Foreign Investment in Germany 2024

Foreign Investment in Germany 2024

FOREIGN INVESTMENT 2024

GERMANY

Roland M Stein, Dr. Leonard Freiherr von Rummel

(BLOMSTEIN)

LAW AND POLICY

Policies and practices

1. What, in general terms, are your government’s policies and practices regarding oversight and review of foreign investment?

The German approach to foreign investment control has traditionally been liberal and open. Germany is among the countries seeking to defend and even expand free trade in goods and capital. No currency or exchange restrictions are imposed on either EU residents or on non-EU residents. However, some non-EU investments, particularly acquisitions in sensitive and high-tech industries by Chinese investors, has led to a rethink of the liberal approach to foreign investment control. This development has resulted in amendments to the applicable law in 2017 and 2019. A further tightening of investment controls came with the amendments adopted in 2020 and 2021, implementing the EU Screening Regulation 2019/452. Under the current law, the Federal Ministry for Economic Affairs and Climate Action (BMWK) must be notified of any planned non-EU investment in sensitive areas whereby the investor directly or indirectly acquires 10 or 20 per cent or more of the company’s voting rights. These sensitive areas include critical infrastructure, additive manufacturing processes, robotics, autonomous driving, cybersecurity, and the infrastructures needed to maintain the permanent functioning of the public health system, which has been a particular focus of public policy in the aftermath of the Covid-19 pandemic. Furthermore, the Russian attack on Ukraine has made it clear to the German and EU governments that they must not become more economically or strategically dependent on third countries.

The BMWK must also be notified of any planned foreign investment reaching the threshold of 10 per cent of the target company´s voting rights in defense-related goods and technologies. This includes investments by non-German, but EU-based companies.

If the subsequent review procedure reveals that the investment is likely to affect public order or national security, the BMWK may prohibit the investment or impose conditions on its approval.

The German government has justified this approach by referring to art. XIV General Agreement on Trade in Services (GATS), which allows for the adoption of measures to maintain the public order.

In the context of the investment review procedure, the BMWK enjoys a broad margin of discretion in considering the background of acquirers and persons acting on their behalf, in particular their past – or future – misconduct, such as illegal or criminal activities, or the influence of foreign states (as also set out in article 4 paragraph 2 EU Screening Regulation). The acquisition of additional voting rights may also be subject to notification if certain thresholds are reached. Circumvention of the notification requirement, for example by acquiring additional seats or majorities in supervisory bodies or by exercising voting rights in the same way as affiliated companies, is excluded.

To ensure the effectiveness of the investment screening, the contractual obligations of the M&A transaction may not be executed before the investment review procedure has been carried out (‘gun-jumping provisions’). Therefore, measures aimed at completing the acquisitions through legal or de facto execution are invalid until the review procedures have been completed.

In conclusion, the changes made to German foreign trade law in recent years have resulted in a considerable tightening of investment controls. In future, the obligation to notify the BMWK of transactions exceeding the thresholds in sensitive industries will be the standard rather than the exception. Some examples of the recent, more interventionist strategy are several prohibitions issued by the BMWK. First, there was the prohibition of the attempted acquisition of the German company IMST by EMST (which is indirectly held by Chinese enterprise Addsino) in 2020. This prohibition, as well as the subsequent prohibition of the already completed acquisition of the German company Heyer by the private Chinese company Aeonmed, have been judicially challenged. While the plaintiffs in the IMST prohibition withdrew the case, the court decision for Heyer is still pending. Second, in November 2022, the German government prohibited two attempted acquisitions of German semiconductor manufacturers (a Swedish subsidiary of the Chinese company Sai Microelectronics attempted to acquire the company Elmos, and a Chinese acquirer attempted to acquire the company ERS). Third, the German government also partially prohibited the attempted acquisition of 35 per cent of the shares in HHLA CTT, a terminal in the port of Hamburg. Finally, in September 2023, the BMWK prohibited the acquisition of an additional 42 per cent to already 53 per cent of the shares of KleoConnect, a satellite business, held by the Chinese acquirer Shanghai Spacecom Satellite Technology. It based its decision on the rationale that the sector of satellite communication is sensitive for Germany’s security interests.

In 2022, the BMWK saw 306 cases, with an additional 264 cases coming from the EU cooperation mechanism. Compared to 2021, the number of national German cases stagnated, while the number of cases coming from the EU cooperation mechanism increased by 24. The figures are remarkable when compared to those of 2016, when the BMKW reviewed around 40 cases.

Main laws

2. What are the main laws that directly or indirectly regulate acquisitions and investments by foreign nationals and investors on the basis of the national interest?

The Foreign Trade and Payments Act (FTPA) and the Foreign Trade and Payments Ordinance (FTPO) provide the legal basis for the control of foreign investments in Germany. The latest update in terms of foreign direct investment screening relevant to the FTPA and FTPO was issued on 27 September 2023 and entered into force on 5 October 2023. It is currently planned to introduce an Investment Control Act in 2024.

