BREXIT – UK investors face German foreign direct investment control

On Christmas Eve 2020, the European Commission and the UK eventually reached an agreement on the terms of their future cooperation: the EU-UK Trade and Cooperation Agreement (“Trade Deal”). We have assessed the main implications of the Trade Deal from a customs perspective in our recent Newsletter, and take now a closer look at the collateral effects which the Trade Deal brings about for UK investors under the German Foreign Direct Investment (“FDI”) regime.

Background – increasing importance of foreign direct investment screening

Over the past few years, the screening of foreign direct investments has become an increasingly important policy tool for EU Member States, most of which have developed their own national screening mechanisms. These national mechanisms are part of a coordinated framework established by the EU-wide cooperation mechanism introduced by the EU Screening Regulation (Regulation (EU) 2019/452 of March 19, 2019). Against that backdrop, investors on both sides of the Channel had been impatient to find out the extent to which the Trade Deal would impose any constraints on the ability of UK investors to invest in the EU-27 and vice versa.

In Germany, the latest amendment of 29 October 2020 to the FDI regime – German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung or “AWV”) – aimed at implementing the EU Screening Regulation. Further amendments are expected for the first quarter of 2021. Generally, Germany distinguishes between a sector-specific and a cross-sectoral examination of foreign investments in Germany. Thus, under the so-called sector-specific investment screening (§§ 60 et seq. AWV), the Federal Ministry of Economic Affairs and Energy (“BMWi”) may examine whether essential security interest of the Federal Republic of Germany are endangered by foreign investments in Germany. According to the rules of the cross-sectoral examination (§§ 55 et seq. AWV), the BMWi may further investigate whether the acquisition of a domestic company by a non-EU resident poses a threat to the public order or security of Germany.

UK-investors in Germany are now subject to investment screening

As from 1 January 2021, UK-investors in Germany will be viewed as non-EU residents. After a brief period of coordination, internally and, apparently, also with the European Commission, the BMWi has communicated that, as from 1 January 2021, it considers UK investors to be fully subject to §§ 55 et seq. AWV. The BMWi refers explicitly to, inter alia, the security exception of the Trade Deal and states that investment screening is a measure to ensure public order or security in Germany and other EU Member States, as well as certain EU programs.

For UK investors, this is an unpleasant development, as next to merger control and potentially other regulatory approval requirements, the German FDI regime poses another regulatory hurdle for successful and fast closing of M&A transactions.

Recommendation

UK-investors in Germany are well-advised to voluntarily apply for certificates of non-objection in cases where a risk remains that BMWi will review the transaction on its own motion and to notify any transactions potentially falling under a notification requirement.

Doing so will ensure they will not jeopardize the lawfulness of their investment. It is to be expected that the UK will position itself in the same manner as regards future investments in the UK by investors from one of the 27 EU Member States, meaning that those, too, should expect to be subject to foreign investment screening in the UK. In that respect, we note that the UK just recently introduced proposals for a very far-reaching and restrictive foreign investment screening regime, the draft National Security and Investment Bill, which is currently under parliamentary consideration.

Note that where the signing took place in 2020 and closing is imminent when the legal change occurs, the BMWi has clarified that only those acquisitions will be subjected to investment screening for which the signing took place after 1 January 2021.

Comments regarding the BMWi’s interpretation

The rules on equal treatment enshrined in the Trade Deal support the view that the substantive provisions of the EU Screening Regulation should, as a matter of principle, not apply to UK investors. The EU Screening Regulation differentiates between EU-based and non-EU-based investors and therefore contains unequal treatment, which the Trade Deal is intended to prevent in the EU-UK relationship.

Consequently, Germany should put UK investors on an equal footing with investors from EU Member States and should not subject them to cross-sectoral examination within the meaning of §§ 55 et seq. AWV unless it can be demonstrated, on a case-by-case basis, that the unequal treatment of UK investors by subjecting them to foreign investment screening is justified under the security exception of Article EXC.4 of the Trade Deal. Yet, as further discussed further below, the BMWi so far appears inclined to rely on the security exception to justify the cross-sectoral examination of UK investors as a general matter and not just on an exceptional basis.

By contrast, applying the sector-specific examination competencies according to §§ 60 et seq. AWV to UK investors, and that without any restrictions, is consistent. In this context, there is no violation of the aforementioned principle of equal treatment, because investors from other EU Member States and the United Kingdom are treated equally.

Hence, the BMWi’s announced approach of fully subjecting UK investors to cross-sectoral investment screening according to §§ 55 et seq. AWV seems at least questionable, as it may disregard the fundamental requirement of equal treatment enshrined in the Trade Deal. The BMWi seems to rely on an exception provision without verifying, on a case-by-case whether the conditions for relying on the exception are actually met. Please read our detailed analysis here.