreign investment regime to cover further industry “infrastructure” sectors. The amendments were prompted by a surge of foreign direct investments in German companies in 2016 but also, just like in many other liberal western jurisdictions, in view of German security interests, by the growing importance of key infrastructures and the continuing development of technologies in the military sector in the past years.
Foreign investors need to be mindful that these changes will likely prompt a surge of notifications. Procedural changes will also likely impact deal timing considerably. Further amendments will effectively require foreign investors for sectors where to date notifications where voluntary to notify the German to avoid a five year review horizon. Moreover, overall review periods have been significantly extended.
Unlike the review of transactions under German merger control rules, Germany’s foreign investment review process has frequently been seen by many as being not very transparent and with overly long (de facto) and unpredictable review periods, as the Federal Ministry for Economic Affairs and Energy (the “Ministry”) apparently tried to adjust to underlying uncertainty to German security interests caused by transactions performed by different investment groups in infrastructure and technology sectors deemed relevant by the Ministry. Thus, the changes now attempt to implement more transparency by expanding the scope of such German foreign investment review as conducted by the Ministry to a range of further infrastructure industries (as well as related sectors). Procedural changes will also mean that investors will want to approach the Ministry (as otherwise they would be exposing their deal to a five-year review horizon). Further, the review periods have been extended from previously one month to three months with respect to the industry-sector specific review and from two months to now four months with respect to the industry-sector unspecific review (as explained below). While this could mean a more reliable review period, in practice however, foreign investors in German targets need to be mindful of these changes, as they can impact deal timing and certainty.
The existing German foreign investment rules
Since 2009, the German foreign investment regime provides for a procedure enabling the German government to block or restrict direct or indirect investments by foreign investors of 25 percent or more of the voting rights in German target companies to the extent that such investments could endanger the public order or safety or essential security interests of the Federal Republic of Germany.
Technically, the German foreign investment regime distinguished between (1) an industry-sector specific review in the fields of defense or encryption technology, which need to be notified to the Ministry (non-compliance would however not trigger administrative fines, unlike, e.g., under German merger control rules), and (2) an industry-sector unspecific review outside such sensitive sectors, where notification to the Ministry by the investor is voluntary.1
While the regime had been quite dormant after its initial introduction in 2009 (and a subsequent revision in 2013), recent “shopping sprees” by foreign (notably Chinese) investors have led to a rethink by the German government. While the existing regime proved to be a questionable tool to address concerns about the identity of the investor, recent investigations – most notably the Aixtron case, where a clearance decision was subsequently withdrawn – show Germany’s effort to counter such buyouts considered a threat to German security interest.
Further sectors subject to voluntary (general) foreign investment review
The changes will expand the scope of business covered by the voluntary (general) review. They will include:
- businesses contributing to a critical infrastructure, including businesses in the sectors of energy, information technology and telecommunications, traffic and transport, health, water, nutrition, finance and insurance;
- businesses developing or refining sector-specific software that is used in connection with the operation of critical infrastructure in the abovementioned sectors;
- businesses assigned with surveillance measures in the meaning of the German Telecommunications Act (Telekommunikationsgesetz – TKG);
- businesses rendering cloud computing services, if the infrastructure used for such services exceeds certain thresholds; and
- key businesses for the telematics infrastructure.
For background, in a general, i.e., industry-sector unspecific, review proceeding, if no notification was submitted, the Ministry could decide to open a formal review process within an initial period of three months upon execution of the underlying share purchase agreement or the publication of a tender offer. The investor was then requested to submit a detailed set of documents and information. Only upon complete provision of such documents and information, a two-month review period commenced – during which the government could decide whether to restrict or prohibit the investigated transaction.
Notification to Ministry now required to launch three-month waiting period
In theory, a foreign investor could attempt to “fly under the radar” by concluding an agreement, but without publicizing it or initiating a review by the Ministry. To counteract such potential circumvention, the changes will now make the commencement of the three-month period conditional upon the Ministry obtaining knowledge of the share purchase agreement’s or tender offer’s conclusion. If the Ministry has not obtained such knowledge, the period for deciding on the opening of such procedures may be extended to up to five years since such conclusion. Further, the two-month review period is extended to a four-month period. The fact that the launch of the review period is linked to the Ministry having knowledge will likely result in a significant increase in notifications to the Ministry. Unlike, e.g., under the UK merger regime, it will not be sufficient for merging parties to adequately publicize the transaction in the relevant press and/or on their website. Indeed, the new rules specify that a written notification to the Ministry about the conclusion of the share purchase agreement or tender offer regarding the investment in such businesses must be submitted.
