On 1 April 2019 the EU regulation establishing a framework for the screening of foreign direct investments into the European Union entered into force (1.) It will become fully applicable at the start of October 2020. The framework will supplement the national German FDI regime. Earlier this year, the German regime on foreign investment screenings by the Federal Ministry of Economics (BMWi) was tightened again (2.).

1. April 2019: New FDI Regulation at EU level

The efforts to implement an EU-wide regime for FDI screenings became concrete at the European level. On 1 April 2019, the Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union entered into force and will be fully applicable as of 11 October 2020. The Regulation aims to:

  • provide a framework for the Member States to review foreign investments on the grounds of security or public order;
  • thereby take into account whether a foreign investor is controlled directly or indirectly, for example through significant funding, including subsidies, by the government of a third country or is pursuing State-led outward projects or programmes. This is particularly targeted to Chinese outbound investments (“Made in China 2025”-strategy)
  • facilitate close and systematic cooperation among Member States and between Member States and the EU Commission, including strengthened exchange of information;
  • prevent circumvention of national screening mechanisms.

With its explicit focus on critical infrastructure, the EU Commission endorses the approach taken by the German government. However, the Regulation is a mere framework and need not be implemented by Member States. The sole competence for national security remains with the Member States. There will be no EU-wide procedure but only cooperation and information between the Commission and the Member States. The cooperation and information mechanism may result in longer review procedures. So far, 14 Member States of the EU have national investment screening regimes in place. In Germany, the new EU rules will supplement the already tightened regime.

2. Stricter German investment screening regime

The investment screening review pursuant to section 55 AWV et seqq. serves to avoid fundamental dangers to national security interests from foreign company takeovers. It can be applied whenever foreigners acquire domestic companies or interests in such companies. This depends, on the one hand, on the area of activity of the company and, on the other hand, on the percentage of shares acquired. If so-called critical infrastructures are affected or in the case of target companies from sectors relevant to defence or security, there is an obligation to notify BMWi. The ministry may prohibit or, subject to conditions, approve transactions if there is a danger to public security or order (in the area of the so-called cross-sectoral audit) or if essential security interests of Germany are endangered (in the area of the so-called sector-specific audit).

With the recent changes, an extension of the catalogue of examples in section 55 para. 1 sentence 2 AWV was introduced. It now includes companies in the media industry that contribute to public opinion formation by means of broadcasting, tele or print media and are distinguished by their topicality and broad impact. Accordingly, the notification obligation now also concerns the acquisition of such companies.

Also, the threshold for the acquisition of shareholdings in security-relevant companies (critical infrastructures) as part of the cross-sector audit was reduced from 25 percent or more to 10 percent or more. In all other respects, the threshold for cross-sector audits remains at 25 percent. For the sector-specific review, the threshold was also lowered to an acquisition of 10 percent or more.

3. Consequences for M&A

In particular, when divesting companies in security or defense-related sectors, careful preparation of the transaction, taking into account the new legal requirements, is essential. With a view to the decreased review thresholds, special attention must be paid to the pertinent material facts, both within the cross-sector and sector-specific screening regime. Constellations that affect the calculation of the percentage of purchased shares must be examined at an early stage with regard to the risk of prohibition and the reporting obligation. With this new EU cooperation and information mechanism, the parties should be prepared for longer lasting review procedures.