The Administrative Procedure Act governs the investment review procedure. The Code of Administrative Court Procedure contains the remedies for administrative investment control measures.

Scope of application

3. Outline the scope of application of these laws, including what kinds of investments or transactions are caught. Are minority interests caught? Are there specific sectors over which the authorities have a power to oversee and prevent foreign investment or sectors that are the subject of special scrutiny?

The relevant industry sector determines the level of scrutiny applied in the review. The sector-specific assessment provides for a strict review procedure for the acquisition of companies operating in sensitive security areas. This includes all German companies that develop, manufacture or modify goods as defined in Part I Section A of the Export List, or have effective control over such goods.

Moreover, manufacturers and developers of war weaponry, ammunition, military equipment (such as tank motors and gears) and any technology used for processing classified government information are subject to the review procedure. Acquisitions of companies that modify or use these goods also fall within the scope of the sector-specific assessment. Furthermore, past activities might suffice to include companies under this definition, if the company or any of its employees retain relevant knowledge or access to relevant technology, documents or data storage of any kind.

As part of the cross-sectoral assessment, the BMWK may, in accordance with the EU Screening Regulation, examine whether the respective acquisition is likely to affect ‘public order or security’ in Germany or any other EU member state. Acquisitions may in particular constitute such prospective impairments if the target:

• operates critical infrastructure such as energy, water, information technology and telecommunications, and infrastructure used for finance or insurance, healthcare, transport or food (section 55a paragraph 1 No. 1 FTPO);
• develops and modifies software that is used for operating this critical infrastructure (section 55a paragraph 1 No. 2 FTPO);
• has been obligated to carry out organizational measures in the telecommunications sector or produces, or has in the past produced, technical equipment used for implementing statutory measures to monitor telecommunications and has knowledge about or other access to this technology (section 55a paragraph 1 No. 3 FTPO);
• provides cloud computing services if certain thresholds are reached (section 55a paragraph 1 No. 4 FTPO);
• holds a license for providing telematics infrastructure components or services (section 55a paragraph 1 No. 5 FTPO);
• is a company of the media industry that contributes to the formation of public opinion via broadcasting, telemedia or printed products and is characterized by particular topicality and breadth of impact (section 55a paragraph 1 No. 6 FTPO);
• provides services ensuring the functioning of communication infrastructures between public authorities (section 55a paragraph 1 No. 7 FTPO);
• develops or produces personal protective equipment (section 55a paragraph 1 No. 8 FTPO);
• develops, produces, markets or holds licenses of pharmaceuticals essential for the provision of healthcare (section 55a paragraph 1 No. 9 FTPO);
• develops or produces medicinal products to diagnose, prevent, predict, cure or mitigate highly contagious or life-threatening infectious diseases (section 55a paragraph 1 No. 10 FTPO);
• develops or produces in-vitro diagnostic products delivering information on physiological or pathological reactions to contagious or life-threatening infectious diseases (section 55a paragraph 1 No. 11 FTPO);
• operates a high-quality remote earth sensing system (section 55a paragraph 1 No. 12 FTPO);
• develops or manufactures goods that can solve certain application problems by means of artificial intelligence and is capable of optimizing its algorithms independently (section 55a paragraph 1 No. 13 FTPO);
• designs or manufactures motor vehicles or unmanned aerial vehicles (or software therefor) that have technical equipment for the control of automated or autonomous driving or navigation functions (section 55a paragraph 1 No. 14 FTPO);
• is a designer or manufacturer of automated or autonomous robots that can work with certain hazardous materials and in extreme environments (section 55a paragraph 1 No. 15 FTPO);
• is a developer, manufacturer or refiner of certain microelectronic or nanoelectronic circuits, of semiconductors or of manufacturing or processing tools of selected products (section 55a paragraph 1 No. 16 FTPO);
• develops or manufactures IT products, or essential components of such products, with the aim of selling them to third parties which have certain points of contact with confidentiality of information technology systems (section 55a paragraph 1 No. 17 FTPO);
• operates an aerospace business or develops or manufactures goods or technology for use in aerospace (section 55a paragraph 1 No. 18 FTPO);
• develops, manufactures, modifies or uses certain goods of Annex I of the Dual-Use Regulation, for example separators for electromagnetic isotope separation (section 55a paragraph 1 No. 19 FTPO);
• develops or manufactures goods and essential components of quantum-based technologies (section 55a paragraph 1 No. 20 FTPO);
• uses additive manufacturing processes (section 55a paragraph 1 No. 21 FTPO);
• develops or manufactures goods that serve the operation of wireless or wireline data networks (section 55a paragraph 1 No. 22 FTPO);
• develops certain smart meter gateways (section 55a paragraph 1 No. 23 FTPO);
• employs people who work in companies that provide the Federal Republic of Germany with important services in the field of information and communication technology (section 55a paragraph 1 No. 24 FTPO);
• processes or refines critical raw materials (section 55a paragraph 1 No. 25 FTPO);
• develops or manufactures goods to which secret patents or utility models extend (section 55a paragraph 1 No. 26 FTPO); or
• cultivates an agricultural area of more than 10,000 hectares (section 55a paragraph 1 No. 27 FTPO).

