July 19, 2017 - National Security

Germany Strengthens Foreign Investment Control: New Rules to Thoroughly Screen Investments in Enlarged Number of Key Industries

brexitGermany ends its longtime liberal approach to foreign investments by increasing its intervention possibilities at national level and by lobbying a stricter regime at the EU level. Since the takeover of German robotics champion KUKA by a Chinese investor last year, the public and political pressure on increasing protection against certain foreign investment was high. The expected change now has taken off through a set of new and amended provisions and it will affect not only non-EU investors eying German targets but also owners of German businesses who are now facing additional hurdles when selling those businesses.

Under the current German Foreign Trade Regulation (“FTR”), the German Ministry for Economic Affairs and Energy (“Ministry”) has the power to examine whether the public order or security of Germany is endangered if a person not resident in the EU or an entity not based or headquartered in the EU acquires a German company (e.g., by acquiring the shares or assets of such company) or directly or indirectly acquires an equity participation of 25 percent or more in a German company. Only in transactions where this threshold is met may the Ministry assert jurisdiction to prohibit or restrict such investments. Foreign investors may, in advance of entering into a definitive acquisition agreement, voluntarily apply for a certificate of non-objection (negative clearance) in order to obtain transaction security as soon as possible.

On 12 July 2017, the German government adopted an amendment to the FTR regime that came into effect on 18 July 2017. The amended FTR rules bring about two major modifications of the examination procedure that may have an impact on a number of inbound investments in Germany, especially with respect to the regulatory approval timetable of such transactions.

First, the obligation to report investments by non-EU residents to the Ministry is extended to certain non-military industry sectors, signaling the importance attributed to companies of these sectors for the German public order and security. The areas of business now explicitly covered include, inter alia, companies operating important (‘critical’) infrastructure facilities in the following sectors: IT and telecommunications, transport, healthcare, water supply, nutrition, finance and insurance. Furthermore, the new reporting requirement also applies to, e.g., companies developing software for such infrastructure facilities and to certain cloud computing service providers. Previously, such reporting requirements were restricted to companies in the defense sector and IT security sector only (so-called sector-specific investment control regime). The amended rules also subject certain additional reconnaissance and sensor technology products to the sector-specific control regime.

Second, the time periods for the examination of foreign corporate acquisitions by the Ministry have been extended allowing the Ministry to investigate the transactions in more detail. This indicates more thorough reviews by the Ministry which reviews will take into account information from other German governmental entities (including the German secret services). As a result, longer time lags have to be expected until transactions are cleared or, as the case may be, restricted or prohibited. The deadline for the Ministry to investigate an investment now starts to run only upon the Ministry having gained actual knowledge of the signing of an acquisition agreement. In case the Ministry does not obtain such knowledge, the newly introduced final time limit for the opening of an examination procedure is five years following signing of the agreement. Furthermore, the time lag in obtaining a certificate of non-objection to the acquisition from the Ministry is now extended from one month to two months. Also, the time period for the examination procedure itself is extended from two months to four months following receipt by the Ministry of the complete documentation on the acquisition – and the Ministry may stop the clock when negotiating with the parties about contractual provisions meant to safeguard public order and security.

While the FTR amendment tightens the procedural framework, the underlying assessment criteria have remained unchanged in substance. The Ministry may only prohibit or restrict an investment if the public order or security of Germany is endangered thereby. As the EU Treaties and applicable decisions by the European Court of Justice only allow for a narrow interpretation of the notion of public order, Germany together with Italy and France launched an initiative at the EU level to expand the reasons justifying a prohibition of foreign investments (e.g., in case the country of origin of the foreign investor does not allow foreign investments itself, please also see our blog post “Reciprocity Rules” of March 13, 2017. Until new rules are adopted also at the EU level, the hurdles for issuing a prohibition decision remain high compared to the foreign investment regulations of other countries.

When planning the acquisition or sale of German targets in industry sectors considered as ‘critical’ with respect to the public order and/or security by or to non-EU investors, the parties to the transaction need to anticipate the new reporting requirements and potential opening of examination procedures by the Ministry. In certain cases where negotiations with the Ministry are likely, the Ministry may suspend the review period and the overall timeframe for the investment control proceedings may be hard to predict. However, absent a stricter EU regime, such negotiations will likely take place in a limited number of cases only. When there is doubt as to whether reporting is required or not, notifying the Ministry appears advisable in order to safely trigger the three-month period for the opening of examination proceedings. When reporting a transaction, it would be prudent for non-EU acquiring parties to apply for the issuance of a certificate of non-objection to the acquisition at the same time in order to gain transaction security and save time in the clearance process.

Following the above mentioned initiative by Germany and other EU member states, and the results of the European Council meeting at the end of June 2017, the European Commission is now analyzing the need for additional legislation at the EU level. As a matter of fact, the German government decided not to wait until such EU rules are adopted but forged ahead to be able to investigate a larger number of transactions and gain more time for a thorough review, especially when infrastructures considered as critical and related software could be at stake.