Double Defeat: Position of foreign investors strengthened by recent judgments in Germany

For a number of years, foreign investment rules have evolved dynamically, with limited to no judicial review and control. After the remarkable Xella judgment by the Court of Justice of the EU earlier this year, the first notable case law is now emerging at Member State level, too. In November 2023, two judgments issued by the administrative court of Berlin (the Court) have set some initial boundaries to the Ministry of Economic Affairs and Climate Action’s (MoE) room for manoeuvre in administrative procedures. 

1. First case: Acquisition of an oil refinery

The first judgment concerns a foreign investment proceeding related to an Austrian company acquiring a 37.5% shareholding in the PCK Refinery (PCK), which was first notified to the MoE in summer 2021. The transaction only became subject to German foreign investment rules because the acquirer’s parent company was located in Guernsey (see the recent Xella judgment in relation to the impact on the applicability of foreign investment rules to EU acquirers with a non-EU parent company, and the contemplated changes for a draft recast EU FDI screening regulation expected in January 2024).

At the time of the first notification in 2021, a German subsidiary of the Rosneft Group already held a substantial share in PCK, and exercised a pre-emption right over the additional shareholding. In light of this pre-emption right being exercised, the Austrian company informed the MoE that its notification had become irrelevant.

Later, in reaction to the war in Ukraine, the MoE put the Rosneft subsidiaries under trusteeship. Since the pre-emption right no longer applied to the shares in question, the Austrian acquirer picked up the notification proceeding with the MoE again in the summer of 2022. However, as the seller of the 37.5% shareholding claimed that the long stop date had expired (therefore cancelling the transaction), the MoE stopped its second review in October 2022 and closed the file without taking a decision, arguing that there could be no “acquisition” after the cancellation of the SPA. In parallel, the acquirer initiated arbitration proceedings against the seller to clarify the status of the SPA. 

The Court decided that closing the file was unlawful as there was no legal basis for terminating a review by means of an administrative act where that review has become potentially irrelevant. Proceedings initiated by a notification can only be terminated by means of a clearance or prohibition decision, or by agreement with the notifying party. Further, the Court said that it was not within the MoE’s remit to decide whether the SPA was effective under civil law terms. 

Given that there was no valid decision by the MoE within the two-month statutory review period - and a transaction is deemed to be cleared if no in-depth investigation is initiated within this time - the Court cleared the transaction.

2. Second case: Acquisition of a medical product manufacturer

In the second judgment, the Court overruled the MoE’s prohibition of Heyer Medical AG’s (Heyer) acquisition by a Chinese investor. 

Heyer is active in the healthcare sector, manufacturing medical products for anaesthesia and ventilation. The MoE prohibited the transaction due to concerns regarding dependency on China in the healthcare market. 

The Court did not rule on the substantive aspects, but instead overturned the prohibition on procedural grounds. First, the Court decided that the parties had not been properly heard by the MoE because the period between the acquirer’s last hearing and the prohibition decision was inappropriately long. Second, the Court held that the initial two-month review period (Phase I) during which a formal investigation (Phase II) must be initiated had started when the MoE first became aware of the transaction (from a newspaper article). If the MoE does not initiate a Phase II within this two-month period, the transaction is deemed cleared, even if the transaction is later notified to the MoE by the parties. This being the case, the Court cleared the transaction. 

3. Impact on daily FI practice

Both judgments were exclusively driven by procedural aspects, and provide guidance on some key questions:

• The judgments revealed several deficits in the management of the proceedings by the MoE. The regulator will need to take much more care with its timing when initiating a Phase II proceeding. It will need to carefully determine the time when it first becomes aware of a transaction and when the clock starts to run, even without having received a notification. However, the impact of the judgments in this respect is rather limited in practical terms, since the law has meanwhile been amended. 

• By commenting on the lack of a proper hearing, the judgments will also likely result in the introduction of new formal steps in administrative proceedings, ensuring that parties are heard properly and at the right time. This will also require that the government present its concerns more openly before making a decision. This will hopefully address the concern that proceedings are often a “black box”, even for the parties involved. When Parties are being heard in proceedings, the MoE will also need to allow sufficient time for them to rebut concerns raised, and to potentially offer specific concessions addressing such concerns. It remains to be seen how the MoE will implement these points in any upcoming complex reviews.

• The judgments also uncover the challenges for the MoE resulting from the law being “patchy”, spread as it is over a number of different regulations. This may catalyse the call for a uniform foreign investment law, as is currently being discussed within the government. In the meantime, the MoE will need to be more careful when entering into the uncharted territory of procedural manoeuvres, such as the unilateral termination of a proceeding without making a final call on substance. 

4. What comes next?

The judgments can still be appealed by the MoE, and the Ministry has not yet stated whether it wants the judgments to be reviewed by the Higher Administrative Court of Berlin. To the extent that the law has meanwhile been adjusted, there may potentially be rather limited appetite by the MoE to do so.

The government now also has an opportunity to reflect on the key concerns raised by the Court in the envisaged reform of the German foreign investment rules. While there is currently no concrete timeline for new draft legislation to be proposed, we do not currently expect any reforms to materialise before the second half of 2024.

Finally, it is a very welcome development that courts have started engaging with the complex and new area of foreign investment control proceedings, and more guidance by the courts will hopefully be provided in the near future.