For the sector-specific assessment, a threshold of 10 per cent of the target’s voting rights applies to all acquisitions of German companies. The same applies to acquisitions within the scope of the cross-sectoral assessment if the target falls into one of the above-mentioned categories of sensitive areas set out in section 55a paragraph 1 Nos. 1 to 7 FTPO. A threshold of 20 per cent applies for section 55a paragraph 1 Nos. 8 to 27. Furthermore, the BMWK is entitled to review all acquisitions of German companies whereby investors acquire ownership of at least 25 per cent of the company’s voting rights.

The review applies to asset deals and share deals, including both direct and indirect shares, and – in principle – irrespective of the relevant industry sector and of both the nature and origin of the investor. The target must be ‘domestic’, meaning:

• legal persons and partnerships based or headquartered in Germany;
• branches of foreign legal persons or partnerships headquartered in Germany; or
• permanent establishments of foreign legal persons or partnerships in Germany.

Definitions

4. How is a foreign investor or foreign investment defined in the applicable law?

German legislation applies the cross-sectoral review to any non-EU or non-EFTA-based investor. In addition, investors located within EU and EFTA territories may be subject to foreign investment control if it appears necessary to prevent abuse or circumvention of the foreign investment control rules. According to section 55 paragraph 2 FTPO, this might be the case where an investor does not pursue any significant independent economic activity or does not maintain a permanent establishment within the European Union in the form of business premises, personnel or equipment. The BMWK tends to interpret the term ‘circumvention’ very broadly and thus substantially widens its review authority.

The sector-specific assessment applies to all non-German (i.e, also EU-based) investors. German investors may also be subject to foreign investment control where this seems necessary to prevent abuse or circumvention of the foreign investment control rules.

As far as EU-based persons invest in a target, the investment control is also limited by the freedom of establishment pursuant to art. 48 TFEU. A broad application of the investment control, which the BMWK tends to apply, is challenged by the recent decision of the CJEU in the Xella case. The CJEU ruled that the EU Screening Regulation is not applicable in cases where an EU acquirer is owned by a natural person or an undertaking from a third country. Instead, the acquirer must be him- or herself constituted or otherwise organized under the laws of a third country. At the same time, in the light of the EU Screening Regulation, the fact that a third country entity holds an EU acquirer does not constitute a circumvention. It remains to be seen how this ruling will affect the German investment control system.

Special rules for SOEs and SWFs

5. Are there special rules for investments made by foreign state-owned enterprises (SOEs) and sovereign wealth funds (SWFs)? How is an SOE or SWF defined?

German legislation does not contain specific provisions for SOEs or SWFs, although the control exerted by foreign governments or armed forces over the acquirer is now explicitly a factor to be considered in the context of the investment review (section 55a paragraph 3 FTPO). The recent developments towards stricter foreign investment control were in part a reaction to the economic activity of foreign SOEs and SWFs in Germany. Thus, a foreign investor’s affiliation with the public sector may play a role in the BMWK’s assessment of whether public order or security in Germany is endangered.

Relevant authorities

6. Which officials or bodies are the competent authorities to review mergers or acquisitions on national interest grounds?

The BMWK is the authority responsible for conducting the review of mergers and acquisitions on national interest grounds. Within the Ministry, the Department for Foreign Trade Policy (Department V) conducts the review. The BMWK regularly consults other federal ministries or agencies, such as the German Chancellery, Federal Foreign Office, Federal Ministry of the Interior and Community, or the Federal Ministry of defense.

The BMWK may only prohibit an acquisition with the approval of the German federal government. Conversely, the German federal government is not entitled to prohibit an acquisition if the BMWK has not issued a negative assessment.

7. Notwithstanding the above-mentioned laws and policies, how much discretion do the authorities have to approve or reject transactions on national interest grounds?

German legislation affords the BMWK a high degree of discretion both in deciding whether to intervene at all, in examining and weighing the background of the acquirer, and in the potential measures to be taken(ranging from conditional approval to prohibition). The FTPO lists possible impairments to the German public order or security to support the BMWK in exercising its discretion. EU and German fundamental rights, including the principle of proportionality, limit the BMWK’s discretion. The BMWK must consider the interests of both the acquirer and the seller and is obliged to state its reasons as well as the standard of review applied in each case. In practice, the BMWK has a very broad margin of discretion, which is rarely challenged in court.

