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Focus on Regulation

Chinese walls? Germany reinforces the control of foreign investments

On 12 July 2017, the German Federal Government significantly reinforced the barriers for the acquisition of German companies by non-EU companies. The new Regulation for the Amendment of the Foreign Trade and Payments Regulation (“AWV”) will impose new reporting obligations for M&A transactions. There are now concerns about the openness of Germany to foreign investment and the additional burden that the new rules will impose on companies.

More uncertainty in M&A transactions

As the case has been until now, the procedure for the control of investment concerns the acquisition of a direct or indirect participation of 25% of voting rights in a German company. Under the new rules, buyers and sellers should foresee a longer period for the review by the Federal Ministry of Economy (“MoE”). The three month deadline to initiate the review procedure now starts running upon knowledge of the transaction by the MoE. Under the new rules, the MoE now has a maximum of five years to initiate the review of the transaction.

The Regulation does not define knowledge of the signing of the SPA. According to German administrative law, the relevant point in time is that of positive knowledge by the MoE of a transaction, not that of when the MoE could have known about it. For example, when a newspaper reports on a deal, the deadline for the review would commence when the MoE was informed about the transaction by internal press clippings. However, how should companies prove this? The new rules lead to more uncertainty, because they replace an objective method of defining the date of signing with a subjective one.

More certificates of non-objection and longer procedural deadlines

The uncertainty generated by the five year period to initiate the MoE’s investigation can only be addressed through the request of a certificate of non-objection. Therefore, the new rules significantly increase the importance of the certificate of non-objection. In practice, the interest of the Federal Government focuses in particular on transactions with Chinese acquirers. Buyers in Chinese related transactions should carefully consider applying for a certificate of non-objection.

The Federal Government has extended the duration of the pre-review phase from one month to two months, in order to address the “increasing complexity of the acquisition processes” (explanatory memorandum to the new rules). This must be aimed at ending the current practice of opening the in-depth-investigation also in non-complex cases, only because the one-month deadline was insufficient to decide. For M&A transactions this means unfortunately that in standard cases the deadlines for investment control proceedings pursuant to the Foreign Trade and Payments Regulation (two months) and for merger control proceedings pursuant to the Act against Restraints of Competition (one month) will diverge. Should the MoE open the in-depth investigation, the deadline will be four months instead of the previous deadline of two months.

Reporting obligations for the acquisition of companies in strategic sectors

Until now, a reporting obligation was in place, for the purposes of “sector-specific review” only, in the case of the acquisition of at least 25% of shares in a German company in the defence sector and IT technology for the protection of classified documents. For all other economic sectors, the MoE could initiate a “cross-sectoral review” and prohibit acquisitions or require amendments. However, unlike under merger control rules, no notification obligation existed. The parties to a transaction were free to decide how to handle the risk of intervention by the MoE.

With the new rules, companies in the following industry sectors are subject to the reporting obligation:

  • Critical infrastructure: according to the Law on the Federal Office for Information Security, the sectors of energy, water, information technology and telecommunications, finance and insurance, health, transport as well as food are considered critical infrastructure.
  • Development of sector-specific software to operate critical infrastructure: this category is conceivably broad and comprises, for example, steering and automation software in power plants, software for the processing of securities and derivative transactions, or software for the operation of a hospital information system.
  • Surveillance with monitoring measures pursuant to Section 110 of the Telecommunications Act: operators of public telecommunication systems are obliged to provide technical facilities for the monitoring of telecommunications and to provide the authorities with relevant information. In the future, such companies will be subject to the reporting obligation.
  • Provision of cloud-computing services: pursuant to the Regulation for the Determination of Critical Infrastructure when certain thresholds are reached (e.g. 5 MW data centre capacity or 75.000TByte/year delivered data volume in content-delivery networks).
  • Key companies for products of telematics infrastructure in the health sector.

The list of critical infrastructure has been used to date to consider applying for a certificate of non-objection. However, the new rules require companies in all these industry sectors to report the transaction to the MoE. The reporting does not automatically lead to the initiation of a full review process. Thus, the reporting is similar to the request for a certificate of non-objection which was previously available to these industry sectors.

In the explanatory memorandum, the Federal Government assumes that the new rules will lead to only ten additional notifications per year, out of which the full review process is expected to be opened for only half of them. Considering the vastness of the term “critical infrastructure” and in particular related software, this seems doubtful. The ever-increasing digitalisation of all economic sectors is likely to lead to substantially more IT-related transactions falling under the reporting obligation.

Solution at the negotiating table

Under the old system, the investment review process only provided for the prohibition or adoption of arrangements to safeguard public order or security. The new rules introduce a more flexible element: the MoE can negotiate with the parties contractual agreements aimed to safeguard public order or security. It remains unclear which form and content such agreements would have. Depending on the design, this can be a flexible instrument for the participating companies to overcome governmental concerns. Certainly, the review deadline for the duration of the negotiations will be suspended. This will arguably extend the M&A process, as no time limits for the negotiations are foreseen.

Other provisions: initiation of the process, circumvention transactions, information obligations

Until now it was difficult for the MoE to prove that it had initiated  proceedings in due time, when the decision had to be served, for example, in China and the acquirer was not exactly known. The new rules clarify that the delivery of the notice to the German target company within the three month deadline based upon knowledge of the transaction by the MoE is the decisive deadline to initiate the procedure.

The Foreign Trade and Payments Regulation included a provision on the circumvention of transactions. The new rules clarify that when a non-EU company uses an EU transaction-vehicle in order to acquire a German company, this is considered to be a circumvention of the rules if the direct EU-acquirer does not have an economically significant independent activity, or if it does not have its own permanent business premises, staff or equipment in the EU. Even if there are other objective grounds for a specific corporate design (e.g. of a tax nature), according to the explanatory memorandum, this does not suffice in order to refute the assumption of a circumvention transaction.

Finally, the obligation to provide information to the MoE is expanded to indirectly participating acquirers and domestic target companies. With this change, it will be possible to request information on technologies and business relationships from all participants, instead of only from the acquirer.

Special rules in the defence sector

Companies that manufacture defence goods listed under the War Weapons List or products with IT-security functions for the processing of classified information were subject to the mandatory approval of the acquisition of a shareholding in a company in Germany. This will now be extended to certain additional key defence technologies that are listed in Part IA of the Export List: this concerns the sectors of command and control (in particular crypto technology), reconnaissance (in particular sensor technology), impact (in particular armoured platforms and underwater units) and support (in particular protection technologies). In terms of time, the sector-specific review process will be extended from one to three months.


In a move largely unnoticed by the public, the Federal Government has considerably tightened up the German rules on foreign investment control. The new rules strengthen the position of the MoE and lead to certain uncertainties and increase the burden for the M&A process. In particular, in the future, more time must be set aside to go through these new procedures in Germany. The instrument of the certificate of non-objection will become significantly more important to avoid five years of legal uncertainty. The new rules have entered into force on 18 July following publication in the Federal Gazette.


Eleni Theodoropoulou, a trainee in our Brussels office, contributed to this article.