Germany: Germany Tightens Rules For Foreign Investments

The German Federal Government enacted a Regulation amending the German Foreign Trade Ordinance on 12 July 2017. The amendment will tighten the review of acquisitions of German companies by investors from non-EU and non-EFTA countries. Recently, there has been a significant increase in the frequency of reviews of such transactions by the German Federal Ministry of Economics and Technology ("BMWi"). The amendment is expected to enter into force soon.

Key Facts

  • Broad interpretation of transactions that may endanger public security or order
  • Introduction of a notification obligation for in-vestments in critical infrastructure
  • Extension of review periods and information obligations
  • Initiative for a review mechanism at the EU level for foreign investments in key industries

We have summarized below in more detail the most important changes.

  1. Dangers to public security and order

Until now, the BMWi could review acquisitions of a 25% or greater interest in a German company by a non-EU or non-EFTA investor and prohibit such acquisitions if the acquisition could endanger public security or order.

The amendment specifies that a danger to public security or order might exist in particular with respect to investments companies which

  • operate critical infrastructures,
  • develop and revise certain industry-specific software for the operation of critical infrastructure,
  • are tasked with telecommunication surveillance measures or manufacture or have manufactured technology to implement such measures,
  • provide cloud computing services and in so doing access certain critical infrastructure, or
  • hold approvals for components or services in the telematics infrastructure.

The list is illustrative and non-exhaustive.

Critical infrastructures are facilities and installations or parts thereof belonging to the sectors of energy, information technology and telecommunication, transport and traffic, health, water, food, finance and insurance, which are of high importance to the functioning of public life because an outage or disruption could result in significant supply shortfalls or could endanger public security.

The amendment also specifies what kind of software is considered to be industry-specific. For instance, as regards the finance sector, relevant software can include software for the operation of payment and securities and derivatives transaction systems etc. As regards information technology, relevant software can include software for the operation of systems for voice and data transmission or data storage and processing etc.

  1. Notification Obligation

The acquisition of a company active in one of the aforementioned areas must be notified to the BMWi in writing.

The notification obligation applies to the conclusion of an agreement creating contractual obligations concerning the acquisition of a German company or the acquisition of a direct or indirect interest in a German company.

As before, the BMWi can only review (direct or indirect) acquisitions of at least 25% of the voting rights of a German company by a non-EU (or non-EFTA) company. The calculation of the voting rights must include the voting rights of third parties in the company (i) in which the acquirer holds at least 25% of the voting rights, or (ii) with which the acquirer has concluded an agreement on the joint exercise of voting rights.

Acquisitions by EU companies may only be subject to the BMWi's review if there are indications that the acquisition structure has also been chosen to circumvent the BMWi's review. The amendment clarifies that there are indications of such a circumvention strategy if the direct acquirer has no considerable economic activities in the EU or its presence within the EU is not established on a basis intended to be long-term in terms of business premises, staff and equipment.

  1. Review mechanism

Previously, the BMWi was not permitted to initiate a review after the expiry of two months from the execution of an agreement creating contractual obligations. From now on, a period of three months will begin not on the execution of the agreement creating contractual obligations, but on the date on which the BMWi gains knowledge of such execution.

In addition, a second review period has been introduced. Since the notice period now relates to when the BMWi gains knowledge of the transaction, an additional five-year period starting with execution of the agreement creating contractual obligations, regardless of knowledge on the part of the BMWi, has been introduced. If five years elapse after execution of the agreement creating contractual obligations, review proceedings cannot be initiated.

In light of these new review periods, it may be advisable to notify the BMWi of execution of agreements even regarding transactions falling outside the aforementioned areas (see above at 1.) to trigger the three-month time period and thus obtain legal certainty.

If after initiating review proceedings, the BMWi concludes that a more detailed review is necessary, it will initiate main review proceedings. The permitted duration of these main review proceedings has been extended to four months. This time period will be tolled for times during which the BMWi conducts negotiations with the companies involved to avoid an order or prohibition.

The participants can also obtain legal certainty by applying to the BMWi to issue a certificate of non-objection. Previously, the BMWi was required to decide within one month after such an application was made. If no response was received, the certificate of non-objection was deemed granted. This time period until a legal fiction of authorization arises has now been extended to two months.

Lastly, the amendment expands the group of parties subject to information obligations to include indirect acquirers and the target company.

  1. Initiative at the EU level

In parallel, a new initiative has been started at the EU level together with Italy and France to carry out changes in European law. The proposal seeks to extend review over transactions concerning key technologies. In June, the European Council issued a call for swift agreement on modern, WTO-compatible trade defence instruments to reinforce the EU's ability to effectively tackle unfair and discriminatory trade practices and market distortions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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