European FDI screening rules
On 1 May 2021, the 17th revision of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung) entered into force.
The revision significantly expands the scope of the German FDI control regime, particularly concerning undertakings operating in the high-tech sector.
The revision reflects the tendency, which has been observed for some time, to constantly expand the scope of the German FDI control regime and tighten the assessment. In the past year alone, the German legislator has initiated several amendments in connection with the implementation of European law requirements and the context of the COVID-19 pandemic.
Q&A
1. What is the current regulatory framework for FDI?
The regulatory framework of the German FDI control regime consists of the Foreign Trade and Payments Act (Außenwirtschaftsgesetz) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung).
2. Have there been any changes or updates to the screening rules during the pandemic?
The German FDI control regime distinguishes between a sector-specific investment review and a general (cross-sector) investment review.
The sector-specific investment review is triggered by the acquisition of German undertakings active in particularly sensitive sectors, such as developing or manufacturing listed military technology and equipment, by investors from outside Germany.
The sector-specific investment review applies if, as a result of a transaction, voting rights that are held directly or indirectly by an acquirer amount to 10%.
Any other acquisitions of voting rights meeting certain thresholds in German undertakings by non-EU/EFTA investors are subject to the cross-sector investment review according to the following:
3. Which sectors do the German FDI rules cover?
The regulatory framework of the German FDI control regime consists of the Foreign Trade and Payments Act (Außenwirtschaftsgesetz) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung).
4. Do the German rules have a limited duration?
The regulatory framework of the German FDI control regime consists of the Foreign Trade and Payments Act (Außenwirtschaftsgesetz) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung).
5. Is a further extension foreseeable?
The German legislator has fundamentally revised the German FDI control regime several times in recent years. Further changes are not excluded.
6. Do the rules apply to investments from any foreign country?
The sector-specific investment review applies to acquisitions by any foreign investor. The cross-sector investment review only applies to acquisitions by non-EU/EFTA investors.
7. What are the Government’s powers to intervene in transactions?
Where transactions have to be notified (see question 8.) to the Federal Ministry for Economic Affairs and Energy (FMEA), it is up to the FMEA to assess and decide whether the transaction can be cleared (with or without commitments) or whether it needs to be prohibited. However, for certain transactions for which there is no obligation to report, the FMEA may open and examine ex officio an assessment (see question 8). Here, too, it can then demand commitments in the event of concerns or even prohibit a transaction. This may even mean that transactions that have already been implemented have to be reversed.
8. When should the transaction be notified?
Where transactions have to be notified (see question 8.) to the Federal Ministry for Economic Affairs and Energy (FMEA), it is up to the FMEA to assess and decide whether the transaction can be cleared (with or without commitments) or whether it needs to be prohibited. However, for certain transactions for which there is no obligation to report, the FMEA may open and examine ex officio an assessment (see question 8). Here, too, it can then demand commitments in the event of concerns or even prohibit a transaction. This may even mean that transactions that have already been implemented have to be reversed.
This obligation not only exists for the first acquisition of voting rights of up to 10% or 20% respectively but also if additional voting rights are acquired that lead to total voting rights of 20%, 25%, 40%, 50% or 75%.
Other transactions may be reviewed ex officio, normally for a period of five years following the signing of the purchase agreement. Therefore, a voluntary notification may be advisable to achieve legal certainty swiftly.
9. How should the notification be submitted?
Notifications must be made in writing or electronically. The type and scope of information to be provided depends on the review procedure.
10. How long does it take the authority to make a decision?
The process timeline depends on the respective procedure, and such procedures can last between two and six months. This may be prolonged or interrupted by requests for additional information or ongoing settlement negotiations.
11. Does the European Commission have decision-making power over investments in Member States?
No.
12. What documents are required for the notification?
The type and scope of information and documents to be provided depend on the review procedure. Notifications must include, at the minimum, basic information on the planned acquisition, the (direct and indirect) acquirer, the domestic undertaking that is the target of the acquisition and the respective fields of business. The notification must be supplemented with further information once a review procedure is initiated. All information and documents have to be submitted in German.
13. What happens if the notification does not comply with the rules?
If a notification does not comply with applicable requirements, it will most likely not trigger the proceedings, and no decision-making process will be triggered.
14. What are the penalties for non- notification?
If a notification is mandatory, the parties are not allowed to implement the respective transaction before the FMEA has cleared the transaction (the standstill obligation). Infringements of the standstill obligation can, in some cases, lead to imprisonment of natural persons and to substantial fines.
15. Are there any exemptions to the application of the rules for foreign investments?
Not applicable.
16. Are the rules applicable when the company’s participation in the mentioned sectors is minimal?
There are no de minimis exemptions (i.e., transactions do not have to meet any minimum turnover or market share thresholds).
17. Were there any cases of special powers enforcement involving Chinese companies in 2021?
Not applicable or not known.
18. Were there any vetoes in 2021?
Not applicable or not known.
19. What legal remedies are activated in the case of veto or imposition of prescriptions or conditions?
If the FMEA has reservations about a transaction, an attempt can be made to resolve these through written commitments by the parties involved or by accepting conditions on the parties involved. This is regularly done within the framework of a public law agreement that has to be negotiated with the FMEA.
Orders or prohibitions issued by the FMEA are administrative acts against which legal remedies provided by the Rules of Administrative Courts (Verwaltungsgerichtsordnung) are available.
20. Besides the legal remedies, are there any practical tips for mitigating the impacts of FDI screening rules?
Early provision of all necessary information is encouraged. A review procedure may be prolonged or interrupted by requests for additional information or documents.