On 17 July 2020, an update to Germany’s foreign investment law entered into force. The key points are as follows:

  • The changes mainly implement EU law.
  • There is a significantly stricter standard of review that makes it easier for the screening authority (the Ministry for Economic Affairs and Energy) to intervene.
  • Sharing specific types of information prior to closing a transaction is prohibited.
  • Breaching the new stand-still obligation may lead to fines and/or imprisonment.
  • The review periods are now identical for all types of proceedings, irrespective of the sector concerned, and the Ministry may extend the review period within specified limits.

Germany has come a long way since the landmark Midea/Kuka-transaction of 2017. The rules on foreign investment in Germany have been tightened since then – most recently at the end of 2018 when the threshold at which the German government can intervene in transactions involving critical sectors was lowered from 25 per cent to 10 per cent. The law that entered into force on 17 July mostly implements the EU Screening Regulation. But it also contains other details, some of which are likely triggered by the current health and economic crisis.

Mandatory Amendments in light of EU law: Co-operation Mechanism

Some of the amendments are mandatory under the EU Screening Regulation for all Member States that have a screening mechanism in place.

Germany will implement a co-operation mechanism to allow the European Commission as well as other Member States to comment on foreign investments undergoing screening in Germany. In future, the German government will consider not only whether foreign direct investments could affect security or public order in Germany but also the situation in (and concerns of) other Member States and the Commission.

Additional Amendments: Stricter Standard of Review and Stand-Still Obligation

The amendment will likely lead to many transactions facing much closer scrutiny. This is because the new law changes the standard of review by reducing the degree of risk required in order for the Ministry to intervene. The power to prohibit an investment or to request commitments is no longer limited to foreign investments that ‘endanger’ public order or security. Rather it is now sufficient if the foreign investment is ‘likely to affect’ these public interests. While this wording stems from the EU Screening Regulation, Member States do not necessarily have to apply this (strict) standard. Rather, this is an active decision of the German government to increase scrutiny.

Another noteworthy amendment is the extension of the scope of the stand-still obligation. Previously, only foreign direct investments in specific, mostly defence-related, sectors were subject to a stand-still obligation. Now, the stand-still obligation applies to all foreign investments that trigger a mandatory notification, ie in particular transactions relating to critical infrastructure/technology, specific software for such critical infrastructure/technology and media companies with a high degree of influence over public opinion. Once the regulation implementing the foreign investment act is in place, the stand-still obligation will also apply to the purchase of companies active in critical technology – a broad term yet to be defined.

’Gunjumping’ (eg closing a transaction or exchanging confidential information before it is approved by the Ministry) will be a criminal offence with fines and/or imprisonment of up to five years. While this provision may help to protect legitimate security interests, the prohibitions are very broad in nature and in some cases may make it difficult to carry out meaningful technical due diligence. This means that both acquirers and purchasers will have to take extra care in transactions to which the stand-still obligation applies.

Unified review periods: Unlikely to lead to shorter review times

The law now stipulates a standard review period for all foreign investment proceedings, irrespective of the sector concerned. The Ministry can still open an investigation within two months of acquiring knowledge of the transaction. If it decides to open an investigation, it has four months to issue a prohibition or instructions. For particularly complex cases, the Ministry may extend the investigation by three months. If the transaction concerns Germany’s defence interests, the review period can be extended by an additional month (ie four months in total). In all cases, the review period will be suspended if the Ministry and the acquirer enter into negotiations about a security agreement to remedy the Ministry’s concerns.

All things considered, the extended review period can last up to 9/10 months (plus the time for preparing submissions to the Ministry and negotiations). On this basis, we assume that overall review periods (at least in sensitive cases) will be longer than before the update. But the new law does provide more certainty for deal timing by providing a designated timeframe for both standard cases (two months plus four months) as well as more complex cases (two months plus four months plus three or four months). We expect that, in cases concerning less sensitive business areas, clearance can still be obtained quicker, ie in well under six months.

What’s Next?

There is more to come. In addition to this new law, there will be an implementing regulation, which will contain further details such as a catalogue of ‘critical technologies’ that will be subject to increased scrutiny and to which the new stand-still obligation will also apply. The Minister for Economic Affairs and Energy, Peter Altmaier, has explained that he wants to protect Germany’s ‘economic sovereignty’. When commenting on the law, he made it clear that this update to the foreign investment act is just another step towards a revised foreign investment review System.

Over the last few months, foreign investment reviews have also been tightened (or changes announced) in France, Spain, Italy, the UK and Slovenia. Other EU Member States may follow suit shortly, heeding the call of the European Commission.