With a draft bill to amend the Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG) issued on January 30, 2020, the German Federal Ministry of Economics and Energy (Bundesministerium für Wirtschaft und Energie – BMWi) has started a legislative process to change the German foreign direct investment control regime (FDI Regime). This will be the third amendment to the FDI Regime since 2017. While the German Government continues to emphasize that Germany maintains an investment-friendly environment, these changes will further strengthen the Government’s ability to scrutinize foreign direct investments in Germany. As with earlier amendments to the FDI Regime, which all aimed to protect German and European security interests, these new changes will have a significant impact on M&A transactions in Germany.
Alignment with new EU regulation
The amendment of the FDI Regime comes in the wake of the new EU Investment Screening Regulation (Regulation), which came into force on April 11, 2019 and will take full effect as of October 11, 2020. The Regulation implements an EU-wide mechanism, institutionalizing the exchange of information and the cooperation between Member States and the European Commission with respect to foreign direct investment reviews. Although the Regulation does not provide for a separate European screening regime, it allows Member States as well as the European Commission to participate in national foreign direct investment investigations, inter alia by way of requesting information and issuing opinions.
Against this background, the German Government envisages an alignment of the FDI Regime with the Regulation, along with a number of changes to the substantial aspects of German foreign direct investment reviews.
Key elements of the upcoming changes
While the draft bill for the amendment of the AWG is still subject to change, its key elements are noteworthy:
- Change in the review standard
Under the current FDI Regime the BMWi assesses whether a proposed transaction poses a threat to public order or security for Germany. The new FDI Regime envisages that the BMWi would determine whether the proposed transaction probably impairs public order or security. This change from “threat” to “probable impairment” means, that in order to intervene in a transaction scenario, the BMWi need no longer identify a concrete and severe risk to public order or security. Rather, an abstract and lower level of risk may suffice to take measures regarding a proposed transaction. This change also allows the BMWi to take a more forward-looking approach and to use far more discretion in its assessment.
- Consideration of EU-wide factors
In its assessment the BMWi will in the future also consider the impact of a proposed transaction on the public order or security of other Member States, as well as on projects and programs of interest to the EU, such as EDIDP, Copernicus or ESA projects.
- Suspensive effect
The validity of any transaction subject to mandatory filing will be suspended pending BMWi clearance. Under the current FDI Regime this only applies to transactions under sector-specific review, i.e., foreign direct investments in the defense and IT security sector. Under the new FDI Regime, this effect shall also apply to foreign direct investments under cross-sector review in sensitive sectors, such as IT and telecommunications, energy, water, transport and logistics, finance and insurance, healthcare and media.
- National point of contact
A national point of contact will be established within the BMWi to implement the EU-wide cooperation mechanism under the Regulation.
In a second step, further substantial changes are envisaged to the Foreign Trade Ordinance (Außenwirtschaftsverordnung – AWV). While the AWG provides the framework for the FDI Regime, the AWV includes more detailed provisions for the FDI Regime’s procedure. The revision of the AWV will follow in due course after the changes to the AWG have been implemented. It is expected for the fully amended FDI Regime to take effect prior to October 11, 2020.
No draft amendment of the AWV has been issued yet. However, according to statements of the BMWi, changes of the AWV will potentially include the following:
- Additional sensitive sectors
Within the cross-sector review procedure new critical sectors will be defined. Any investments in such sectors by non-EU/non-EFTA investors will mandatorily have to be notified to the BMWi if such investment constitutes an acquisition of at least 10% of voting rights in a German business active therein. The new sectors shall comprise artificial intelligence, robotics, semi-conductors, biotech, quantum and satellite technologies.
- Investor focus
The Regulation foresees certain criteria for assessing a foreign direct investment. Thus, the amended AWV will expressly stipulate that factors pertaining to the investor must be taken into account in the BMWi’s assessment. While on paper the AWV has so far mainly focused on the target business, the BMWi has in practice already included the background of the investor in its review, in particular with a view to state ownership, government funding and recent activity in sensitive sectors.
- Review periods
It is not yet fully clear whether the new FDI Regime will alter the current review periods. However, the BMWi has already indicated it would add clarifications with regard to the start and end of review periods, and consider implementing an option to prolong review periods in individual cases to accommodate the involvement of all stakeholders involved. As the Regulation provides for the involvement of other Member States and the European Commission in a national foreign direct investment review procedure, it cannot be excluded that the new FDI Regime will stipulate longer review periods. It should at least be expected that review procedures will factually be prolonged to effectively implement the EU-wide cooperation mechanism under the Regulation.
Significant impact on inbound M&A transactions
The repercussions of the revised FDI Regime on inbound M&A transactions in Germany will be significant:
- The wider discretion in the BMWi’s assessment allows the BMWi to intervene in foreign direct investments more easily and will therefore result in increased uncertainty for the respective transactions.
- Foreign investors will be required to notify transactions they would not have notified in the past. In consequence, the number of foreign direct investments being scrutinized by the BMWi will increase.
- German foreign direct investment review procedures will become more complex and will potentially comprise an increased scope of information to be submitted by the parties to a transaction. The larger number of transactions to be reviewed by the BMWi, combined with the coordination with other Member States and the European Commission, seem to make longer review procedures inevitable.
- Foreign direct investment reviews will become a major factor in German M&A inbound transactions for which such review could come into play. The parties’ own risk assessment, information gathering and notification preparations will need to start early in the transaction process.
It will be interesting to see whether and how the BMWi adjusts its practice to accommodate the uncertainties the revised FDI Regime entails for foreign investors in Germany. In particular, providing more guidance in the course of pre-notification discussions would be essential to mitigate some of such uncertainties and to allow foreign investors to conduct a meaningful and comprehensive feasibility assessment for their potential acquisition. This would help to achieve the Government’s goal of protecting German and European security interests, while keeping Germany open and attractive for foreign direct investments.