The Federal Ministry for Economic Affairs and Energy further tightened foreign direct investment control, but the investment climate remains liberal
In order to fall under the scrutiny of the BMWi pursuant to the sector-specific review, investments must reach or exceed a threshold of 10 percent of the target’s equity or voting rights.
Pursuant to the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz; AWG) and the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung; AWV), the German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie; BMWi) is entitled to review any inbound transaction by foreign investors based outside the European Union (EU) or the European Free Trade Association (EFTA). The BMWi may prohibit or restrict a transaction if it poses a threat to the public order or security (öffentliche Ordnung oder Sicherheit) of the Federal Republic of Germany.
Ever since around 2016, foreign investment control has toughened. Several transactions involving, in broad terms, critical infrastructure, telecommunication networks or the like have been cleared only after lengthy investigations and are subject to strict compliance remedies. Since summer 2018, the German government has further tightened its regime for foreign direct investment reviews. In July 2018, the German Federal Government had decided to prevent the acquisition of a 20 percent stake in the power grid operator 50Hertz by a Chinese investor by arranging for an investment by the state-owned Kreditanstalt für Wiederaufbau (KfW). In August 2018, the BMWi—for the first time—had threatened to veto a Chinese inbound transaction after the new investment control rules had come into force in July 2017, which brought about significant changes to the landscape of German investment control reviews.
After broad political discussions especially regarding the relevant threshold for foreign investment reviews, finally in December 2018 the German Federal Government adopted a new amendment to the AWV aimed at further tightening investment control.
At the end of November 2019, the BMWi announced that it intends to adapt the AWV to the new European Foreign Direct Investment Regulation until October 2020.
SCOPE OF REVIEW AND TYPES OF DEALS REVIEWED
The AWV distinguishes between a cross-sectoral review for all industries and a sector-specific review that applies only with respect to certain highly sensitive industries. The scope of the latter includes arms and military equipment, and encryption technologies as well as other key defense technologies such as reconnaissance, sensor and protection technologies. The BMWi is entitled to review all types of acquisitions, i.e., share deals as well as assets deals. The sectors-pecific review applies to all foreign investors, whereas the crosssectoral review applies only to non-EU/EFTA investors.
An intervention by the BMWi under both review processes requires the investment to pose a threat to public order or security. With respect to the cross-sectoral review, the AWV provides a nonbinding and non-exhaustive list of assets and technologies in respect of which public order and security is likely to be affected:
- Operators of critical infrastructure that is of particular importance for the functioning of the community
- Companies developing or changing industry-specific software for the operation of critical infrastructure
- Companies entrusted with organizational monitoring measures for telecommunication facilities
- Companies providing cloud computing services above a certain volume
- Companies engaged in the area of telematics infrastructure and (additionally since December 2018)
- Media companies that contribute to the formation of public opinion by means of broadcasting, telemedia or print products
In order to fall under the scrutiny of the BMWi pursuant to the sector-specific review, investments must reach or exceed a threshold of 10 percent of the target’s equity or voting rights. The cross-sectoral review applies to investments reaching or exceeding a 25 percent threshold unless the target operates any critical infrastructure as listed above, in which case the threshold also amounts to 10 percent.
The calculation of voting rights will take into account certain undertakings that may be attributed to the ultimate owner, such as an agreement on the joint exercise of voting rights. In order to prevent circumvention transactions, the AWV amendment of December 2018 provides more details on how to calculate and attribute acquired voting rights. Asset deals require a comparable test for the respective asset values, whereby 25/10 percent of the total assets of the acquired business are deemed relevant.
PROCESS CONSIDERATIONS AND TIMELINE
The completion of the investment review process is by law not required for the consummation of a transaction (albeit that for transactions triggering a sectorspecific review, the SPA/APA is deemed temporarily invalid until clearance). Since 2017, the obligation to notify the BMWi of a transaction is not limited to a sector-specific review but extends to the crosssectoral review where the target operates any kind of critical infrastructure (as listed above). Even if the transaction does not trigger a notification obligation, foreign investors often decide to initiate the review process by submitting an application to the BMWi for a non-objection certificate (Unbedenklichkeitsbescheinigung) in order to obtain legal certainty.
