Foreign investment control has become a key factor in M&A deals and 2020 was a particularly  eventful year. A large number of countries have recently introduced foreign investment control regimes (or tightened their existing rules) and made use of them with, for example, prohibitions witnessed in France and Germany. Hearing about renewed German plans for stricter foreign investment control laws, some readers may wonder: “Again? Didn't Germany only last year enact two reforms to foreign trade law that tighten the substantive standard of review for M&A transactions by foreign, especially non-EU, acquirers? And wasn't it only in December that a Chinese acquisition of a German company was prohibited?”

This is true, but only two of the three planned reforms were implemented in 2020. The implementation of additional target activities within the scope of foreign investment control, as set out in the EU FDI Screening Regulation, into German law as part of the third reform step found itself delayed last year. The coordination between the different ministries of the German government proved to be more difficult than expected. On 22 January 2021 the Federal Government finally presented a compromise in the form of the draft bill for the 17^th AWV reform (only available in German).

For M&A transactions involving German target companies directly or indirectly via the acquisition of a foreign group, the draft contains some good and bad news:

• Future deals will be made more difficult by the fact that the catalogue of companies whose acquisition is subject to notification will be significantly expanded once again.
• Moreover, in addition to the acquisition of voting rights, the acquisition of control and management rights can now, for the first time, also trigger an ex officio review. Furthermore, the draft confirms that share increases beyond existing stake-holdings are subject to foreign investment control, even if the thresholds were already exceeded before the transaction.
• On the other hand, it is positive that the German government has decided against using very broad terms such as “critical technologies” from the EU FDI Screening Regulation. Instead, the draft contains a list of concrete individual target activities. Even though the list is extremely long and will probably grow in the future, the concrete definition of the target activities triggering a review avoids uncertainties in the implementation of investment control as they occur in other EU Member States. Without this (and given the importance of new technologies in almost all industries), it was conceivable that almost every deal would have needed notification to the Federal Ministry of Economics.

Below is a summary of the key amendments of the proposed reform:

Newly covered cross-sectoral activities of target companies

The draft introduces 16 additional groups of activities in the area of cross-sectoral screenings, i.e. outside of defence technology. Together with the five new case groups (four of them from the health and biotechnology sectors) already added with last year’s amendment, the number of covered activities increases more than fourfold compared to the status one year ago.

Activities covered up to now, such as critical infrastructure and specially developed software for such critical infrastructure or the media sector, remain subject to control. 

The 16 new groups of activities will in future be subject to notification if a non-EU acquirer acquires at least 10 percent of the voting rights or comparable management or control rights (see 3. below) over a German company. This concerns companies in the following areas:

1. high-quality earth remote sensing systems (as regulated in the Satellite Data Security Act)
2. artificial intelligence (AI) technology that has the potential for misuse, e.g. AI that can be used to automatically (i) carry out cyberattacks, (ii) imitate individuals for targeted disinformation, (iii) perform or analyse voice communication or biometric remote identification of individuals for the purpose of surveillance or internal repression, or (iv) analyse movement, location, traffic, or event data for the purpose of surveillance or internal repression. It is important to note that it is not necessary to demonstrate a specific intention to misuse the data, but that it is sufficient if the overall circumstances make such misuse possible as a result of the acquisition
3. automated driving or flying (i.e. autonomous mobility, including drones) as well as essential components or software therefor
4. industrial robots, including software, technology or specific IT services therefor
5. certain semiconductors such as integrated circuits on a substrate and discrete semiconductors as well as optoelectronics
6. IT products or components for cybersecurity, i.e. in particular the IT security industry as well as the IT forensics industry
7. aeronautical companies as defined in Regulation (EC) No 1008/2008 and aerospace companies that develop or manufacture certain dual-use goods or goods or technology intended for aerospace use or for use in space infrastructure systems
8. nuclear technology
9. quantum technology including quantum computing, quantum computers, quantum sensors, quantum metrology, quantum cryptography, quantum communications, and quantum simulation
10. additive manufacturing (3D printing)
11. network technologies, especially in the area of 5G networks
12. smart meter gateways certified or in the process of being certified, or security modules therefor
13. information and communication technology services important to the Federal Republic of Germany, e.g. digital radio for governmental agencies. This will cover employees of the target company who work in connection with “vital facilities” pursuant to the Security Clearance Act (SÜG)
14. critical raw materials as detailed on the European Union’s List of Critical Raw Materials
15. secret patents, e.g. technologies for the enrichment of atomic isotopes, crypto keys, and encryption technologies or technologies for the production of banknotes
16. food security, i.e. enterprises that directly or indirectly manage an agricultural area of more than 10,000 hectares

The new categories stem largely from Regulation (EU) 2019/452 (the EU FDI Screening Regulation). The regulation defines the category of “critical technologies and dual use items” as “including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies.”

