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Law and policy
Policies and practices
What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?
The German approach to foreign investment control has been liberal to date. Germany is among the states attempting to defend and even to extend the free trade of goods and capital. Currency or exchange restrictions are neither imposed on EU residents nor on non-EU residents. However, the increasing number of investments from non-EU states, in particular recent acquisitions in sensitive and high-technology industries by Chinese investors have led to a slight rethinking of the liberal approach to foreign investment control. This development has resulted in an amendment of the applicable law in 2017. Under the current law, the Federal Ministry for Economic Affairs and Energy (BMWi) must be notified of any planned non-EU investment in critical infrastructure and any non-German investment in security-related technologies whereby the investor directly or indirectly acquires 25 per cent or more of the company’s voting rights. If the following review procedure reveals that the investment constitutes a threat to the German ‘public order or security’ or ‘essential security interests’, the BMWi may prohibit the investment or issue approval conditions. The German government has justified this approach by referring to article XIV GATS, which allows for the adoption of measures to maintain the public order.
At the same time, the German government - together with France and Italy - requested that the European Commission draft an EU legal framework for foreign investment control. In a letter, the three governments expressed their concerns on the lack of reciprocity regarding the possibility of European firms investing in third states, claiming to be currently unable to combat unwanted foreign investments ‘with effective instruments’.
In conclusion, we have noticed a tendency towards a stricter approach to foreign investment control. We expect the government to examine the cases more in-depth than it has done in the past. Also, the current Minister for Economic Affairs has proposed to lower the thresholds for launching a review procedure to an acquisition of more than 15 per cent of the target’s voting rights. A first example of the recent, more interventionist strategy is the prohibition of Chinese Yantai Taihai Corporation’s attempted acquisition of the German company Leifeld by in 2018 (see question 23).
What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?
The German Foreign Trade and Payments Act (AWG) and the German Foreign Trade and Payments Ordinance (AWV) provide the legal basis for the control of foreign investments in Germany. The latest amendment of the AWV dates from 13 December 2017.
The Administrative Procedure Act governs the investment review procedure. The Code of Administrative Court Procedure contains the remedies for administrative investment control measures.
Scope of application
Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?
The BMWi is entitled to review all acquisitions of German companies whereby investors acquire ownership of at least 25 per cent of the company’s voting rights. The review applies to asset deals as well as share deals, including both direct and indirect shares, and - in principle - irrespective of the relevant industry sector and of both nature and origin of the investor. The target must be ‘domestic,’ meaning:
- legal persons and partnerships based or headquartered in Germany;
- branches of foreign legal persons or partnerships headquartered in Germany; or
- permanent establishments of foreign legal persons or partnerships in Germany.
However, the relevant industry sector is decisive as to the level of scrutiny applied in the review.
Under the cross-sectoral review, the BMWi may examine whether the respective acquisition poses a threat to the ‘public order or security’ of the Federal Republic of Germany. Acquisitions may in particular constitute such threat if the target:
- operates critical infrastructure such as energy, water, information technology and telecommunications, infrastructure used for finance or insurance, healthcare, transport or food;
- develops and modifies software that is used for operating such critical infrastructure;
- has been authorised to carry out organisational measures in the telecommunications sector or produces the technical equipment used for implementing statutory measures to monitor telecommunications and has knowledge about this technology;
- provides cloud computing services if certain thresholds are reached; or
- holds a licence for providing telematics infrastructure components or services.
The sector-specific review sets out a stricter review procedure for the acquisition of companies that operate in sensitive security areas such as defence and cryptotechnology. This includes manufacturers and developers of war weapons, ammunition, military equipment such as tank motors and gears, and any technology used for processing classified government information.
How is a foreign investor or foreign investment defined in the applicable law?
The AWV applies the cross-sectoral review to any non-EU or non-EFTA based investor. In addition, investors located within EU and EFTA territories may be subject to foreign investment control where it seems necessary to prevent abuse or circumvention of the foreign investment control rules. This might be the case where an investor does not pursue any significant independent economic activity or does not maintain a permanent establishment within the European Union in the form of business premises, personnel or equipment. The BMWi tends to read the term ‘circumvention’ very broadly and thus substantially widens its review authority.
The sector-specific review applies to any non-German (ie, any non-German EU-based) investor. German investors may also be subject to foreign investment control where this seems necessary to prevent abuse or circumvention of the foreign investment control rules.
Special rules for SOEs and SWFs
Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?
