This information was provided by Bärbel Sachs on 15 September 2020,
and should be reviewed against any later legislative updates.
In Germany, the provisions on foreign direct investments are laid down in the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, “AWV”) which is based on the German Foreign Trade and Payments Act (Außen-wirtschaftsgesetz, “AWG”).
The Federal Government amends the AWV fairly often and quickly, to take political developments into account. The German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie, “BMWi”) carries out the investment controls. It cooperates closely with other parts of the federal administration, such as the Ministry of Defence, the Foreign Office, and the Federal Chancellery. In most cases, a prohibition or an order imposing remedies needs to be approved by the Federal Government.
BMWi has the power to review direct and indirect acquisitions by a foreign investor of 10% or 25% or more of the voting rights in German companies. The rules also apply to asset deals. Please refer to the answer to question 5. The scope of application of the rules depends on the sector the German target company operates in.
The “sector-specific” review (sections 60-62 AWV) applies to acquisitions of certain defence and IT security companies. The review applies if
(i) the investor is non-German and
(ii) the share of voting rights in the German business that the foreign investor will hold directly or indirectly after the acquisition reaches or exceeds 10%.
The general review (sections 55-59 AWV) applies to all companies, regardless of their sizes and activities. However, the applicable shareholding threshold depends on the sector the target company operates in. If it operates specific types of critical infrastructure, is a specific type of media company, or carries out other sensitive activities listed in section 55(1) sentence 2 AWV, the review applies if
(i) the investor is from a non-EU country and
(ii) the share of voting rights in the target company reaches or exceeds 10% after the transaction.
Critical infrastructure defined in more detail in the IT Security Regulation (BSI-KristisV) comprises specific types of companies in the energy, water, food, IT and telecommunication, health, finance or insurance, and transport and traffic sectors. For target companies not falling within the definitions, the general review of sections 55-59 AWV applies if
(i) the investor is from a non-EU country and
(ii) the share of voting rights in the tar-get company reaches or exceeds 25%.
The provisions on foreign investments are not limited to specific sectors.
As set out above, stricter rules may apply for target companies operating in the energy, water, food, IT and telecommunication, health, finance and insurance, transport and traffic, defence and IT security sectors.
4. Does the legislation apply to investment activities in a defined term? If so please provide a description.
“Investment” is defined as the direct or indirect purchase of the voting rights of a domestic company.
Section 56 AWV provides a definition.
5. Could the legislation be applicable to a broader category of activity, such as transactions whereby the foreign person acquires ownership or controlling interest by means of e.g. increased ownership through a rights issue?
Asset deals are subject to the same rules as share deals if the acquired assets constitute the business or a part of the business that can be separated or all essential inventory of the business or part of the business.
For a review under section 60 AWV, the relevant criteria are “essential security interests” of the Federal Republic of Germany.
An intervention is justified in particular where the acquisition endangers German military policy or military security. For a review under section 55 AWV, the relevant criteria are “public order or public security” of the Federal Republic of Germany. These criteria are interpreted in the light of the fundamental freedoms under EU law, and in particular the free movement of capital. An intervention requires an actual and sufficiently serious threat affecting “one of the fundamental interests of society”. Please note that the Federal Government just recently submitted a draft bill for the amendment of the AWG which would result in a reduction of the degree of risk required for investment restrictions. Instead of an actual threat to public order or the security of the Federal Republic of Germany, a probable impairment will be sufficient. Moreover, in addition to the already known aspects of security, public supply and critical infrastructure, in future the focus may also be on critical technologies such as artificial intelligence, robotics, semiconductors, cyber security, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies.
7. Is the screening requirement triggered in relation to foreign (EU or non-EU) investors, or may it also be triggered by domestic investors?
Please refer to the answer to question 2.
In addition, please note that branches and permanent establishments of a non-EU investor are not considered EU residents and are therefore seen as foreign investors.
8. Would the screening mechanism apply to an investor from another EU Member State if the investor is owned by a foreign entity (non-EU Member State)?
9. Are there any specific thresholds for when the screening procedure is triggered / exempted? (Threshold could be the % of ownership or value of the investment.)
Yes. The thresholds are 10% and 20%, depending on the target company’s activities.
Please refer to the answer to question 2.
10. Does the screening mechanism apply also for foreign investments in publicly listed companies? (For examples when stocks are traded on the open market).
Yes, the provisions also apply to investments in publicly listed companies reaching or exceeding the relevant thresholds.
Yes. BMWi and all other stakeholders involved in the review are obliged by law to protect confidential information, including personal data and business secrets.