PROCEDURE

Jurisdictional thresholds

8. What jurisdictional thresholds trigger a review or application of the law? Is filing mandatory?

The Federal Ministry for Economic Affairs and Climate Action (BMWK) is entitled to review all acquisitions of German companies where the investors acquire ownership of at least 25 per cent of the voting rights. A threshold of 10 per cent applies to acquisitions that are subject to a sector-specific review and to acquisitions within the scope of the cross-sectoral assessment, if the target falls into one of the categories set out in section 55a paragraph 1 Nos. 1–7 of the Foreign Trade and Payments Ordinance (FTPO). A threshold of 20 per cent applies to acquisitions within the scope of the cross-sectoral assessment, if the target falls into one of the categories set out in section 55a paragraph 1 Nos. 8–27 FTPO. The type of review depends on the sector concerned.

Notification of an acquisition to the BMWK is mandatory if:

• an investment is subject to the sector-specific assessment; or
• an investment is subject to cross-sectoral assessment and falls within one of the sensitive areas laid out in section 55a paragraph 1 Nos. 1–27 FTPO). For the purpose of calculating the voting rights, the voting rights of third parties in the domestic company may be attributed to the acquirer if the acquirer holds significant shares in the third company or if it can be assumed that voting rights are exercised jointly.

The acquisition of further shares may also constitute a reportable acquisition. This may be the case if the acquirer’s direct or indirect shareholding in the domestic company already reached or exceeded a reportable share of voting rights prior to the acquisition, and the acquirer’s voting rights now reach certain thresholds laid down in section 56 paragraph 2 FTPO as a result of the further acquisition. A differentiation is made according to the significance of the additional acquisition of shares. Accordingly, the BMWK cannot automatically check minor changes in shareholdings. However, it may be a condition in a clearance of the BMWK to notify future acquisitions below the thresholds laid down in the FTPO.

In addition, a provision has been introduced whereby the granting of control and management rights can also trigger the screening mechanism. According to the FTPO, it is sufficient for the investor to acquire a share of voting rights below the relevant threshold if this is accompanied by ‘additional seats or majorities in supervisory bodies or in management’, the ‘granting of veto rights in strategic business or personnel decisions’ or the ‘granting of rights over information’. Intra-group restructurings, on the other hand, are excluded from the right of inspection of the BMWK pursuant to section 55 paragraph 1b FTPO.

In contrast to merger control, other elements such as turnover, purchase price or enterprise value do not trigger a notification or filing obligation. In addition, there is no de minimis exception limiting the FDI procedure to targets of a certain size, which makes it particularly difficult for start-ups in sensitive areas to raise money without regulatory approval.

Investors who are not subject to a notification obligation are nevertheless advised to either notify the BMWK of the acquisition or to apply for a certificate of non-objection in cases where the BMWK could conceivably see a threat to public order or security in Germany or any other EU member state.

National interest clearance

9. What is the procedure for obtaining national interest clearance of transactions and other investments? Are there any filing fees? Is filing mandatory?

German legislation provides for three ways to start a review procedure:

• the investor applies for a certificate of non-objection;
• the investor applies for clearance; or
• the BMWK initiates a review procedure.

Notification of an acquisition to the BMWK is mandatory if:

• an investment is subject to the sector-specific assessment; or
• an investment is subject to cross-sectoral assessment and the target falls into one of the sensitive categories set out in section 55a paragraph 1 FTPO.

The review procedure will be initiated and the BMWK will issue clearance where the review procedure reveals no threat to essential security interests (section 61 FTPO) or to public order or security of Germany, of another Member State of the European Union or in relation to projects or programs of Union interest (sections 55, 55a FTPO).

In addition, the BMWK may initiate the review procedure ex oficio regarding any investment of which it becomes aware and which raises concerns regarding public order or security. The authority to initiate review procedures ex oficio expires five years after the signing of the agreement (section 14a paragraph 3 sentence 2 FTPA). If review procedures are taken up ex oficio, the BMWK will officially inform the parties involved and require further statements and data (section 55 paragraph 3 and section 60 paragraph 4 FTPO).

In general, the review procedure consists of two phases: a preliminary examination (phase 1); and an in-depth examination, including an investigation (phase 2). In most cases, the review procedure is concluded within the first phase. The BMWK will only proceed to the second phase, a formal investigation, if the preliminary examination gives rise to concerns about the transaction’s compliance with investment control rules.