The AWV does not contain specific provisions for SOEs or SWFs. However, the recent developments towards stricter foreign investment control (see question 1) were in part a reaction to the increased economic activity of foreign SWFs in Germany. Thus, a foreign investor’s affiliation with the public sector may play a role for the BMWi’s assessment of whether the public order or security of Germany is endangered.
Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?
The BMWi is the authority responsible for conducting the review of mergers or acquisitions on national interest grounds. Within the ministry, the department for foreign trade policy (no. 5) conducts the review.
The BMWi may only prohibit an acquisition with the approval of the German federal government. Conversely, the German federal government is not entitled to prohibit an acquisition if the BMWi has not issued a negative assessment.
Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?
The AWV affords BMWi discretion in regard to both the decision whether to intervene at all and potential measures (ranging from conditional approval to prohibition). Since 2017, the AWV lists possible threats to the German public order or security to support the BMWi in exercising its discretion. EU and German fundamental rights, including the principles of equality and proportionality limit the BMWi’s discretion. BMWi must take into account the interests of both the acquirer and the seller, and is obliged to state its reasons as well as the standard of review applied in each case. In practice, the BMWi has a very broad margin of discretion, which is hardly ever challenged in court.
What jurisdictional thresholds trigger a review or application of the law? Is filing mandatory?
The BMWi is entitled to review all acquisitions of German companies where the investors acquire ownership of at least 25 per cent of the voting rights. The type of review depends on the sector concerned (see question 3 for further details).
Notification of an acquisition to the BMWi is mandatory if:
- an investment is subject to the sector-specific review; or
- an investment is subject to cross-sector review and falls within the category of a threat to the German public order or security (laid out in section 55, paragraph, 1 sentence 2 AWV).
In contrast to merger control, other elements such as turnover or purchase price do not trigger a notification or filing obligation.
Investors who are not subject to a notification obligation are nevertheless advised to either notify the BMWi of the acquisition or to apply for a certificate of non-objection in cases where it is conceivable that the BMWi could see a threat to the public order or security:
Voluntary notification to the BMWi sets in motion a time limit of three months for the BMWi to initiate a cross-sectoral review procedure (section 55, paragraph 3, sentence 1 AWV). This creates legal certainty for the investor who might otherwise be subject to a review procedure for up to five years after the acquisition - provided that the BMWi learns of the transaction.
Investors who are not subject to a notification obligation may also apply for a certificate of non-objection according to section 58 AWV. Such certificate confirms that the BMWi does not object as regards Germany’s public order and security. The certificate is deemed issued if the BMWi does not open a cross-sectoral review procedure within two months of receipt of the application (section 58, paragraph 2, sentence 1 AWV).
National interest clearance
What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees?
The AWV provides for three ways to start a review procedure:
- the investor applies for a certificate of non-objection;
- the investor applies for clearance; or
- the BMWi initiates a review procedure.
For investments that are subject to the cross-sectoral review, the investor may apply for a certificate of non-objection. The certificate provides legal certainty that the transaction does not pose a threat to German public order or security (section 58 AWV, see question 8).
For investments that are subject to sector-specific review, the investor must apply for clearance (sections 60 and 61 AWV). The investor initiates the review procedure by notifying the BMWi of the planned acquisition (section 60, paragraph 3, sentence 1 AWV). The BMWi will issue clearance where the review procedure reveals no threat to essential security interests (section 61 AWV).
In addition to the foregoing, the BMWi may initiate the review procedure in regard to any investment it learns of and that raises concerns with regard to the AWV. In this case, the BMWi will officially inform the parties involved and require further statements and data (section 55, para 3 AWV).
The review procedure consists of two stages: a preliminary examination and an examination in detail, including an investigation. In most of the cases, the review procedure is concluded within the first phase. The BMWi will only enter into the second stage, a formal investigation, if the preliminary examination gives rise to concerns about the transaction’s compliance with investment control rules.
There are no standard application forms. Pursuant to a decree dating from 2 September 2013, the application should include the following information:
- the name and place of business of investor and target;
- an explanation of the business of investor and target;
- the shareholder structure of investor and target;
- the annual consolidated financial statements of investor and target of the past three years;
- business contacts with public sector customers of the past five years;
- the acquisition agreement; and
- information on the short, mid and long-term strategy post-completion.
This list is non-exhaustive, and the BMWi may request any further documents it deems necessary to reach a decision. The documents must be in German.
The application must be submitted to the BMWi. The BMWi does not charge any fees or expenses, the applicants must bear their own expenses.
