Germany expands its Foreign Direct Investment screening

The German government passed a further amendment of the Foreign Trade and Payments Regulation (AWV) to expand notification obligations for Foreign Direct Investments (FDI) on 27 April 2021. Only three days later, on 30 April 2021, the new bill was announced in the Federal Gazette and entered into force on 1 May 2021. The expanded notification obligations apply to all M&A transactions whose underlying agreements were or will be concluded on or after 1 May 2021.

The new bill is intended to complete the ongoing reform of the German FDI regime which already saw a major overhaul in 2020 and will further tighten investment control in Germany (see here and here). The focus of the extension is the expansion of notification requirements by increasing the number of activities that are subject to notification obligations as well as the amendment of the participation thresholds for notification requirements and further regulations regarding "atypical acquisitions of control".

Cross-sector review - Critical Activities

The newly introduced notification obligations for direct and indirect acquisitions of German companies by non-EU/EFTA investors aim to clarify certain categories from the EU FDI Screening Regulation (EU) 452/2019 and acquisitions of companies with the following activities will be captured (for the current list of critical companies see here):

Operator of satellite technology:

Operators of high-quality earth remote sensing systems pursuant to sec. 2 (1) no. 4 of the Act on Satellite Data Security (Satellitendatensicherheitsgesetz).

Development or manufacture of artificial intelligence:

A company that develops or manufactures goods that solve specific application problems by means of artificial intelligence methods and are capable to independently optimize their own algorithms and which can be used to automatically to:

• carry out cyber-attacks;
• imitate persons in order to disseminate targeted misinformation;
• assess speech communications or bio-metric distance identification of persons for the purpose of surveillance in a manner objectively suitable as well for use in internal repression; or
• analyse movements, location, traffic or event data relating to persons for purposes of surveillance which is objectively suitable for the use in internal repression.

The actual usability of an application for these purposes shall be decisive according to the bills explanatory statement.

Manufacture of vehicles for automatized or autonomous driving or flying:

A company manufacturing vehicles or unmanned aircraft equipped to be controlled via automatized or autonomous driving or navigation functions or producing or developing components or software required for such purposes.

Development or manufacture of robotics:

A developer or manufacturer of automatized or autonomously mobile robots having the following characteristics:

• specially constructed for handling of high explosive materials;
• specially constructed or hardened to withstand a radiation dose of in excess of 5 x 10³ Gy (silicon) with no loss of functionality;
• specially constructed for operability at altitudes above 30,000 meters; or
• specially constructed for underwater operability at depths below 200 meters.

Development or manufacture or finishing of integrated circuits and semiconductors:

A developer, manufacturer or processor of:

• micro- or nanoelectronic non-optical circuits (integrated circuits) on a substrate as well as discrete semiconductors;
• micro- or nanostructured optical circuits on a substrate as well as discrete optical components (optoelectronics); or
• manufacturing or processing tools, in particular crystal growing, light exposure, mask production, fibre drawing or coating equipment, grinding, etching, metal finishing or sawing equipment, or clean room transport equipment, test tools and masks for the aforementioned products.

Development or manufacture of products in the field of cybersecurity:

A company that develops or manufactures IT products (or essential components of products) with the aim of selling them to third parties that have the following key characteristic:

• the protection of the availability, integrity, authenticity or confidentiality of information technology systems, components or processes;
• defence against attacks on IT systems, including damage analysis and restoration of affected IT systems; or
• the electronic investigation of crimes and preservation of evidence by law enforcement authorities.

Air and space travel:

A company with an operating licence under Regulation (EU) No 1008/2008 or a company developing or manufacturing certain goods covered by EU Dual-Use Regulation (EU) No 428/2009 subcategories 7A, 7B, 7D, 7E, 9A, 9B, 9D or 9E of Annex I or goods or technologies intended for use in space or space infrastructure systems.

Development or manufacture of nuclear technology:

A company that develops, manufactures, modifies or uses certain goods covered by the EU Dual-Use Regulation (EU) No 428/2009: Category 0 or list items 1B225, 1B226, 1B228, 1B231, 1B232, 1B233 or 1B235 of Annex I.

Development or manufacture quantum technology:

A company that develops or manufactures goods and key components of:

• quantum computing, in particular quantum computers and quantum simulation;
• quantum communication, in particular quantum cryptography; or
• quantum-based measuring technology, in particular quantum sensors and quantum metrology products.

Development or manufacture of additive manufacturing technology:

A company that develops or manufactures:

• goods with which components for industrial applications made from metallic or ceramic raw materials are manufactured by means of additive manufacturing processes (in particular powder-based manufacturing processes which have an inert gas atmosphere and use a laser or electron beam as the energy source);
• key components of the aforementioned goods; or
• powder materials employed in the aforementioned manufacturing processes.

Development or manufacture of network technologies:

A company that develops or manufactures goods specifically supporting the operation of wireless or wireline data networks, in particular wireline or lightwave transmission technologies, network coupling elements, signal amplifiers, network monitoring, network management and network control products.

