On 12 July 2017, the German government adopted new provisions amending the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung “AWV”).

By implementing the new rules, Germany is trying to stop losing know-how to foreign countries by blocking unwanted takeovers by non-European companies. The amendments are regarded as a response to the takeover of German robotics manufacturer Kuka last year by a Chinese company, which could not be prohibited by the German government although know-how concerning key technologies was affected.

In particular, the amendments will allow the government to block takeovers of domestic companies by foreign investors if this could endanger critical infrastructure. In addition, the period for review of potential acquisitions by the German Ministry for Economic Affairs and Energy (“the Ministry”), as the competent authority dealing with foreign investment controls, was extended. Ultimately, rules to prevent the circumvention of relevant laws have been tightened.

Foreign investment controls in Germany come in the form of either ‘sector-specific reviews’ or ‘cross-sector reviews’.

Changes to Sector-Specific Reviews

Sector-specific reviews under Section 60 et seq. AWV are required where a non-German party (whether or not based in another EU member state) wishes to acquire at least 25 per cent of shares or voting rights in a domestic company that develops or produces:

  • items which are listed in a detailed annex to the German Military Weapons Control Act (Kriegswaffenkontrollgesetz – “KWG”), i.e., military weapons, engines or transmission systems for combat tanks, or other tracked armoured vehicles used for military purposes; or
  • products with IT security functions to process classified state information or components essential to the IT security function (i.e. cryptographic products). Even if the production or development of these products (or components) has ceased, this requirement continues to apply on the basis that the relevant know-how is still available to the target company.

The recent amendments extend the scope of sector-specific reviews to further items listed in the annex to the KWG. This primarily affects companies that develop or produce electronic equipment for military or aerospace purposes, such as fire-control systems; imaging or electronic countermeasure devices; specialised products used for military training and simulation purposes; military robotics; nuclear energy facilities and nuclear propulsion; laser protection equipment; and certain other electronic military equipment. Sector-specific reviews are now also applicable to companies manufacturing components for the products above. The former one-month period for the first initial assessment as to whether to open an in-depth, formal investigation has been extended to three months and the period for the investigation has also been extended from one to three months. In addition, the investigation is to be suspended for the duration of any negotiations concerning potential commitments.

Changes to the Cross-Sector Review

Any acquisition of more than 25 per cent of the shares or voting rights in a German company by an investor from outside the EEA may be subject to a cross-sector review under Section 55 et seq. AWV. Under the old provisions there were no requirements for investors to notify the Ministry or obtain its approval for any acquisition in Germany. The Ministry could initiate proceedings ex officio within three months following the conclusion of a purchase agreement. Apart from some minor changes, this still applies for most business sectors. However, the three-month period now starts when the Ministry becomes aware of the agreement. This can sometimes be much later than the actual date the agreement is concluded. To increase legal certainty for the parties, the new provisions clarify that the Ministry may only initiate a cross-sector review within five years after a purchase agreement is signed.

Moreover, under the new provisions, non-EEA investors are now subject to a notification obligation requiring them to inform the Ministry in writing of any purchase agreement involving a target company that develops, manufactures or operates software or other technical systems used for critical infrastructure, such as telecommunications interception; telematics infrastructure; specific cloud-computing services; technology used to control the generation and supply of electricity; technology used to maintain the water supply and sewerage system; facilities used to operate voice and data communication systems; software used to maintain banking and financial services; software or other infrastructure required to operate hospitals and to ensure the supply of pharmaceutical products; software used to operate public transportation systems and the infrastructure required for any other form of transportation (by air, sea or road) used for the movement of people and goods as well as software required to maintain logistics; and the software required to operate the food supply network.

In the event of a sector-specific or cross-sector review, to increase legal certainty, the acquirer can apply to the Ministry for a certificate of non-objection. Under the former rules, the Ministry had a one-month period to assess whether to issue the certificate or open a formal, in-depth investigation. This period has now been extended to two months. In addition, the former two-month period for a formal investigation has been extended to four months. The extension of the review periods was justified on the grounds that, in the past, the Ministry was hurried to open a formal review in certain cases because it was running out of time.

As with sector-specific reviews, the investigation will be suspended for the duration of any negotiations between the parties regarding potential commitments.

Conclusion and Outlook

While the sector-specific review applies to only a very limited number of business sectors and thus will not affect many investors, the recent changes to the cross-sector review will create some obstacles in the form of additional administrate burden for acquirers from outside the EEA. In particular, the recent changes will double the time acquirers from outside the EEA take to obtain legal certainty when purchasing a German-based company and so slow down takeover proceedings.

Further tightening of foreign investment controls is expected at a European level now that some EU member states have requested the EU Commission to take action. In addition, both the European Parliament’s Committee on International Trade and the European Council have come to the conclusion that Member States should be enabled to take steps against unfair and discriminatory trade practices and market distortions, also including foreign investments.
Ultimately, the leaders of the countries assembled at the G20 meeting in Hamburg in early July 2017, recognised the role of legitimate trade defence instruments, foreign investment control being one of them.