In a general order, the BMWK has listed the documents to be submitted for the various types of procedure. The information varies depending on whether the acquirer applies for a certificate of non-objection or a clearance, and if he or she makes a notification in the cross-sector assessment or a notification in the sector-specific assessment. There are standard Excel forms that must be submitted to the BMWK to provide essential information that must be disclosed for all types of procedures. A more detailed explanation can be found in a BMWK fact sheet. According to this form, the application should include, among other things, the following information:

• the name and place of business of investor and target;
• the investor’s share of voting rights before and after the transaction;
• the shareholder structure of investor and target;
• the possible sectors affected by the transaction according to section 55a paragraph 1 FTPO in the area of cross-sector assessment or according to section 60 paragraph 1 FTPO in the area of sector-specific assessment; and
• business contacts of the target company with public sector and defense customers of the past five years.

The general order also indicates that additional documents must be submitted if an investigation has been opened and the information was not submitted with the original application. These include a detailed account of the purpose of the acquisition and the business strategy of the domestic company.

The documents must be in German. The application must be submitted to the BMWK. Starting from 1 January 2024, the BMWK charges fees in certain cases, e.g, €800 after ending the screening procedure in the preliminary examination (phase 1). The fee is set at €2,500 when the procedure is concluded after the in-depth review (phase 2) with an administrative act or implied by law because of the expiry of the deadline. However, the fees for the second phase may rise to up to €30,000 depending on the particular difficulties of each individual case. There is an exemption limit in cases where the value of the investment does not exceed €5,000.

10. Which party is responsible for securing approval?

Both investor and target are legally obliged to comply with the foreign investment rules. However, the notification obligations are among the exclusive duties of the investor: for both investments subject to the sector-specific assessment (section 60 paragraph 3 FTPO) and cross-sectoral assessment (section 55a paragraph 4 FTPO), it is the investor who must apply for clearance.

Review process

11. How long does the review process take? What factors determine the timelines for clearance? Are there any exemptions, or any expedited or ‘fast-track’ options?

The BMWK´s preliminary review (phase I) may last two months from the moment the BMWK was notified of the acquisition or became aware of the conclusion of the investment contract. Equally, in the event of an application for a certificate of non-objection, the certificate is deemed to have been granted if the BMWK has not formally initiated an examination procedure (phase II) within two months of the application being filed. A review procedure is legally precluded if more than five years have passed since the conclusion of the investment contract.

After the preliminary review period (phase I), the BMWK may, if necessary, perform an in-depth examination and prohibit an investment or impose conditions on the investment within the first four months of the investor providing complete information on the transaction. The four-month period begins when the parties to the transaction have answered all questions posed in the decision to open a phase II proceeding. Subsequent requests for documents do not restart the clock but suspend the deadline until the complete documentation is provided. Furthermore, ongoing negotiations between the BMWK and the investor on conditional approval also suspend the limitation period. The law does not limit the duration of these negotiation periods. The only eventuality allowing for the extension of the review period are examination procedures characterized by particular complexity of a factual or legal nature (extension by three months). A further extension of one month is possible if German defense interests are affected to a particular extent. According to the BMWK this one-month extension has not yet been used. The BMWK determines on a case-by-case basis, in consultation with other authorities involved, but ultimately at its own discretion, whether the conditions for an extension of the review period are met.

The authorities do not publish data regarding the duration of the procedure. In the past, experience has shown that clearance often took two to three months. Recently, however, it has been observed that particularly clear-cut cases are often cleared within four to six weeks. The process may be significantly prolonged where the BMWK launches the second stage of the review procedure (phase II). In particular, in the case of politically sensitive investments, the need to provide additional information subject to review will result in potentially significant delays in the process.

Regardless of the legal time limits, the investor may try to accelerate the procedure by cooperating fully with the authorities and by providing the necessary information as early as possible.

12. Must the review be completed before the parties can close the transaction? What are the penalties or other consequences if the parties implement the transaction before clearance is obtained?

In the absence of a notification requirement, nothing prevents the parties from closing  the transaction before obtaining the approval of the BMWK. However, the validity of both the transaction and the underlying transaction contract may be affected by the BMWK’s decision.

In the case of both sector-specific and reportable cross-sector acquisitions, the underlying contractual obligations are valid but subject to dissolution if the BMWK issues a prohibition to conclude the transaction. If the BMWK refuses to clear the acquisition, the transaction is ex tunc invalid and, therefore, considered as never having had any legal effect. Failure to issue a prohibition within the review periods is considered equivalent to the transaction’s clearance (either actually expressed or deemed to be granted).

In order to prevent the de facto implementation of foreign investments, the provisions of the FTPA explicitly prohibit particularly serious enforcement actions, including the exercise of voting rights by the acquirer and the disclosure of company-related, security-relevant information. These regulations are comparable to gun-jumping rules in merger control proceedings.

Violations of these bans can be punished as deliberately or negligently committed offenses under criminal and administrative law and constitute a (potential) threat to security and public order, undermining the whole transaction. Consequently, the parties are advised to obtain clearance before executing the transaction. However, a normal exchange of information in the course of due diligence is permitted.