Manufacture of Smart Meter Gateways:

Manufacturer of (a) smart meter gateways within the meaning of sec. 2 sentence 1 no. 19 of the Metering Point Operating Act (Messstellenbetriebsgesetz) which has been certified by the Federal Office for Information Security, or (b) a security module for smart meter gateways, either certified by the Federal Office for Information Security or in the process of obtaining certification, to ensure compliance with the security requirements.

Access to vital facilities:

A company who employs personnel working in vital facilities pursuant to the German Security Screening Regulation (Sicherheitsüberprüfungsfeststellungsverordnung) at security-sensitive locations. (This covers companies that provide relevant goods and services to Germany in the fields of information and communication technology).

Extraction, processing and refining of critical raw materials:

Companies that extract, process or refine raw materials or their ores that have been included as part of the Raw Materials Initiative of the European Commission, on the List of Critical Raw Materials as an annex to the current Commission communication and which the Federal Ministry for Economic Affairs and Energy has published in the Federal Gazette.

Development or manufacture of products to access sensitive information:

A company that develops or manufactures goods covered by the scope of protection of a patent classified under sec. 50 of the German Patent Act (Patentgesetz) or a utility model classified under sec. 9 of the German Utility Model Act (Gebrauchsmustergesetz).

Food Security:

A company that directly or indirectly manages an agricultural area of more than 10,000 hectares.

Old and new review-thresholds

With regard to the level of shareholding that triggers a notification requirement in case of acquisition, the cross-sectoral regime applies two different low thresholds:

• The initial thresholds for the activities that were covered under the old regime namely critical infrastructures remain unchanged at acquiring or exceeding 10% of the voting rights.
• The initial thresholds for activities defined to trigger a notification including the newly defined activities mentioned above is acquiring or exceeding 20% of the voting rights.

For all other business activities which are not specifically defined, the threshold remains at 25% of the voting rights but these transactions are not subject to a mandatory notification requirement.

At the same time, the new law implements notification obligations for investors that already hold voting rights in such defined critical companies and increase their shareholding. Depending on the activity, notification obligations are triggered if subsequent transactions meet or exceed 20%, 25%, 40%, 50%, 75% of the voting rights or the full acquisition of the company.

In addition, the Federal Ministry for Economic Affairs and Energy (BMWi) is authorized to initiate an ex officio review procedure in the case of "atypical acquisitions of control" which are below the thresholds and typically would not trigger a notification obligation. The reasoning for this is, that foreign investors may not only gain (additional) influence over a domestic company by acquiring or adding voting rights. In practice, this aims at specific rights or powers granted to the foreign investor in shareholder agreements which are not reflected by the level of the actual voting rights. These additional factors or rights could be eg additional seats in the boards of directors or management, veto rights regarding strategic business or personnel matters or particular information rights.

General procedural amendments

The new law provides for guidance when intragroup restructurings are exempted from notification requirements which is in particular the case if two fully owned subsidiaries of a parent company are involved and these subsidiaries are incorporated under the same controlling entity. However intra-group restructuring need to be carefully review in light of the newly defined thresholds as also intragroup transactions can be subject to a notification requirement if one of the thresholds is crossed.

Further, the possibility to apply for a certificate of non-objection (Unbedenklichkeitsbescheinigung) (ie an early application to obtain clarity that the authority does not see concerns) has been limited to acquisitions of companies that do not trigger a mandatory notification requirement. This means that transactions which are subject to a mandatory notification requirement can only be notified in the clearance procedure.

Sector specific review

The separate provisions regarding the sector specific review which apply to all foreign investors largely remain untouched. However, the sector specific review has been newly structured and mandatory notification requirement apply to FDI that reach the threshold of at least 10% of the voting rights in the following companies:

Development or manufacture of export controls goods:

Companies that develop, manufactures, modify or have effective control over goods as defined in Part I Section A of the German export list (namely weaponry, ammunition and defence material).

Development, manufacture or modification of military technology:

Companies that develop, manufacture or modify goods in the field of military technology or which have effective control over such goods, in each case to which the scope of protection extends of a patent classified under sec. 50 of the German Patent Act (Patentgesetz) or a utility model classified under sec. 9 of the German Utility Model Act (Gebrauchsmustergesetz).

Products with IT security functions:

Companies that manufactures or has manufactured and still possesses the technology for products with IT security functions for the processing of government classified information or essential components of such products were the entire product has been approved by the Federal Office for Information Security.

Companies that are key defence institutions:

The above-mentioned companies within the meaning of sec. 1 (5) sentence 2 no. 1 of the Security Screening Act (Sicherheitsüberprüfungsgesetz).

Regarding companies active in the areas of export controlled goods and military technology mentioned above, the notification requirement also applies to companies that have developed, manufactured, modified or had actual control over such goods in the past and still have knowledge of, or other access to, the underlying technology of such goods.

Outlook

This new reform is particularly relevant for anyone involved in venture capital and private equity and looking for investments into Germany. Given the broadened scope of the review regime and potentially dire consequences of failures to notify, which range from the invalidity of the transaction to fines and potential prison sentences, careful planning and review of transactions will be required to avoid pitfalls under the German FDI regime. An AWV audit in particular on the level of the products of the target companies will have to be carried out for all transactions by EU/EFTA foreigners in order to identify reporting obligations and avoid enforcement risks.