Further sectors subject to mandatory (sector-specific) foreign investment review
To date, only transactions relating to targets that are active in rather specific military industry sectors (including (i) war weapons (e.g. missiles, military planes and helicopters, warships, armoured vehicles), (ii) specially designed engines or gears to drive battle tanks or other armoured military tracked vehicles and (iii) products with IT security functions to process classified state information and their essential components) are subject to a mandatory (sector-specific) review.
The new rules will expand such review to a very broad range of military products and components, such as: 2
- military equipment,
- weapon sighting units,
- data fusion equipment,
- sensor integration equipment,
- electronic military equipment,
- global navigation satellite systems jamming equipment,
- space vehicles (also) designed for military use,
- military training equipment and
- goods designed for the production of bombs, torpedos, rockets, missiles and other explosive devices.
For background, for transactions in sensitive sectors, the Ministry could thus far decide to open a formal (industry-specific) review process within an initial period of one month upon receipt of a notification of the investment by the direct purchaser. The investor was then requested to submit a detailed set of documents and information. Only upon complete provision of such documents and information, a formal one-month review period commenced - during which the government could decide whether to restrict or prohibit the respective transaction.
In practice, the Ministry has often de facto circumvented the formal one-month review period by (i) on the one hand, linking its launch to the provision of a “complete” notification and (ii) on the other hand, continuously requesting further documents during an ongoing investigation, thereby ever preventing completeness of the notification. While such practice was questionable and resulted in a de facto prolongation of the review process, new rules will now result in a formal extension of the review periods: i.e., the initial period, to decide on the opening of proceedings, and the formal period, to decide on the prohibition or restriction of the investment, have both been extended to three-month periods respectively. While this seems a significant extension of the review periods from previously two to now six months for reason of the aforementioned circumvention approach by the Ministry, one would hope that in practice the actual review periods will not increase significantly. It remains to be seen though if the Ministry now ceases the aforementioned circumvention approach. Given that the new rules now also provide that the three-month period to decide on prohibition or restriction of the investment shall be suspended during the negotiation of commitments to address concerns, investors would rightly expect that the Ministry can provide greater clarity and certainty with respect to its review periods.
In the future, the acquisition of a "critical infrastructure" operator or of a software company that is working towards such an operator will specifically be subject to foreign investment review by the Ministry. While the German government estimates that the Ministry will receive about (only) ten additional notifications per year in this respect3 , it seems rather likely that this estimate will be surpassed significantly. Due to the now compulsory notification of such acquisitions, foreign investors will need to check carefully if their targeted acquisition object falls within the extended scope of the AWV and is subject to the notification obligation. In this respect, the specification of various critical infrastructure businesses in the AWV wording is likely to facilitate the law’s applicability test with respect to the intended investment. It is likely, however, that most foreign investors will file notifications with the Ministry in order to avoid an up to five-year uncertainty with respect to the planned investment. Investors should be aware that such notifications can be rather cumbersome, given that the Ministry generally requires a submission of the underlying share purchase agreement and, if such agreement has not been drafted in the German language, the translation of the agreement into the German language.
The scope of application of the sector-specific foreign investment review has been considerably increased by the expansion of the list of military products and components. On the one hand, this does not alter the fact that still only investments in businesses which are active in military- and security-related industrial sectors are potential objects of interest for the Ministry. On the other hand, the expanded scope increases the number of “borderline” cases in which it needs to be examined precisely whether a produced good of a potential target company is actually a critical product in the meaning of the AWV. Therefore, investors should be particularly aware of potential military and security-relevant aspects of a target company’s activities.
In any case, the changes of the AWV show that the German government is further tightening its course on the critical examination of foreign investments deemed relevant to certain critical sectors. Foreign investors should therefore assess as early as possible the potential applicability of the AWV in order to avoid delays in the M&A transaction procedure in the best possible way.