Involvement of authorities

13. Can formal or informal guidance from the authorities be obtained prior to a filing being made? Do the authorities expect pre-filing dialogue or meetings?

The BMWK is open to discuss with the investor the possible obstacles and concerns related to the proposed acquisition. If the investor can provide comprehensive information about the planned acquisition, these discussions may facilitate the subsequent investigation and examination procedures. However, the transaction must be rather advanced. In some cases, meetings with the BMWK may be possible – for example, to explain the target´s business activity or the business strategy. However, it is at the BMWK´s discretion whether these meetings take place.

14. When are government relations, public affairs, lobbying or other specialists made use of to support the review of a transaction by the authorities? Are there any other lawful informal procedures to facilitate or expedite clearance?

Investors are free to rely on the assistance of public relations and political advisers before and during the review procedure. This is particularly useful in difficult cases, such as investments in the defense sector or by SOEs in critical infrastructure.

15. What post-closing or retroactive powers do the authorities have to review, challenge or unwind a transaction that was not otherwise subject to pre-merger review?

In cases where voluntary notification applies and the investor has abstained from making such a notification, the BMWK is entitled to initiate a review procedure ex oficio within five years of the transaction. This review might result in a retroactive conditional approval or prohibition of the foreign investment. Review procedures are excluded if the BMWK has not initiated procedures within two months of becoming aware of the signing. In cases of notifications of acquisitions or clearance requests, review procedures are equally precluded if not taken up within two months.

Therefore, investors are strongly advised to notify the BMWK of a planned investment in the case of the slightest doubt. This is the fastest way to obtain legal certainty as to the admissibility of the planned investment and minimizes the risk of the BMWK’s retroactive interference with the transaction.

Where the BMWK blocks an investment, it is authorized to prohibit the exercise of the voting rights of the target or to appoint a trustee assigned to rescind the investment. In addition, the BMWK may take further measures to enforce the prohibition.

SUBSTANTIVE ASSESSMENT

Substantive test

16. What is the substantive test for clearance and on whom is the onus for showing the transaction does or does not satisfy the test?

The substantive test for clearance depends on the type of review applicable. The cross-sectoral review requires an examination as to whether the investment is likely to jeopardize public order or security in Germany or another EU member state or programs of Union interest within the meaning of art. 8 of the EU Screening Regulation. In the context of the sector-specific assessment, the BMWK examines whether the investment will potentially endanger essential security interests of Germany. Both terms are subject to interpretation. As they derive from EU law, the case law of the Court of Justice of the European Union has served as a primary source for interpretation.

Cross-sectoral assessment: likely impairment of the ‘public order or security’

In line with the guidelines set out in the EU Screening Regulation, the ‘public order or security’ test strikes a balance between the imperatives of maintaining an attractive investment climate and protecting targets of strategic importance to the member states. A likely impairment of the public order or security may arise where the existence or functioning of the state, of government institutions or public services is affected. In accordance with this substantive test, the avoidance of potential future harm is a sufficient objective to allow for the performance of forward-looking investment reviews. The public order or security test also encompasses the maintenance of foreign relations, national military interests and the survival of the population. The BMWK’s case practice shows that a threat to public order or security was primarily seen in the possible access of non-EU companies to German security-relevant technologies and infrastructures, as well as in the transfer of security-relevant technology to foreign countries. Negative impacts on economic or financial interests or on the labor market did not constitute a threat to the public order and security. Thus, an investment could not be blocked to preserve jobs in Germany.

Section 55a paragraph 3 FTPO contains factors that shall be considered in the evaluation of prospective impairments of the security or public order in Germany or any other EU member state. These factors relate to the background of the investor, including (significant risks of) past and present misconduct, such as illegal or criminal activities, or the influence of foreign governments and armed forces, in particular through ownership structures or funding.

The (non-exhaustive) list of strategic industries and sectors (section 55a paragraph 1 Nos. 1 to 27 FTPO) indicates a threat to the public order or security. The list serves as a guideline for the BMWK’s assessment.

The BMWK may also examine whether projects or programs of Union interest within the meaning of article 8 of the EU Screening Regulation are likely to be affected by the investment. This includes projects in which Union funds are provided in significant amounts or to a significant extent, or which are covered by Union legislation on critical infrastructure, critical technologies or critical resources essential to security or public order. These projects and programs are listed in the Annex to the EU Screening Regulation. They include, among others, programs involving European satellite navigation systems, trans-European energy networks and a European defense development program.

Sector-specific assessment: threat to ‘essential security interests’

The ‘essential security interests’ test aims to protect key industries and technologies related to military defense. For example, essential security interests would be threatened if the investment jeopardized the core capabilities of the German defense industry. In the sector of crypto-technology, essential security interests could be threatened where the reliability of such technology used by the government is in doubt. The provision also intends to secure the existence of German companies supplying the government with crypto-technology and other defense equipment. The assessment requires the consideration of future foreign, security and economic policy that could conflict with the foreign investment.

