On December 19, 2018, the Federal Cabinet adopted considerable amendments to the rules governing investment reviews.
The amendments to the Foreign Trade and Payments Ordinance are leading to an expansion of the reporting requirements relating to the acquisition of German companies by foreign investors. In particular, they have an impact on planning and timing corporate acquisitions.
The Federal Cabinet used the amendment to the Foreign Trade and Payments Ordinance to lower the threshold for sensitive sectors (in critical infrastructures, such as companies operating in the defense and IT security sectors) above which the Federal Government may review an acquisition of shares by an investor. Previously starting at 25 percent and above, reviews are now commencing as of a share acquisition of 10 percent and above, Section 56 Foreign Trade and Payments Ordinance.
Due to their importance for an open, free, and democratic society, media companies will also be included in this group in the future. Transactions where the target companies "particularly contribute to shaping public opinion" and "are characterized by being particularly topical and having a broad impact" will be subject to a more detailed examination. The indefinite legal terms used in these provisions lead to certain room for interpretation – in particular with respect to companies in the digital economy. While German media are increasingly exposed to pressure as relates to their independence and therefore require special protection by the German state, it remains to be seen whether and to what extent the interpretation of the Ordinance by the Federal Government will also be politically instrumentalized in the future.
Ministerial approval is required if an investor domiciled outside the EU, Iceland, Liechtenstein, Norway, and Switzerland intends to acquire – directly or indirectly – a relevant stake (i.e., 10 percent or more) in a German company in a strategic business sector. In such event, the Federal Government will examine whether the specific acquisition endangers public order or the security of the Federal Republic of Germany, i.e., whether there is an actual and sufficiently serious threat that could affect a fundamental interest of society.
Both in business and in politics, the adopted stricter rules in foreign trade law have certainly proven controversial. The question is how much influence the German state may exert on the private sector by reserving the right to prohibit certain investments in Germany by foreign investors.
The changes in foreign trade law are not simply a German effort alone. The EU also intends to review investments from third countries in strategic sectors in the future. At EU level, a corresponding legislative process is currently underway. Given the considerable resistance in some Member States, it remains to be seen, however, whether the planned EU rules will actually enter into force.
Foreign investors and their negotiating partners will have to prepare for the fact that the uncertainties and the time and effort involved in investment control will tend to increase in the future.
This will lead to increased costs, particularly in the preparatory stage of a transaction, as investment control has developed into a considerable regulatory hurdle for the duration and complexity of procedures. The amendment to the Foreign Trade and Payments Ordinance of December 19, 2018 is likely to have especially sensitive effects for investors dealing with a tight schedule or budget.
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