Which party is responsible for securing approval?
Both investor and target are legally obliged to comply with the foreign investment rules. The notification obligations, however, depend on the type of review applicable: investments subject to cross-sectoral review may be notified to the BMWi either by the investor or by the target. For investments subject to the sector-specific review, it is the investor who must apply for clearance.
How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?
The timeline for the review process is highly dependent on the procedure applied.
Cross-sectoral review procedure
The BMWi may initiate the review procedure within three months of acquiring knowledge of the conclusion of the investment contract. A review procedure is legally precluded if more than five years have passed since the conclusion of the investment contract.
The BMWi may furthermore only prohibit an investment or impose conditions on the investment within the first four months since the investor provided complete information on the transaction. Ongoing negotiations between the BMWi and the investor suspend the limitation period. The law does not limit the duration of such negotiation periods.
In the event of an application for a certificate of non-objection, the certificate will be deemed issued if the BMWi did not formally initiate an examination procedure within two months after the application was filed.
Sector-specific review procedure
The BMWi may initiate the procedure within three months after the submission of the application. Clearance will be deemed granted if the BMWi does not react within the three-month period.
The authorities do not publish data regarding the duration of the procedure. Experience indicates that clearance for cross-sectoral investments takes two to three months. The preliminary assessment of sector-specific investments usually takes one to three months. The process may be lengthened considerably where the BMWi launches the second stage of the review procedure (in-depth examination).
Regardless of the legal time limits, the investor may try to accelerate the procedure by cooperating with the authorities and by providing the necessary information as early as possible.
Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?
In principle, nothing prevents the parties from closing the transaction before obtaining the approval of the BMWi. However, the validity of both transaction and underlying transaction contract may be affected by the BMWi’s decision.
Transactions without notification obligation
The lack of approval does not affect the legal validity of the actual transaction nor of the transaction contract. However, if the BMWi prohibits the investment, the prohibition renders both actual transaction and underlying transaction contract invalid. Consequently, the parties are advised to obtain clearance before concluding the transaction, or to conclude the contract under the condition that the BMWi approves the investment.
Transactions with notification obligation
In contrast to the above, contracts that include a notification obligation remain provisionally invalid until the approval of the BMWi has been obtained.
Involvement of authorities
Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?
The BMWi is open to discuss with the investor the possible hurdles and concerns involving the acquisition contemplated. Where the investor is able to provide comprehensive information on the planned acquisition, such discussions might facilitate the subsequent investigation and examination procedures. The transaction, however, needs to be rather advanced.
When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?
The AWV alone governs the two-stage foreign investment review procedure described in question 9. However, investors are free to rely on the assistance of public relations and political advisers before and throughout the review procedure.
What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?
In cases where voluntary notification applies and the investor has abstained from making that notification, the BMWi is authorised to initiate a review procedure within five years of the transaction. Such review might result in a retroactive conditional approval or prohibition of the foreign investment. In cases of voluntary notification in which the investor did notify the BMWi, any review procedure is precluded if the BMWi has not initiated a procedure within three months of the notification. In cases of mandatory notification, any review procedure is precluded if the BMWi has not initiated a review procedure within three months after the investor has produced complete information on the planned acquisition.
Therefore, investors are strongly advised to notify the BMWi of a planned investment in case of the slightest doubt. It is the fastest way to obtain legal certainty as to the admissibility of the planned investment and minimises the risk of the BMWi’s retroactive interference with the transaction.
Where the BMWi blocks an investment, it is authorised to prohibit the exercise of the voting rights of the target or to appoint a trustee assigned to rescind the investment. In addition, the authorities may take further measures in order to execute the prohibition.
What is the substantive test for clearance and on whom is the onus for showing the transaction does or does not satisfy the test?
The substantive test for clearance depends on the applicable type of review. The cross-sectoral review requires an examination as to whether the investment will endanger the German ‘public order or security’. Under the sector-specific review, the BMWi assesses whether the investment will endanger ‘essential security interests’ of Germany. Both terms are subject to interpretation. Since they stem from EU law, the case law of the Court of Justice of the European Union has served as primary source for interpretation.
Cross-sectoral review: threat to the ‘public order and security’. The ‘public order and security’ test balances the imperatives of maintaining an attractive investment climate and protecting targets of strategic importance to the member states. A threat to the public order and security may arise where the existence or functioning of the state, of governmental institutions or public services is endangered. The ‘public order and security’ test also encompasses the maintenance of foreign relations, national military interests and the survival of the population. Negative impacts on economic or financial interests or on the labour market do not constitute a threat to the public order and security. Thus, an investment may not be blocked to preserve jobs in Germany.