Although concerns have been raised that aspects such as net benefit or reciprocity should be considered in the substantive test, they have not yet been incorporated into the FTPO. In principle, the onus for showing whether the transaction does or does not satisfy the test is on the BMWK. However, the applicant is obliged to actively participate in the review procedure, in particular by providing sufficient information on the planned transaction. In practice, due to the wide discretionary powers of the authorities, the onus lies more on the applicant’s side.

17. To what extent will the authorities consult or cooperate with officials in other countries during the substantive assessment?

The BMWK has generally not consulted or cooperated extensively with officials in other countries during the substantive foreign investment assessment. Reviews regarding national security interests have by nature been limited to the respective state. Given that such review procedures often concern companies in possession of sensitive technology and know-how, authorities are reluctant to share information across borders.

However, in light of the EU-wide cooperation mechanism under the EU Screening Regulation, the cooperation and exchange of information on investments between the European Commission and member states has improved significantly. The EU cooperation mechanism is set out in articles 6 and 7 of the EU Screening Regulation. The basis of this cooperation mechanism is that member states shall notify the Commission and the other member states of all foreign direct investments in their territory that are subject to review. The other member states or the Commission can then address comments to the reviewing member states, which must take them into account. Even if a foreign direct investment is not subject to review in a member state, another member state may address comments if the transaction is likely to affect its own security or public order. It is therefore likely that member states will increasingly consider EU-wide interests while reviewing foreign direct investments. In addition, there is an EU-wide FDI expert group from the member states’ screening authorities that regularly exchanges views on best practices.

Other relevant parties

18. What other parties may become involved in the review process? What rights and standing do complainants have?

Although the Foreign Trade and Payments Act (FTPA) and the FTPO do not provide for the formal involvement of third parties in the investment control procedure, third parties may voice their concerns with respect to a particular transaction. It might be of strategic advantage for competitors to provide the BMWK with additional information on the investment.

Where the BMWK is unable to decide an investment case on the basis of the information currently available, it consults other federal ministries or agencies. The BMWK regularly relies on the expertise of the Federal Foreign Office, the Federal Ministry of defense, the Federal Ministry of Finance, the Federal Ministry of the Interior and Community and the Federal Office for Economic Affairs and Export Control.

Prohibition and objections to transaction

19. What powers do the authorities have to prohibit or otherwise interfere with a transaction?

Where an investment subject to cross-sectoral review is likely to affect public order or security in Germany or another EU member state or programs of Union interest, the BMWK may either prohibit it or impose conditions on its approval. The same applies to investments subject to sector-specific assessment where these investments endanger Germany’s essential security interests.

20. Is it possible to remedy or avoid the authorities’ objections to a transaction, for example, by giving undertakings or agreeing to other mitigation arrangements?

Investors have two options if the BMWK concludes that the investment might affect the public order or security or essential security interests.

First, the investor may negotiate with the BMWK certain conditions on its approval. The BMWK may either prohibit a transaction or attach certain conditions to its approval. With regard to the principle of proportionality, the BMWK must apply the least restrictive measures possible while protecting the German public order and security interests. If possible, it will debate conditions of approval with the investor before prohibiting a transaction. It may, for example, require that the merger excludes a certain, critical division or component of the target. To this end, the investor may submit a statement guaranteeing its compliance with the conditions to the BMWK.

Second, the investor and the BMWK may negotiate an agreement under public law that includes statements of commitment from both sides (as well as the target). Such an agreement allows the parties to find a workable solution, such as the conditions for approval. However, the agreement must respect the limits set by the FTPO, in particular the substantive tests for clearance set out in sections 55 and 60.

Challenge and appeal

21. Can a negative decision be challenged or appealed?

The BMWK’s decision can be appealed before the Administrative Court of Berlin. The foreign investment rules do not provide for a review procedure within the BMWK. In practice, judicial review of BMWK decisions is limited. The BMWK is granted considerable discretion in the assessment of investments. Therefore, judicial review mainly examines whether the BMWK has correctly applied the procedural rules, and whether it has taken into account all of the information provided for by the investor. As a negative decision affects both investor and target, both parties may bring an action against the BMWK. To our knowledge, only three prohibitions have been challenged in court. While two decisions are still pending, the court has already dismissed one case.

Confidential information

22. What safeguards are in place to protect confidential information from being disseminated and what are the consequences if confidentiality is breached?

