On July 12, 2017, Germany tightened its control over acquisitions of domestic companies by foreign investors by introducing amendments to the Foreign Trade and Payments Ordinance (the Ordinance). As a result the German Federal Ministry for Economic Affairs and Energy (the Ministry) can now block certain acquisitions more easily based on security reasons.
The change in the law was the result of the German federal government’s reaction to the security concerns raised by the latest trend of foreign investments into domestic companies. During the previous year, there was an increase in acquisitions of German companies by Chinese investors. Examples include the multi-billion acquisitions of Energy from Waste (EEW) by Beijing Enterprises and of Kuka by the Chinese Media Group. Both acquisitions alarmed the public, and the Ministry was criticized for not blocking these investments. The main concern was that foreign investors were able to get access to German know-how in strategically important sectors.
While in the United States the Committee on Foreign Investment in the United States (CFIUS) can still exercise much tighter control over foreign investments, it should come as no surprise that the new rules on German foreign investment control are becoming fractionally more aligned with those in the United States.
In Germany, foreign investment reviews fall into two categories: (1) cross-sector and (2) sector-specific reviews.
Cross-sector reviews: The cross-sector reviews apply to all acquisitions that can raise concerns in relation to public order or security. The Ministry can investigate any acquisition of at least 25 percent of the voting rights in a German company by an investor located outside the EU/European Free Trade Association (EFTA). Any foreign investment of that nature can be prohibited or restricted by the Ministry on the basis that it threatens public order or security. After the conclusion of the contract the Ministry has a three-month deadline to initiate investigations.
The amendments to the Ordinance allow the Ministry to exercise greater control over foreign investments. One of the crucial changes is the extension of time limits and deadlines for review. Under the new rules, the aforementioned period of three months within which the Ministry has to decide on whether to investigate a foreign transaction starts to run only when the Ministry gains positive knowledge of the conclusion of such transaction.
Another significant change is the introduction of a limitation period of five years if the Ministry claims that it has not been aware of the conclusion of the contract unless the acquirer can prove otherwise. In order to obtain legal certainty the investor can apply for a certificate of non-objection issued by the Ministry. A certificate of non-objection, or also called clearance certificate, is a binding confirmation that the acquisition does not raise any concerns regarding public order or safety. The Ministry has now two months (previously one month) to issue a clearance certificate following the application of the acquirer. The clearance certificate is considered as granted if the Ministry fails to open an investigation in that period of time.
Once the Ministry decides to open an investigation, it can require the submission of relevant documents by the contracting parties to assist with its investigation. There is no statutory deadline on when this process needs to be completed, which could extend the M&A process. After the Ministry deems that it has all the necessary documentation, there is a deadline of four months (previously two months under the old rules) upon which the Ministry needs to make a decision either prohibiting, restricting or clearing the transaction.
The most significant change is that the law now provides specific guidance on the interpretation of the term “public order or security.” The amended law introduces a catalogue of industry sectors where the acquisition by foreign investors is potentially considered a threat to public security. These specifically mentioned industries are subject to mandatory notifications of the Ministry. Going forward, higher scrutiny will be on so-called “critical infrastructure.” This term encompasses organizations and facilities that have such a vital function to the nation’s society and economy that their failure or degradation could cause dramatic consequences to public order and safety. Critical infrastructure relates to the energy, information technology and telecommunication, transport and traffic, health, water supply, nutrition, finance and insurance sectors. The amended law also, inter alia, specifically lists the following sectors: companies that produce telecommunication interception measures, companies providing cloud computing services as well as companies for products of telematics infrastructure in the health sector.
Under the old regime, notification of an acquisition was voluntary with regard to all cross-sector reviews. Under the new regime, notification is mandatory for all acquisitions by non-EU/EFTA purchasers that belong to the sectors specifically referenced in the newly implemented list. Non-listed sectors continue not to fall under a mandatory notification requirement.
Sector-specific review: In addition, the Ministry can initiate investigations of any acquisition of at least 25 percent of the voting rights in a German company by any investor located outside of Germany if the target produces or develops highly sensitive products such as war weapons, engines and gears for the drive of battle tanks and security relevant IT products. Companies operating in these sectors are subject to a mandatory approval of the acquisition. Now the Ministry even extended the sector-specific list by further goods in the defense, sensor and crypto technology sector. The amended law has also extended the deadline for the Ministry to initiate a sector-specific review procedure from one to three months upon notification of the acquisition. Going forward, the Ministry has three months (again an increase on the period of one month previously allocated) upon receipt of all (requested) relevant documents to prohibit or restrict the acquisition.
Looking Into the Future
The amended Ordinance gives the Ministry greater control over acquisitions of domestic assets by foreign investors. However, for foreign investors the new rules will increase uncertainty and the regulatory burdens involved in the M&A process. This development aligns Germany more closely to the regime in the United States. Securing a clearance certificate will be even more important under the new regime since it will provide legal certainty to the acquirer. Finally, it will be interesting to see how the EU will react to this development. Commission President Jean-Claude Juncker emphasized in his State of the Union Address 2017 that Europe must defend its strategic interests. He announced that the Commission will be introducing a new EU framework for screening foreign investment that raises security or public order concerns for the EU or its Member States. The vetting of foreign direct investment has been subject to debate across Europe in recent years. Germany, an influential Member State, has just tightened its policy on foreign investments. Will the European Union follow?