The 2017 AWV reform has introduced a - non-exhaustive - list of strategic industries and sectors (section 55, paragraph 1, sentence 2, see question 3). Foreign investments in the listed sectors indicate a threat to the public order and security. The list serves as a guideline for the BMWi’s assessment.
Sector-specific review: threat to ‘essential security interests’. The ‘essential security interests’ test aims at protecting the key industries and technologies related to military defence. For example, essential security interests would be endangered where the investment compromises the core capability of the German defence industry. In the sector of cryptotechnology, essential security interests might be threatened where the reliability of such technology used by the government is in doubt. The provision also intends to secure the existence of German firms supplying the government with cryptotechnology and other defence equipment. The assessment requires the consideration of future foreign, security and economic policy that might conflict with the foreign investment.
Although concerns have been raised that aspects such as net benefit or reciprocity should be considered in the substantive test, they have not yet been incorporated in the AWV.
In principle, the onus for showing the transaction does or does not satisfy the test is on the BMWi. The applicant, however, is obliged to actively participate in the review procedure, in particular by providing sufficient information on the planned transaction. Because of the authorities’ wide margin of discretion, in practice the onus lies more on the applicants’ side.
To what extent will the authorities consult or cooperate with officials in other countries during the substantive assessment?
In our experience, the BMWi does not usually consult or cooperate with officials in other countries during the substantive foreign investment assessment. Reviews regarding national security interests are by nature limited to the respective state. Given that such review procedures often concern companies in possession of sensitive technology and know-how, authorities are reluctant to share information cross-border. However, in light of the recent German, French and Italian efforts to create an EU legal framework for foreign investment control (see question 1), it is expected that the cooperation and exchange of information on investments between the European Commission and the member states will be enhanced significantly.
Other relevant parties
What other parties may become involved in the review process? What rights and standing do complainants have?
Although the AWV does not provide for the formal involvement of third parties in the investment control procedure, third parties may voice their concerns with respect to a particular transaction. It might be of strategic advantage for competitors to provide the BMWi with additional information on the investment. However, competitors have no legal right to be heard by the BMWi.
Where the BMWi is unable to decide an investment case based on the currently available information, it consults other federal ministries or agencies. The BMWi regularly relies on the expertise of the Federal Ministry of Foreign Affairs, the Federal Ministry of Defence, the Federal Ministry of Finance, the Federal Ministry of the Interior and the Federal Office for Export Control.
Prohibition and objections to transaction
What powers do the authorities have to prohibit or otherwise interfere with a transaction?
Where an investment subject to cross-sectoral review endangers Germany’s public order or security, the BMWi may either issue a prohibition or conditions for approval. The same applies to investments subject to sector-specific review where such investments endanger Germany’s essential security interests. In addition, any investment falling under the sector-specific review is subject to clearance by the BMWi. For the respective requirements and procedures see questions 3 and 9.
Is it possible to remedy or avoid the authorities’ objections to a transaction, for example, by giving undertakings or agreeing to other mitigation arrangements?
Investors have two options where the BMWi concludes that the investment might affect the public order or security or essential security interests.
First, the investor may negotiate approval conditions with the BMWi. The BMWi is authorised to either prohibit a transaction or attach its approval to certain conditions. In light of the principle of proportionality, the BMWi is obliged to apply the least restrictive measures possible while protecting the German public order and security interests. If possible, it will debate approval conditions with the investor before prohibiting a transaction. It may, for example, require that the merger excludes a certain, critical division or component of the target. To this end, the investor may submit a statement guaranteeing its compliance with the conditions to the BMWi.
Second, the investor and the BMWi may negotiate an agreement under public law that includes statements of commitment from both sides. Such an agreement allows for the parties to find a workable solution, such as approval conditions. However, the agreement has to respect the limits set by the AWV, in particular the substantive tests for clearance set out in sections 55 and 60 (see question 16).
Challenge and appeal
Can a negative decision be challenged or appealed?
The BMWi’s decision can be appealed before the Administrative Court of Berlin. The foreign investment rules do not provide for a review procedure within the BMWi.
Judicial review of the BMWi’s decisions is limited. As mentioned in question 7, the BMWi is granted considerable discretion in the assessment of investments. Judicial review therefore mainly examines whether the BMWi has correctly applied the procedural rules, and whether it has taken into consideration all information provided for by the investor.