The BMWK is obliged to treat the information received as strictly confidential. Any breach of confidentiality may result in disciplinary measures as well as in criminal liability. Information on a transaction submitted to the BMWK is exempted from the right to access official information granted by the Freedom of Information Act (IFG). In principle, this Act gives everyone the right to access official information from federal authorities . However, section 3 No. 1(f) IFG provides for an exception where the disclosure of the information may have detrimental effects on measures to prevent illicit foreign trade. Pursuant to this provision, any transaction in violation of the FTPA or FTPO is considered ‘illicit’. However, under the EU cooperation mechanism, information is shared with both the European Commission and other member states. The confidentiality of the information collected under the EU Screening Regulation will be ensured in accordance with EU law and the law of the member state concerned. That being said, when a case is prohibited, the German Federal Cabinet must confirm the prohibition. As many different stakeholders are involved in this, prohibition decisions have found their way into the public press.

RECENT CASES

Relevant recent case law

23. Discuss in detail up to three recent cases that reflect how the foregoing laws and policies were applied and the outcome, including, where possible, examples of rejections.

Since the authors were involved in the first two cases cited, these will only be described and not supplemented with a legal assessment.

GlobalWafers–Siltronic

On 31 January 2022, the German federal government did not prohibit the acquisition of Siltronic, a German manufacturer of silicon wafers, by the Taiwanese company GlobalWafers. However, the Federal Ministry for Economic Affairs and Climate Action prolonged the screening period and thus did not grant approval within the long stop date set out in the share purchase agreement, which ultimately prevented the transaction from taking place. Wafers are an important precursor to semiconductor chips, an industry that is known to have been suffering from production bottlenecks since 2020. One of the reasons given for extending the screening period is the increasing economic tensions between China and the US. At the end of 2020, still in the early stages of the crisis, GlobalWafers submitted a voluntary public takeover offer to Siltronic’s shareholders and applied for a certificate of non-objection (section 58(1) FTPO) on 10 December 2020. Due to security concerns regarding the supply of semiconductors to Germany, complex negotiations between the BMWK and GlobalWafers ensued, which ultimately failed. GlobalWafers then unsuccessfully sued the federal government for interim legal protection to obtain an approval.

On 26 October 2022, the German government decided to partially prohibit the acquisition of a HHLA terminal by CSPL, a company partly owned by COSCO. According to the Ministry’s decision, the Chinese investor can acquire a stake of less than 25 per cent in HHLA CTT, one out of four container terminals of the Hamburg Harbor. Initially, CSPL had planned to acquire 35 per cent of HHLA CTT, which has led to negative public comments alleging that the Chinese state, through COSCO, would have access to strategic infrastructure.

KleoConnect

Another recent prohibition reported in the press is the attempted ‘acquisition’ of KleoConnect by its current Chinese majority shareholder, Shanghai Spacecom Satellite Technology (SSST), which already holds 53 per cent of KleoConnect’s shares. KleoConnect and the German shareholder EightyLeo had a disagreement and KleoConnect attempted to confiscate the shares of EightyLeo (45 per cent) pursuant to the Act on Limited Liability Companies. The German government interpreted this as an ‘acquisition’ of shares. The German government is of the opinion that both the acquisition and the withdrawal of voting rights trigger an investment control review.

UPDATE AND TRENDS IN FOREIGN INVESTMENT IN GERMANY

Key developments of the past year

24. Are there any developments, emerging trends or hot topics in foreign investment review regulation in your jurisdiction? Are there any current proposed changes in the law or policy that will have an impact on foreign investment and national interest review?

In general, we observe a trend towards a stricter approach in German foreign investment review.

In September 2023, the Federal Ministry for Economic Affairs and Climate Action (BMWK) revealed to the public (in a key issues paper) that it plans to revise the FTPO completely. It intends to consolidate the complex provisions in a separate Investment Control Act and, at the same time, amend the existing rules of foreign investment control. However, the exact content is not yet clear as the proposals by the BMWK are still being discussed with the ministries involved. For the time being, the ministry has proposed four points. First, the scope of application shall be extended to cover certain acquisitions of intellectual property rights of a company and Greenfield-investments. Second, the BMWK wants to amend the list of critical technologies that trigger an investment control to include cases in the areas of semiconductors production, cloud computing, autonomous driving and flying, cybersecurity, and raw materials. Third, the ministry is considering lowering the thresholds that trigger an investment control in certain cases. Finally, a reversal of the burden of proof is being discussed. In certain sensible sectors, the applicant would have to disprove the general assumption that the investment might be against Germany’s security interest. However, to mitigate these aggravated provisions, the ministry also wants to shorten the period within which the BMWK can make a decision from two months to 45 days. The BMWK released its report on the evaluation of the current legal framework for the screening of foreign investments in September and the EU Commission followed shortly thereafter and released its third ‘Annual Report on the screening of foreign investments into the Union’ on 19 October 2023. Both underline that there is an ongoing need for an effective screening of foreign investments, especially during times of crisis, such as Russia’s war of aggression against Ukraine.

* The information in this chapter was accurate as at November 2023.

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“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”

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