As a response to international transactions becoming increasingly complex and sensitive, the review periods were extended significantly as part of the 2017 reform. This leaves the BMWi with considerably more time to perform its review process (including by using broad discretion regarding at what point in time filings are complete so that the statutory deadlines are triggered), which has a significant impact on the transaction timetables.
The sector-specific reviews will be completed within a review period of three months. The review process for cross-sectoral reviews is typically initiated by the parties applying for a nonobjection certificate. After complete submission of the application, the BMWi has two months to decide whether to issue such certificate or open the formal review procedure. Upon expiration of this period, the non-objection certificate is deemed to have been issued if no review procedure has been opened.
The period available to conduct the formal review measures is four months starting upon receipt of all necessary documentation; it is suspended for as long as negotiations on mitigation measures are conducted between the BMWi and the parties involved.
In order to safeguard public order or security, the BMWi may prohibit the transaction or issue “instructions” (taking the form of mitigation measures). Except for acquisitions included in the sectorspecific review procedure, such measures require the approval by the German Federal Government.
RECENT DEALS REVIEWED BY THE BMWI
Since 2016, the number of deals reviewed by BMWi has continuously increased. From January 2016 to December 2018, 185 transactions have been subject to BMWi investment reviews, of which 75 acquisitions were attributed directly or indirectly to a Chinese acquirer. In 2018, 78 transactions were reviewed by the BMWi; the number almost doubled vis-à-vis 2016 with only 41 reviews.
The first transaction reviewed by the BMWi following the 2017 reform was the acquisition of the German aerospace composite fiber components manufacturer Cotesa by a Chinese consortium.
In August 2018, a Chinese investor dropped its attempt to acquire German toolmaker Leifeld ahead of an expected veto by the German Federal Government, which had indicated its intention to block the transaction but had not yet issued its veto. This decision would have been the first prohibition of a transaction under the AWG/AWV regime.
In July 2018, the German state bank KfW acquired a 20 percent stake in high-voltage grid operator 50Hertz, denying China’s State Grid the acquisition after the transaction had been announced. The government officially confirmed that the acquisition by KfW was aimed at protecting critical infrastructure for energy supply in Germany. The necessity for the intervention of the KfW (according to public sources) arose as the transaction did not fall within the scope of the BMWi’s review competences at that time, given that the stake was below the 25 percent entry threshold, which had been lowered to 10 percent for this kind of transaction afterwards.
TRENDS IN THE REVIEW PROCESS
The current market climate is characterized by the BMWi’s substantially increased awareness and persistent efforts toward enhanced scrutiny. Having said that, the overall number of approved transactions clearly shows that the investment climate in Germany remains liberal for the overall majority of transactions. After BMWi’s two vetoes in 2018, no further interventions by the BMWi have become public, but several transactions have only been cleared subject to “remedies.”
HOW FOREIGN INVESTORS CAN PROTECT THEMSELVES
Parties to M&A transactions — whether public or private — should carefully consider the risk of foreign investment control procedures as typically being part of the due diligence process. If AWG/AWV rules apply, it may be appropriate that the parties initiate discussions with the BMWi even before the signing of an SPA, or, in case of a public deal, the announcement of the transaction. Depending on the timing and the type of offer, the purchase agreement or the public takeover offer and a related business combination agreement will contain corresponding condition precedents and covenants.
In sensitive sector transactions, foreign investments meeting the above-mentioned thresholds must be notified to the BMWi and should not be closed before the acquisition is approved or deemed to be approved by the BMWi. While any BMWi decision may be challenged before a German court, this is often not a practical option for the parties, and the government enjoys broad discretion as to what constitutes a threat to public security or order.
- Although the German Federal Government further tightened investment control rules again in 2018, the overall number of deals approved shows the continuous openness of Germany toward foreign direct investments
- The threshold for a prohibition of a transaction by the BMWi remains high in the current legislative environment, requiring an actual and sufficiently serious danger to public order or security, but “compliance remedies” have become more common
- The BMWi intends further to observe the sale of companies active in sensitive industries to foreign investors, and does not exclude using state-owned entities or private investors as “white knights” if a transaction does not fall within the scope of German AWV. In particular, the BMWi does not exclude further acquisitions of KfW— as already happened in 2018 in the “50Hertz-case”—if there is no other instrument available to protect sensitive or security-relevant technologies