At first glance, the draft regulation with its detailed listing seems to go beyond this general clause. In practice, however, such a specific list is to be welcomed. Other EU member states such as Italy or Spain have adopted the broad EU wording without further specification in their law. The experience gained from this makes it clear that uncertainties about the concrete interpretation lead to acquisitions being notified in case of doubt or the authorities being consulted at least informally. In the context of M&A transactions, this can result in delays and uncertainties, for example as to how the conditions precedents for the closing should be designed.

In the future, it will be important for acquirers, sellers and target companies jointly to identify at an early stage whether the target company meets one of the newly introduced criteria. Involving experts from the company as well as legal (and possibly technical experts) will be indispensable for this exercise.

Changes in the area of sector-specific activities of target enterprises

In the area of sector-specific review - i.e. in particular affecting targets in the field of defence technology - reference is to be made in future to all military equipment as defined in Part I Section A of the German Export List (Ausfuhrliste). Until now, only a few individually listed items in the field of armaments were covered.

In addition, the Federal Government intends to apply last year's broadened substantive review standard from the cross-sectoral investment assessment also for sector-specific activities. This lowers the standard of review to “probable threat” - a concrete impairment is no longer required.

The different assessment criteria of sector-specific (essential security interests) and cross-sectoral investment assessment (public order or security) remain unaffected by this amendment.

Atypical acquisition of control

According to the wording of the German Foreign Trade and Payments Ordinance, foreign investment control applied only if an investor acquires 10 percent or 25 percent of the voting rights of a German target enterprise. The amendment intends to clarify that, in accordance with the previous practice of the Federal Ministry of Economics and Technology, incremental share acquisitions above these thresholds also fall within the scope of application of foreign investment control because such increases in voting rights can give an investor additional influence over the target.

What is new and particularly relevant in practice is that control rights outside of formal voting rights can, going forward, also trigger an ex officio review (but not a notification). This concerns investor or shareholder agreements which can give the acquirer a disproportionate influence in comparison to the actual share of voting rights and, therefore, influence comparable to a higher share of voting rights. The Federal Government refers to the appointment of supervisory bodies or management as well as to veto rights in strategic business decisions or extensive information rights. For the interpretation of these terms, a comparison with merger control law can help where the assessment of (co-)control rights has always been standard practice.

Procedural questions

The existence of a mandatory notification obligation in the area of cross-sectoral review (i.e. according to one of the specifically regulated case groups of the new Section 55a (1) AWV) and a parallel voluntary application for the granting of a clearance certificate for activities not specifically mentioned are mutually exclusive in the future. The new regulation serves to clarify that an application for a clearance certificate is excluded in the case of a reportable acquisition and in the case of an examination procedure already initiated ex officio.

In addition, the new regulations clarify that the Federal Ministry for Economic Affairs and Energy can switch from the cross-sectoral to the sector-specific examination and vice versa. The practice of the last few years shows that for more and more cases it is difficult to conclude whether the cross-sectoral or sector-specific investment assessment applies. Sometimes the authorities can only determine in the review procedure, after receipt and examination of detailed information, which procedure is actually applicable in the case at hand.

Outlook

The Federal Ministry of Economics and Technology launched the public consultation with trade associations on 22 January 2021 and gives the associations and companies involved the opportunity to discuss their views and proposals for amendments with the Federal Government. However, it is not expected that the underlying logic of listing a large number of specific sectors will be abandoned in favour of a broader catch-all clause.

It will likely still take a few months until the regulation has found its final version and enters into force. For M&A transactions currently in preparation, however, the draft bill is already an important indication of possible notification obligations. It is also of practical significance that the German government is already sharing notifications for investment assessment with the EU Commission in order to enable coordination with other Member States that may be affected. As a result, not only will more procedures be subject to scrutiny in the future, but the review procedures will also take longer due to several European authorities being involved.

While 2021 promises to be a year with a particularly large number of M&A transactions after the COVID-19 shock in 2020, and while the review of transactions under antitrust law in Germany has just been considerably simplified by higher thresholds, the German government is keen to scrutinise foreign investments even more thoroughly with the help of investment control instruments.

Authored by Falk Schöning and Stefan Kirwitzke