Germany lowers substantive test for FDI screenings

On 18 June 2020, the German Parliament adopted a bill to overhaul the foreign direct investment rules for investments in German companies. The bill reflects some changes introduced by the EU Regulation establishing a framework for the screening of foreign direct investments (FDI) into the Union (Regulation (EU) 2019/452, EU FDI Screening Regulation).

New substantive test

One of the major changes brought about by the bill is the introduction of a new substantive test for the screening of investments. The current review test is based on the criteria of public order and security and requires that public order or security is actually endangered by the acquisition being reviewed.

The intervention threshold will be lowered and brought in line with the requirements of the EU FDI Screening Regulation; i.e. an intervention becomes possible if public order or security is expected to be impaired by the acquisition. This lowered substantive test will give the reviewing authority (the Federal Ministry of Economics and Energy, BMWi) a much broader discretion for review.

In addition, the subject of "public order and security" is broadened and no longer limited to (only) German public security or public order concerns. The review can also consider the (potential) impact on other EU Member States or projects and programmes of Union interest. This is an implementation of the EU FDI Screening Regulation which foresees and establishes a cooperation mechanism between the EU Member States and the EU Commission. This means that a transaction could be prohibited solely on the grounds and impact of the transaction in a different Member State. This applies even if that Member State either does not review the transaction under its own FDI screening rules or does not have an FDI screening mechanism at all.

Overall, the new substantive test can be expected to lead to more interventions in the future. To this extent the Federal Minister of Economics told the press that the security of supply with medical protection gear is currently one of the major concerns, i.e. cases where the security of supply for the German market may be at stake could see a higher rate of interventions. Currently this could be applied if a transaction could deprive the German market of access to certain crucial medical equipment, devices, etc. However, one would need an indication that the acquirer is planning to reroute needed products to other territories.

New prohibition to implement

In addition, the bill introduces a prohibition to implement transactions which are subject to a notification requirement (see the latest changes to the notification requirements here). This is similar to merger control proceedings for transactions triggering a notification requirement.

The new law foresees in this regard:

• The purchase agreement pertaining to a transaction triggering a notification requirement will be subject a condition subsequent or resolving condition that the competent authority does not prohibit the transaction; i.e. the effects of the purchase agreement will cease in case of a prohibition.

• The legal or factual implementation of the transaction triggering a notification requirement is prohibited for as long as the transaction has not been cleared or not prohibited within the procedural timeframes; i.e. all legal implementation acts are invalid during a review procedure or if the parties fail to make a notification.

Furthermore, the prohibition to implement is supplemented with explicit prohibitions of specific implementation acts. These encompass:

• Exercising of voting rights in the target by the acquirer;

• payment of dividends to the acquirer;

• providing or disclosing sensitive information related to the company to be acquired to the acquirer insofar as this information relate to the business activities which may affect public order and security interests of Germany; and

• providing or disclosing information related to the company to be acquired to the acquirer if the competent authority issues a respective order.

Violations of the prohibition to implement can be met with imprisonment of up to 5 years or a penalty of up to € 500,000 in case of negligent violations.

Insofar as the wording of the prohibition to implement limits disclosure of information, parties to a transaction are faced with a rather broad wording of this prohibition and uncertainty as the scope may not always be entirely clear with a view to information made available, for example, during a due diligence phase. The legislative material indicates that the prohibition aims at such information which represent critical know how and technology and, therefore, commercial or other customary information which the investor obtains in the course of a due diligence exercise to assess the viability of the investment should not be affected. Still the wording of the law leaves room for interpretation in particular as the substantive test of the expectation of impairment of public order and security can be highly political. Given the potential consequences of criminal sanctions for individuals, this new prohibition will have to be reflected in the planning of future M&A transactions and it should be considered how parties structure providing access to information.

Procedural time limits

The newly adopted amendments to the Foreign Trade and Payments Act (AWG) also include provisions for the procedural timeframe of the screening procedure. This is a rather technical change as the existing procedural framework has been transferred from the Foreign Trade and Payments Regulation (AWV) to the AWG. Still some additions were made.

The review procedure remains a two-step process. In the first phase, the BMWi has to decide whether to open an in-depth review. The BMWi can ultimately only prohibit an FDI acquisition or order certain restrictions if the BMWi opens (and notifies the parties hereof) a detailed review procedure within two months after obtaining knowledge of the planned FDI. In order to ensure that the time limit for obtaining knowledge is not endless, the opening of the review procedure is excluded if more than five years have passed since a conclusion of a potential contract agreed on with a view to an FDI acquisition. However, this five-year period will only have relevance for transactions that do not trigger a notification requirement (i.e. those companies that do not qualify as "critical company" as defined in the AWV. See the latest changes to the notification requirements here). For transactions triggering a notification requirement, the two-month period will start with the notification.

In the second phase, the BMWi has to issue specific orders including a prohibition within a period of four months after receiving the required documentation.

Additionally, certain extensions of the four-month time limit are possible in individual cases: E.g. an extension of further three months can be ordered if the examination procedure encounters particular difficulties or an extension of one further month can be ordered if defence interests of Germany are affected. Further extensions of the time limit are possible with the consent of the acquirer and the seller.

A new procedural aspect is the suspension of the four-month review period in case the BMWi requests (additional) information or documents or enters negotiations with the parties involved. Hence the BMWi as reviewing authority can stop the clock by these acts.

From a procedural point of view, the existing procedure and time limits remain the same but the new rules on extension and suspension of time limits can substantially prolong the review period.

Future changes

The amendment of the AWG is intended to ensure more effective monitoring of foreign investments. It is to be expected that the amendment of the law, as well as the extension of the notification requirement, will result in a significant increase of cases to be reviewed per year and also that cases will be reviewed more intensely compared to the past.

For the time being, the thresholds for the cross-sector review remain unchanged; i.e. direct and indirect acquisitions reaching or exceeding 10% of the voting rights in a critical company and 25% of the voting rights in all other companies trigger a notification. However, the BMWi already announced that further requirements of the EU FDI Screening Regulation will be specified separately in a further amendment to the AWV. Adjustments will be made which will most likely concern the subject matter of the review. In this regard a definition of critical technology will be introduced, and companies engaged with such critical technology will be subject of the notification requirement of the 10% threshold. The fields of critical technology have been identified as artificial intelligence, robotics, semiconductors, biotechnologies and quantum and nuclear technologies, but the details remain unclear.