Further tightening of investment screening in Germany expected

On 22 January 2021, later than originally expected, the Federal Ministry for Economic Affairs and Energy (“BMWi”) published a ministerial draft of the 17th revision to the Foreign Trade and Payments Ordinance (“AWV”) (German only), in which it proposes to tighten German foreign direct investment screening for the fourth time in less than 12 months. The stated aim of the draft revision is to adapt the AWV to the provisions of the just recently amended Foreign Trade and Payments Act (“AWG”) and to transpose further aspects of the EU Screening Regulation (Regulation (EU) 2019/452 of 19 March 2019) into German foreign direct investment screening legislation. The draft revision also contains measures that substantially tighten and expand  the scope of German foreign direct investment screening, making the draft revision accordingly controversial.

Core elements of the draft

Among other things, the draft contains four key changes:

• Firstly, the draft introduces a large number of additional case groups for target companies concerned in the context of the cross-sectoral review (under section 4(1) no. 4 and section 5(2) AWG and sections 55 to 59 AWV). The creation of each new case group triggers a reporting obligation for investments from third countries, lowers the applicable threshold of controlled voting rights from 25% to 10%, involves a comprehensive prohibition on implementing transactions, and leads to a presumption that there is a threat to German public order or security which can ultimately lead to a restriction on acquisition. The number of case groups is to be significantly expanded from currently 11 to 27. The focus of the new case groups is on future and key technologies such as artificial intelligence, autonomous driving, robotics or cyber-security. The BMWi deserves praise here for not adopting the case groups verbatim from the EU Screening Regulation, but specifying them in more detail and thus defining their scope more narrowly. However, many case groups are ultimately still very broadly defined, meaning that the number of acquisitions required to be reported is very likely to increase sharply.
  
  
• Secondly, the sector-specific review (under section 4(1) no. 1 and section 5(3) AWG and sections 60 to 62 AWV) is to be expanded to all acquisitions of companies which develop, manufacture, modify or have de facto control over listed military technology and equipment. This goes hand in hand with a reporting obligation (in this area, for each foreign investment regardless of whether the buyer comes from the EU or from a third country), a lowering of the applicable threshold of controlled voting rights from 25% to 10%, a comprehensive prohibition on implementing transactions, and a presumption that that there is a threat to German public order or security. Especially with regard to target companies supplying corporate groups which in turn manufacture military goods, this appears to greatly increase the number of planned acquisitions that will need to be reported to the BMWi, indeed well above the doubling estimated in the draft revision. According to the applicable export control rules, the list of controlled items also includes  “specially designed” components for listed military equipment, and the authority responsible for export control in Germany, the Federal Office for Economic Affairs and Export Control, interprets the characteristic of special design in a very broad manner.
  
  
• Thirdly, special attention should be paid to a provision according to which, for the first time since the inception of the German ruleset on foreign direct investment screening, the acquisition of rights of control and management are also to be taken into account. Previously, to determine whether the key thresholds of controlled voting rights were met or exceeded (10% in the area of acquisitions requiring reporting or 25% for all other acquisitions) the only factor take into account concerned the nominal voting shares. According to the provision now envisaged, it will be enough for the acquirer to acquire a voting share below the relevant threshold if that is accompanied by the “promise of additional seats or majorities on supervisory committees or in the management”, the “granting of veto rights in strategic business or personnel decisions” or simply the “granting of rights to information”, and thus in each case an influence on the domestic company is conveyed which corresponds to a voting share of 10% or 25%. It may make sense, from the perspective of covering as many transaction structures as possible, to cover de facto possibilities of influence as well as the percentage of formal voting rights. However, the BMWi’s jurisdiction thereby loses a clearly defined and circumscribed identification requirement. Unlike the precise percentage of voting rights, “influence” cannot be easily quantified and thus in certain cases it cannot be reliably ascertained whether the acquirer’s influence is comparable to a voting share of 10% or 25%. A similar problem is well-known in the space of German merger control. The catch-all criterion of “the acquisition of competitively significant influence” below the formal shareholding threshold of 25% (section 37(2) no. 4 of the German Act against Restraints of Competition) also harbours uncertainties, and its applicability in practice can often only be clarified by formally consulting the competent authorities. A similar situation may well arise from the proposed revisions to the AWV procedure. In the interests of transaction security, and in view of the lack of a formal reporting obligation for the acquisition of such possibilities of influence, foreign investors are likely to voluntarily apply to the BMWi for certificates of non-objection more often or to consult the BMWi in advance regarding its jurisdiction, with corresponding effects on the transaction timetable.
  
  

• Finally, the revision contains a provision described as a “clarification”, which is meant to codify the BMWi’s investment screening practice to date and which assumes that investment screening applies in the case of each share increase above the relevant thresholds of 10% or 25%. This is meant to apply even if the acquirer has received a certificate of non-objection or approval from the BMWi for its previous share purchases. This rule or practice is to be viewed critically in connection with the increasingly broad expansion of the reporting obligations and prohibitions on implementing transactions, which are subject to criminal penalties. Even minimal changes in shareholdings or intra-group restructurings can thus be reviewed by the BMWi and may have to be reported without any obvious need to do so. Especially in the capital market, it seems cumbersome to have to notify even small capital increases (undertaken to make the most of a favourable share price) to the BMWi and to wait for its approval. However, that is precisely what the BMWi already requires in practice now, as formalized by the current draft revision of the AWV. Here, too, a look at German merger control might be helpful where the increase in a shareholding is reviewable only if it leads “to a significant reinforcement of the existing affiliation between undertakings” (section 37(2) of the Act against Restraints of Competition). Alternatively or in addition, the review option could be made dependent on whether the acquirer’s interest exceeds certain voting rights thresholds (see section 37(1) no. 3 of the Act against Restraints of Competition). If the draft revision were to enter into force without amendments, it may be necessary to discuss with the authority whether a “provisional notification” can already be made in advance for shares acquisitions within a certain range, to be obtain additional flexibility.

Impact on transaction practice

The impact of the draft of the 17th revision of the AWV on transaction practice would be considerable. The BMWi itself estimates (“conservatively”, it says) that the number of reportable acquisitions will rise by around 180 per year (150 in the cross-sectoral examination, 30 in the sector-specific examination). The BMWi has included in this estimate the fact that UK investors are now also subject to foreign direct investment screening as a result of Brexit. We previously reported on this issue. Given this context, and considering that the existing investment screening framework already provides the BMWi with comprehensive intervention powers, one should critically examine the extent to which security-policy concerns really warrant the creation of further case groups in the cross-sectoral examination and the inclusion of the full list of military technology and equipment in the sector-specific examination.

Affected business associations now have the opportunity to submit comments to the BMWi until the end of February. Given the heated discussions about the draft revision of the AWV, we expect to see extensive changes before it is passed.