Yet another tightening of German foreign investment rules on the horizon

2020 was an exceptional year in German foreign investment control, with three major reforms, a record number of filed cases and one leaked prohibition decision. But in spite of these already notable developments, yet another significant reform is in the pipeline, focusing on a further expansion of the mandatory sectors.

Background

The German legislator has substantially strengthened the foreign investment rules in Germany over the last three years, in particular by (i) lowering the applicable acquisition threshold to 10% of voting rights for sensitive sectors, (ii) repeatedly extending the scope of sectors to which the mandatory filing requirement applies and (iii) introducing criminal sanctions in case of non-compliance with a filing requirement and restrictions on information sharing.

In addition, German foreign investment enforcers conduct regular market screening and make use of their broad call-in powers for transactions which are not notified by the transaction parties. The EU-wide cooperation mechanism, which  has been in force since October 2020, further facilitates transparency in transactions which may be relevant from a foreign investment control angle, in particular by introducing a coordinated exchange of information on ongoing foreign investment cases between 16 EU foreign investment regulators and the EU Commission.

Expansion of the sectors requiring a mandatory notification

The proposed further reform, which may come into force at the end of Q1 or in Q2 2021, aims to expand the mandatory German foreign investment control regime, namely the “sector-specific regime”, which is relevant for non-German investors in the wider defence and IT security sector, as well as the “cross-sector regime” relating to investments by non-EU/EFTA investors in other sensitive sectors.

Sector-specific regime: Activities which are relevant in this regime will be significantly expanded. Most importantly:

• all military equipment defined in the German export list will be included; and
• the review regime will be extended to investments in companies that develop, manufacture, modify or have in their possession certain defence technology to which secret patents or certain secret utility models relate.

The regime will not only relate to current activities but also activities which were carried out in the past and for which some knowhow still exists within the company.

Cross-sectoral regime: The draft bill proposes to add a further 16 sectors to the pre-existing 11 sensitive sectors. The new sectors mainly focus on:

• critical technologies as defined in the EU Screening Regulation, covering AI, robotics, semiconductors, cyber security, aerospace, as well as quantum and nuclear technology; and
• certain further specified dual-use technologies, critical raw materials and food security (also based on the EU Screening Regulation).

For the sectors listed in the EU Screening Regulation, the reform aims to provide companies with some welcome guidance by defining the very broad terms contained in the EU Screening Regulation in greater detail (although these definitions are not always clear enough). However, the draft bill, in some instances, goes beyond the EU Screening Regulation and also includes certain other sensitive activities, e.g. automated driving / flying, optoelectronics, the operation of air carriers and additive manufacturing as additional sensitive sectors.

New thresholds for foreign investment review

Under the new proposals, the regulator will have the power ex officio to review the acquisition of material influence below the currently applicable threshold of 10% of voting rights. Further, the law clarifies the regulators’ current interpretation of the law; each acquisition of further voting rights about the threshold triggers a new filing requirement (with no de minimis threshold being applicable).

Next steps and key takeaways for investors

The draft bill is still under discussion with stakeholders, and this may result in further changes.

Irrespective of the reform coming into force, most transactions in the newly added sectors are already currently within the scope of the broader ex officio regime, and companies engaged in M&A in these sectors will need to carefully assess whether a voluntary filing is warranted or not. The draft bill sends a clear signal to the market as to which sectors are regarded as particularly sensitive from a German foreign investment perspective. We are also aware of a number of instances in which the regulator is conducting market screening activities and is actively calling in cases.

To read more, please see our recent client alert on these reforms.