Germany Foreign Direct Investment (FDI) Control: Massive Extension of Scope

For the forth time within one year, Germany will broaden the reach of its foreign direct investment control system. The latest amendments (16th Amendment to Foreign Trade and Payments Ordinance [AWV] and Amendment of Foreign Trade and Payments Act [AWG], please refer here) had completely changed the system of investment control by prohibiting closing acts without clearing by the Federal Ministry of Economic Affairs and Energy (BMWi) and making such acts prosecutable as criminal acts.

The (17th) Amendment to AWV intended to take effect now (probably in March 2021) widely broadens the scope of industries concerned by the stricter rules that had taken effect, last year (for the draft, please refer here). This regards non-EU/non-EFTA investments in critical industries and infrastructure (so-called “non-sectorial review” as well as non-German investments in the armament and security sector (so called “sectorial review”).

In addition, the draft amendment clarifies which kinds of measures BMWi can take in case it finds an anticipated impairing of the ordré public or public security of the Federal Republic of Germany, another EU member state or with regard to projects or programs of EU interest.

1. Scope

‘Non-sectorial’ FDI Control

In the range of the ‘non-sectorial’ review, the scope of concerned industries will be broadly extended: So far, the (direct or indirect) acquisition of 10 % or more of the voting rights in operators of critical infrastructure (and developers/manufacturers of software for such operators) as well as life sciences industries (and some other businesses) by non-EU/non-EFTA investors required notification immediately after signing and clearing by BMWi before transferring voting rights and dividends to the purchaser. In addition to these, the following businesses will also be encompassed in future:

• operators of a high-quality remote sensing system under the Satellite Data Security Act;
• air carriers with an operating license;
• employers of employees working at security-sensitive posts in vital facilities;
• raw materials extractors, processors and refiners;
• entities of fundamental importance for food safety and directly or indirectly covering or culturing an agricultural area of more than 10,000 hectares;
• developers or manufacturers of
  • goods which, by means of artificial intelligence procedures are capable of independently optimizing their algorithms usable for cyber attacks, identity fraud, surveillance & repression;
  • autonomous motor vehicles or unmanned aerial vehicles and components;
  • industrial robots;
  • semiconductors;
  • IT products and components for the protection IT systems, defense against cyber attacks and IT technology for investigation of criminal offences and the preservation of evidence by law enforcement authorities;
  • certain dual-use goods in the aviation and space industry area;
  • dual-use nuclear technology;
  • quantum technologies;
  • goods with which components for industrial applications are manufactured by means of additive manufacturing processes;
  • goods specifically for the operation of wireless or wireline data networks;
  • smart-meter gateways and security modules for them;
  • goods which are protected as secret patents by law.

‘Sectorial’ FDI Control

In the range of the ‘sectorial’ review, the scope of concerned industries will be broadly extended, too: Currently, the (direct or indirect) acquisition of 10 % or more of the voting rights in manufacturers/developers of war weapons, tank engines and gearboxes, certain other military goods as well as security products for the processing of classified information by non-German investors requires notification immediately after signing and clearing by BMWi before transferring voting rights and dividends to the purchaser. This scope will be broadened to include manufacturers and developers of

• manufacturers and developers of all armament goods that require export licences under Germany’s export control list;
• manufacturers, modifiers and developers of goods in the field of defense technology to which the scope of protection of a secret patent encompasses;
• entities which are defense-important facilities as defined by law.

2. Clarification on Measures by BMWi

AWV so far had only stated that BMWi had the competence to prohibit acquisitions or to decree orders the purchaser (and the target) needs to comply with in case BMWi finds a potential impairment of ordré public or public security. It was not exactly clear by what measures BMWi could execute its prohibition, especially if closing had occurred, already. The new amendment explains that BMWi may prohibit or restrict the exercise of voting rights in the acquired enterprise which belong to or are attributable to a non-EU/non-EFTA , or appoint, at the expense of the acquirer, a trustee to reverse a completed acquisition.

With regard to other measures, BMWi may order the parties to an acquisition to submit at specified intervals written reports on compliance with obligations ordered by BMWi or assumed by the purchaser per public-law contract with BMWi. The report needs to be prepared by an independent competent person.

3. Other issues

In addition to the aforementioned changes, the ordinance draft contains certain clarifications regarding procedures and requirements. It also broadens the scope of FDI review in the so-called “sector” relating mainly to military goods by including.

4. Next steps

While it is not expected that the draft will see major changes, BMWi has invited interested parties to comment the draft until 26 February 2021.

It is strongly recommendable for any future non-EU/non-EFTA investors in Germany to check the applicability of the broadened FDI review scope on their intended acquisitions (including asset deals on acquisition of businesses) as early in the process as possible. The same applies to sellers interested in non-EU/non-EFTA investors, as well.

Investors should also take the new rules into account for their investment strategies in Germany. Generally, there could be a risk of a ‘chilling effect’ on non-EU foreign investments in Germany.