12. Would it be normal procedure to use mitigation agreements and typical clauses in relation to FDI? Is it required by law?
Yes, mitigation agreements are a common tool to address concerns of the authorities.
Mitigation agreements are not explicitly required by the legal provisions. However, according to the fundamental principle of proportionality, BMWi is often obliged to aim for a mitigation agreement instead of a prohibition of the transaction in question, as the mitigation agreement is the milder means of restriction compared to a prohibition.
13. What are the notification obligations (or could the notification be voluntary), i.e. before or after the investment is completed (e.g. in an M&A transaction, would the notification have to be made before signing or closing)?
A notification to BMWi is mandatory if the German target company is active in one of the sensitive sectors listed in section 60 AWV (defence and IT security sector) or in section 55(1) sentence 2 AWV (critical infrastructure, media, and other similarly sensitive sectors).
According to a draft amendment to the AWV which is expected to be passed shortly, the notification must be submitted “without undue delay” after the signing of the SPA. Please note that another draft AWG reform bill, which Parliament is expected to pass at the end of June or beginning of July 2020, would introduce a closing prohibition in the case of mandatory filing requirements.
The investor has to submit the notification.
15. Does the competent authority have a right to call-in, or to ex officio start a screening i.e. ask for information about an investment that has not been notified?
BMWi may initiate a review on its own initiative (ex officio) when it learns about the acquisition (e.g. from media reports or other authorities).
An ex officio review can be initiated up to five years after the signing of the SPA. To obtain legal certainty earlier, the investor may also voluntarily apply to BMWi for a clearance certificate.
16. What information does the authority normally require in a notification? For example, information about the ownership of the investor, the financing of the investment, and any ties to a foreign government?
Mandatory and voluntary filings need to provide information about the investor, the German target company and the basic features of the acquisition. Upon request by BMWi, the investor might have to submit further and more detailed documentation.
Please note that in the event that BMWi initiates a formal review of the transaction, the investor needs to submit a comprehensive list of information and documents. In practice, BMWi will raise additional questions in this case.
17. What are the main steps of the procedure and the time limits for those steps? Is there a period within which the competent authority has to issue a decision?
The procedure and time limits vary depending on whether the rules on the general review (sections 55 to 59 AWV) or those on the sector specific review (sections 60 to 62 AWV) apply. In the case of the general review, BMWi may initiate a formal review and request further documentation within two months after a voluntary or mandatory filing has been made and within three month if BMWi acts ex officio. After another four months starting from the submission of complete documentation, BMWi can no longer prohibit a transaction or issue orders.
As BMWi holds the position that it can request additional documents any time, the procedure – in practice – has no hard time limits. Further, the period is suspended if and as long as BMWi negotiates with the investor. In the case of the sector-specific review, slightly different time limits apply.
18. Does the competent authority take the final decision or another authority or governmental body (e.g. consultation with other authorities)?
Usually, BMWi takes the final decision.
Only the prohibition and the order to impose remedies need to be approved by the entire federal government (Bundesregierung), i.e. the cabinet.
Yes. BMWi and other authorities involved in the review are required to protect confidential information, including personal data and business secrets.
20. What types of decisions may the authority adopt, for example, to stop or condition an investment?
BMWi has the power to prohibit or restrict an acquisition.
In practice BMWi, typically resorts to the tool of a public law contract in order to condition an investment.
21. What are the tools available to enforce decisions (for example fines or injunctions), and what are the penalties for not adhering to a decision by the competent authority?
The tools available for enforcement depend on the type of the decision. In the case of a prohibition, the parties may no longer close the purchase agreement. If the transaction has already been closed, BMWi may appoint a trustee to unwind the transaction and it may prohibit or restrict the exercise of voting rights in the target company. In the case of a review under section 55 AWV, the purchase agreement becomes void and unenforceable under German civil law. In the case of a review under section 60 AWV, any legal acts to implement the purchase agreement are void under German civil law, i.e. the investor has not become the legal owner of the shares or assets of the target company. A mitigation agreement typically contains provisions on liquidated damages.
Please note that a draft bill put forward by the government intends to introduce a closing prohibition for the duration of a mandatory investment screening procedure. This prohibition would be subject to criminal penalties. The envisaged penalties are severe: imprisonment for up to five years or a fine.
22. Is the authority's decision subject to appeal in court or are there other means of changing a decision (new notification or filing)?
A decision to prohibit a transaction or to impose orders is subject to appeal before the Administrative Court of Berlin.