The German Federal Ministry of Economics and Technology ("BMWi") has presented plans to further tighten foreign investment review rules last week.

A Ministerial Draft is aimed at amending the German Foreign Trade Act. Further, a strategy paper published simultaneously announces changes to the Foreign Trade Ordinance. The amendments shall be enacted later this year.

Key Facts

- Extension of notification requirements to investments in the areas of artificial intelligence, robotics, semiconductors, biotechnology and quantum technology

- Prohibition on implementing notifiable acquisition before clearance by the BMWi

- Lowering of the requirements for a prohibition

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

  1. Extension of notification requirements

Direct or indirect acquisitions by investors from outside of the EU and EFTA of 10% or more of the voting rights in German companies active in the following areas shall be subject to notification requirements:

  • artificial intelligence;
  • robotics;
  • semiconductors;
  • biotechnology; and
  • quantum technology.

Until now, notification requirements have only applied to investments in German companies that

  • operate critical infrastructures;
  • develop or update certain industry-specific software used to operate critical infrastructures;
  • are tasked with activities in the telecommunications surveillance field or produce or have produced technology for the implementation of the same;
  • provide cloud computing services and in so doing have access to certain crucial security infrastructures;
  • hold authorizations relating to components or services in the telematics infrastructure; or
  • contribute to shaping public opinion in the media industry through radio, telemedia or printed matter and are characterized by particular topicality and wide-ranging impact.

In addition, there are notification requirements in the context of the so-called sector specific investment review for non-German acquirors for investments in companies that produce or develop certain weapons, ammunition and armaments, components of military vehicles and products with IT security functions used to process classified state secrets or components of such products.

  1. Prohibition on implementing transactions before clearance for all notifiable transactions

All notifiable investments shall be subject to an implementation prohibition. A notifiable investment in a German company shall be provisionally invalid. The underlying legal transaction shall only become valid when the BMWi has cleared it in writing or the review period has lapsed.

Until now, an implementation prohibition applies only within the sector specific review regime (see above at 1., last paragraph).

According to the explanatory memorandum to the Ministerial Draft, the extension of the implementation prohibition is intended to reduce the risk that, prior to the conclusion of the BMWi's review proceedings, exactly those actions are carried out that have security-related consequences that a future prohibition by the BMWi would have been able to prevent.

  1. Lowering of the prohibition criteria

Until now, the BMWi has only been permitted to prohibit acquisitions or issue orders when an investment endangers public order or security in the Federal Republic of Germany. In the future, a lower level of risk will suffice. An "anticipated impairment of public order or security" is to be sufficient in the future.

According to the explanatory memorandum to the Ministerial Draft, the review of individual cases will depend, among other factors, on whether and to what extent an acquisition can impair the technological sovereignty of the Federal Republic of Germany. In addition, the specific investor and the investor's background are to be taken into account.

The BMWi is also to review in the future whether an acquisition could impair public order or security in another member state of the European Union or programs of Union interest.

  1. Further changes

A "National Contact Point" for the new EU-wide cooperation mechanism is to be established within the BMWi. Among the responsibilities of this new Contact Point will be to inform all member states and the European Commission of in-depth investment reviews initiated in Germany and to accommodate information requests and position statements. The result should be to improve cooperation between EU member states in the field of investment review.

The planned amendments to the Foreign Trade Ordinance have not been published, but further changes are anticipated. In particular, the maximum durations for proceedings are expected to be extended. Also under discussion are potential means of reviewing additional purchases (share increases), atypical acquisition of control and the like.

  1. Assessment

The planned tightening of investment review continues developments in recent years. German investment review was already intensified in 2017 (see our 2017 client information) and in 2018 (see our 2018 client information).

The proposed amendments that have now been released are part of the Industry Strategy 2030 that was presented in late November by Federal Minister of Economics Peter Altmaier. On the one hand, the Strategy emphasizes freedom of international movement of capital as a high value. On the other, the technological sovereignty of Germany and of Europe must be protected. In particular, losses of know-how must be avoided and autonomy in central technological fields must be preserved.

Until now, the BMWi regarded itself as restricted from further tightening by European primary law, in particular the free movement of capital and the relevant case law of the European Court of Justice. The BMWi now regards secondary law as providing additional room to maneuver. Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union entered into force on 11 April 2019. Germany, France and Italy had begun pushing for a change in the EU-law framework as early as 2017.

It remains to be seen whether the Ministerial Draft will be approved by the Federal Parliament in its current form. Industry representatives have already voiced critique. The prohibition on implementing transactions may pose particular challenges for M&A transactions and investments in Germany. Further challenges may be posed by the extension of review to new, as yet undefined areas and the very low reporting threshold of 10%, which also applies to indirect investments. In particular, it is of concern that many wholly unobjectionable investments into German companies will be complicated by additional bureaucratic obligations.

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.