Stricter rules on direct foreign investments in Germany, again?

Germany has come a long way since the landmark Midea/Kuka-transaction of 2017. The rules on foreign investments in Germany have been tightened since then - most recently in the end of 2018 when the threshold at which the German Government can intervene in transactions involving critical sectors has been lowered significantly. In light of the so-called EU Screening Regulation the German Ministry of Economics and Energy has now published a draft bill to intensify foreign investment reviews, again.

Mandatory amendments in light of EU law: co-operation mechanism

Some of the amendments suggested by the German Government are mandatory under the EU Screening Regulation for all member states that have a screening mechanism in place. Accordingly, Germany will implement a cooperation mechanism to allow the European Commission as well as other member states to provide comments in relation to foreign investments undergoing screening in Germany. As a consequence of this co-operation mechanism, the German Government will not only consider whether foreign direct investments could affect the security or public order in Germany but will also take into account corresponding security concerns of other member states as well as with regard to projects and programmes of the European Union, if raised by a member state or the European Commission.

Additional amendments: stricter standard of review and stand-still obligation 

In addition to implementing mandatory requirements of EU law, the German Government intends to use its scope of implementation to strengthen the review of direct foreign investments in Germany. According to the draft bill, it is intended to change the legal standard for the substantive review by reducing the degree of risk necessary for the German Government to intervene. The power to prohibit an investment or to request commitments will no longer be limited to foreign investments that (actually) 'endanger' the public order or security. Rather it will be sufficient if the foreign investment is 'likely to affect' security interests. While the suggested wording stems from the EU Screening Regulation, there is no obligation on the side of the member states to apply this (strict) standard. It is rather a conscious decision of the German Government to increase scrutiny.

In addition, the scope of the review will be extended. The draft bill clarifies that in the future foreign investment review will not be limited to protecting (national) security interests and critical infrastructure but will also comprise aspects such as the 'technological sovereignty' of Germany.

Another noteworthy amendment is the extension of the scope of the stand-still obligation. Currently, only direct foreign investments that fall within the scope of application of the so-called sector-specific regime (focusing on the defense sector) are subject to a stand-still obligation. In the future, this will affect all foreign investments that are subject to a mandatory review in Germany, ie in particular all filings relating to critical infrastructure and, prospectively, critical technology.

Key takeaway 

Ever since Germany’s Economic Minister Peter Altmaier announced his Industrial Strategy 2030 it was clear that Germany intends to amend the test for screening foreign investments and to increase the scope of state intervention. The draft bill that has now been published will have a significant impact on planning and structuring future deals involving German assets. In particular, as a result of the additional consultation requirements, we expect that the average review period will increase further. It will also become difficult to obtain clearance against relatively light touch mitigation agreements given the stricter standard of review which will make it easier for the German Government to block a transaction if no appropriate remedies are offered.

And there is more to come. The Ministry has another bill in the pipeline, which will extend the scope of foreign investment reviews and define a catalogue of critical technologies that will become subject to an increased mandatory scrutiny for which the new stand-still obligation will also apply.