Germany’s FDI rules so far had a reputation of not being very strong. In the past few years, only three transactions have been prohibited (disputably, two of these transactions on other grounds). This is set to change under a new bill: According to the intended regulation, an “expected impairment” of Germany’s public order and security instead of an “actual, sufficiently grave threat” may lead to measures by the Federal Ministry of Economy and Energy (BMWi). Also, the scope of BMWi’s review will be extended to the public order and security of other EU member states and projects and programs of interest to the whole EU. Moreover, the closing of acquisitions in the field of critical infrastructure (which is to be broadened by a new ordinance that is currently being prepared) will be void until approved by BMWi. The latter is underlined by criminal and administrative sanctions.
The German government intends to broaden its powers regarding the review of foreign direct investments. Current FDI rules allow BMWi to review (direct or indirect) acquisitions of 10% or more of the shares/voting rights of a German critical infrastructure entity (as defined by law) by non-EEA nationals/entities (non-German nationals/entities for the production of certain military goods and production of IT security products licensed for classified documents). However, the closing of such transactions is effective under current law (except for the aforementioned military/IT security firms) until BMWi declares it void. Also, the scrutiny standard of BMWi is currently an “actual, sufficiently grave threat to public order and security” (as defined by EU rules) of the Federal Republic of Germany exclusively.
BMWi may order measures or prohibit transactions under a lower scrutiny standard
The bill stipulates that BMWi may order reviews of transactions and take measures pursuant to FDI in respect of critical infrastructure if there is an “expected impairment” of Germany’s public order and security. This is rather a lower standard than the one in place. In particular, it overrides the element of a “sufficiently grave threat”. We expect that BMWi will therefore extend the number of transactions it will review.
While BMWi may order prohibitions of transactions, it may also take other measures by imposing certain requirements, e.g. limiting certain voting rights or the carve-out of certain fields of business. BMWi’s power to prohibit and/or order such requirements will be strongly enhanced if the bill comes into force.
Closing without BMWi approval is void
Hitherto, in respect of acquisitions in the field of critical infrastructure, it was possible to close transactions and BMWi could only order reverse transactions if it saw a grave threat. If the new bill comes into force the closing of transactions in the field of critical infrastructure will be “pending ineffective” until BMWi approval. While notification was already hitherto required by law, it is possible that not all deals were notified due to the fact that non-notification was not sanctioned and closing was effective unless BMWi intervened within five years. The new rules would lead to a situation where notification of BMWi is indispensable for a secure transaction.
(Actual) closing may lead to criminal or administrative sanctions
The government bill would make it a crime punishable with up to five years imprisonment to allow the purchaser to use voting rights, to receive dividends, and to provide critical information to the purchaser before BMWi approval (with or without closing). In addition, the forfeiture of any gains made by the illegal act could be ordered by a court. This could apply to the full purchase price.
In case of negligence, such actions could be sanctioned by administrative fines of up to EUR 500,000 or forfeiture of gains made by the illegal act. This would in a worst case scenario even lead to forfeiture of the purchase price.
Thus, besides the purchaser, the seller has a strong interest in having BMWi notified of relevant transactions and in not concluding a deal before its approval.
The scope of notifiable transactions is expected to be broadened
BMWi has also indicated that the scope of transactions that require notification of the ministry will be extended in the near future. So far, classical fields of critical infrastructure have been notifiable (energy, health, transport, etc.). In order to protect German knowhow and technology in critical areas, it is intended to also include artificial intelligence, robotics, semiconductors, biotechnology and quantum technology by an amendment of the Foreign Trade Ordinance before long.
The new rules incorporate public order and security of all EU member states and projects and programs of EU interest
The bill is also intended to implement Regulation (EU) 2019/452 under which EU member states and the EU Commission cooperate with regard to FDI. Thus, the bill provides that BMWi can take measures or prohibit a transaction not only in the interests of Germany’s public order and security, but also regarding all other EU member states and projects and programs of EU interest.
Thus, if a transaction in Germany could, for example, impair Portugal’s public order and security because the German target manufactures software for the operation of Portugal’s power stations, for example, BMWi could prohibit such a transaction or impose requirements for such a transaction.
The new rules broaden Germany’s FDI law in every respect. We expect a chilling effect for a number of transactions with non-EEA parties. Parties should seek early advice for each transaction that could potentially impair public order and security.
What to do?
- German sellers as well as non-EEA purchasers should be prepared to perform an in-depth due diligence on whether a target falls under the notification requirements.
- In the case of transactions, notification documents should be prepared as early as possible and clearly demonstrate that the public order and security of no EU member state would be impaired.
- For transaction timelines, especially in respect of closing, sellers and purchasers should take into account that the BMWi review procedure may take several months and consider that BMWI must now involve the Commission as well as other EU member states and stakeholders in other ministries.