For M&A transactions in Germany and beyond, Foreign Investment Control screenings have become an indispensable standard element to assess when structuring deals and planning for regulatory review. Similarly to merger control, acquirers and sellers need to consider the impact of the increasing number of jurisdictions that might want to review their proposed transaction. In the last few years, Germany has been at the forefront of the EU member states concerning, in particular, the screening of Chinese investments, although the number of notified acquisitions by US acquirers has also increased. And the regulatory framework continues to evolve quickly:
On 18 June 2020, the German Federal Parliament passed the second of three planned reform steps of German FDI rules. After implementing specific safeguards in the health sector in light of the COVID-19 crisis already on 20 May 2020 (amendment publicly available in German here), the underlying Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG, publicly available in German here), has now been amended. The new rules will immediately impact in particular M&A transactions in the field of critical infrastructure, and as of later in the year likely also “critical technology” more broadly.
The amendment to the law implements the EU FDI Framework Regulation (EU) 2019/452 that will be applied as of October 2020 and which for the first time sets out requirements at European level for investment screening.
As a very important procedural change, any acquisition subject to reporting requirements will now be subject to a stand-still obligation for the duration of the investment control procedure. “This will prevent those involved in the acquisition from creating faits accomplis during the ongoing procedure and undermining the objectives of investment control,” the Federal Government states. Until today, only transactions in the field of defence could not be closed, which will now apply also to transactions in the field of critical infrastructure such as energy grids or telecommunication networks.
On the substantive side, the focus of the revised German law is on the screening standard: in the future, it is sufficient for the government to find that an acquisition is “likely to affect public order or security in Germany“. Up to now, an “actual threat” has been the applicable standard. As a result of the change, critical infrastructure acquisitions could be examined in a more “forward-looking” manner in the future.
In addition to the effects of an acquisition in Germany, the scope of the examination will in the future also expand to the effects on other EU member states and on EU programs and projects.
The AWG amendment will now be signed by the German President and published in the Federal Gazette to enter into force shortly in the coming weeks.
In a third, later step, the government plans to also amend the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV). The AWV specifies the provisions of the AWG in practice and sets out to which type of target companies the German FDI rules apply. Importantly for M&A transactions in the technology field, this will primarily involve identifying “critical technologies” to be covered by the German FDI regime. This term has not yet been defined.
However, under the underlying EU Regulation (EU) 2019/452 artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies are all characterized as critical technology. The challenge for the German legislator will be to define these terms in a way or make them subject to materiality thresholds that not each and every company that only indirectly deals with technological development such as AI or computer chips will be subject to a mandatory review procedure. It is expected that this last step of the German FDI reforms will trigger an intensive debate between the government and industry stakeholders. The AWV amendment is expected to become effective in the third or more likely fourth quarter of 2020.
For an in-depth review of the legislative developments we refer to our earlier blog on the largely similar first draft of the adopted AWG amendment as well as the further intended German FDI reforms.
Read our previous blogs on related topics here:
- Industrial policy strikes again: Germany announces further tightening of Foreign Investment Control rules
- No Christmas Presents for Foreign Investors: The German Government tightens regulations on Foreign Investment Control (again) and amends the anti-boycott provision
- Chinese walls? Germany reinforces the control of foreign investments
- Foreign Investment Control on the Rise – New List of EU Member States’ FDI Screening Mechanisms
- New EU rules for foreign direct investment screening: One step closer to adoption and entry into force
- The Foreign Investment Regulation Review: EU Overview
- We are the champions – France and Germany unite to revive industrial policy at European level
- A New European Deal? – German Minister of Economics suggests revising EU and German merger control regulations to enable the creation of European champions – and keeps FDI options on the table to prevent acquisitions by non-European players