Since a negative decision affects both investor and target, both parties may bring an action against the BMWi.
What safeguards are in place to protect confidential information from being disseminated and what are the consequences if confidentiality is breached?
The BMWi is obliged to treat the information received as strictly confidential. Any breach of confidentiality may result in disciplinary measures as well as in criminal liability. Information on a transaction submitted to the BMWi is exempted from the right to access official information granted by the Freedom of Information Act. In principle, this Act entitles anyone to access official information from the authorities of the federal government. However, section 3 No. 1 lit f) provides for an exception where the disclosure of the information may have detrimental effects on measures to prevent illicit foreign trade. Pursuant to this provision, any transaction in violation of the AWG or AWV is considered ‘illicit’.
A possible future European legal framework on foreign investment control may lead to a change in the confidentiality requirements, since member states would possibly be required to share information on investments both with the European Commission and with other member states.
Relevant recent case law
Discuss in detail up to three recent cases that reflect how the foregoing laws and policies were applied and the outcome, including, where possible, examples of rejections.
In May 2016, the Chinese company Fujian Grand Chip Investment (GCI) announced its intention to invest in the German electronics manufacturer Aixtron. Thereby, GCI would have acquired 50.1 per cent of the company’s voting rights. The Chinese investor had already successfully applied for a certificate of non-objection. Subsequently, the BMWi revoked the certificate in October 2016 and announced the resumption of the review procedure. The revocation was based on concerns raised by the United States regarding its national security interests. The acquisition subsequently failed owing to an American veto, so that the BMWi did not have to resume the review procedure.
In 2016, the Chinese Midea Group announced investment negotiations with the German company Kuka. Kuka develops and produces robots for various industries, such as automotives, electronics, energy or healthcare. The announcement triggered a public debate on the influence of foreign investors on German firms and on a potential transfer of technical know-how from Germany to China. However, the BMWi issued a certificate of non-objection after a preliminary examination, without even entering into the second stage of the review procedure. Subsequently, Midea took over 95 per cent of the voting rights of Kuka. This case - together with Aixtron and some other cases - led to the 2017 AWV reform introducing stricter rules on foreign investment control.
In August 2018, the Leifeld case came to be known as the first formal prohibition of a foreign investment by the German government based on the 2017 AWV reform. The Chinese investor Yantai Taihai Corporation had aimed at taking over the German company Leifeld Metal Spinning. The target mainly produces sophisticated, seamless pipe-formed metal parts that are used in the aerospace, but also in the nuclear sector. Therefore, the investment qualified as subject to cross-sectoral review, on the basis that it ‘operates critical infrastructure’. The BMWi - with the approval of the other federal ministries - concluded that the takeover would endanger the German public order and security. This decision can be seen as a harbinger for a stricter review of foreign investments in the future in general and of Chinese investments in particular.
Updates & Trends
Updates & Trends
Updates and trends
While the German foreign investment control regime is still quite moderate by international comparison, the trend is towards stricter control. This trend found expression in the amendment to the AWV in 2017, introducing longer review periods, a notification obligation for investments in certain ‘critical’ infrastructures, and stricter rules to prevent misuse and circumvention of the foreign investment control rules. The stricter rules have led to the first formal prohibition of a foreign acquisition, the Leifeld case.
A further tightening of foreign investment control is currently under discussion. The German Minister for Economic Affairs, Peter Altmaier, has suggested lowering the threshold for initiating a review procedure from acquisitions of 25 per cent of a company’s voting rights to 15 per cent. Foreign investment control in Germany thus remains an area subject to continuous development.
Any transaction whereby a foreign investor acquires 25 per cent or more of a German target’s voting rights should be notified to the BMWi. Although a notification obligation only applies in certain cases (see question 8), the notification sets in motion exclusion periods. After an exclusion period has expired, the investor obtains legal certainty that any further assessment by the BMWi - possibly leading to a prohibition or conditional approval - is precluded. Since a preclusion period only starts to run after the investor has supplied the BMWi with full details on the acquisition, special attention should be paid to an accurate and comprehensive notification.
The BMWi’s decision might retroactively affect the validity of the transaction. Thus, it is advisable to notify the BMWi ahead of the closing of the transaction or to apply for a certificate of non-objection beforehand. Such certificate confirms the compliance of the transaction with foreign investment rules and thus provides for legal certainty in regard of the future investment. The duration of a possible review procedure should also be taken into account - preliminary examination alone usually takes up to three months, and an in-depth examination procedure may take even longer.