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Investment Control in Germany: Current developments and regulations

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Rules on foreign investment have long been the subject of considerable discussion and public interest in Germany. The Siemens/Alstom merger, which was ultimately blocked by the European Commission, and the perceived role of the German government in the aborted Deutsche Bank/Commerzbank merger are vivid recent examples of this development. The German Federal Minister for Economic Affairs and Energy has announced a ‘National Industrial Strategy 2030’ to promote the creation of European and German champions and there continues to be active political debate regarding its implementation.

In this context, the traditional market-liberal approach to foreign investment control in Germany has been gradually changing. Following the acquisition of German robotics company Kuka by Chinese Midea in 2016, there was widespread political concern and scepticism about the adequacy of existing rules, which did not allow the German government to block the transaction. This led to a first revision of foreign investment rules in 2017, whereby ‘critical infrastructure’ businesses were explicitly addressed and made subject to a notification obligation, and timelines for review were significantly expanded. When State Grid Corporation of China in 2018 tried to purchase a minority stake of 20 per cent in 50Hertz, the electricity transmission system operator, co-shareholder Elia, the Belgian utility, exercised a right of first refusal. Subsequently, a second 20 per cent stake came to market. As foreign investment rules at that time only applied at a threshold of 25 per cent of voting rights, the government had no legal tools at hand to block the acquisition, but negotiated with Elia a renewed exercise of the right of first refusal, with a pre-wired sale of the stake to German state-owned bank KfW. In August 2018, the German government authorised the prohibition of a transaction for the first time, when Chinese Yantai Taihai Corporation attempted to acquire Leifeld Metal Spinning, as the target produced high-tech materials relevant for the nuclear sector.

In light of the 50Hertz transaction, German rules on foreign investment were tightened a second time in late 2018 and since then the rules have applied when 10 per cent of voting rights in enterprises active in critical infrastructures are acquired directly or indirectly. In addition, certain media companies were added to the critical infrastructure list. Apart from critical infrastructures, the applicable general threshold for foreign investment review remains at 25 per cent of voting rights.

Following these earlier changes in 2017 and 2018 and with the adoption of a legislative bill amending the German Foreign Trade Act (AWG) shortly before the parliamentary summer break in 2020, the level of scrutiny has been increased yet again. Formally on the basis of the EU Screening Regulation, but clearly also influenced by the current covid-19 crisis, the new rules (the 2020 Revisions) have substantially tightened several core provisions of German foreign investment control, introducing, inter alia, a suspensory effect and a much relaxed substantive review standard; health-related industries have also been included in the definition of critical infrastructures.

It is to be expected that, on top of these revisions to the AWG, the planned adoption of a 16th amendment to the Foreign Trade and Payments Ordinance (AWV), containing several key implementation rules, will further expand the scope of government review as the list of critical infrastructure businesses (and corresponding review and prohibition rights) will be greatly expanded to include, in particular, critical technologies, such as cybersecurity, nanotechnology and artificial intelligence.

In practice, the approach taken by the authorities also seems to have become more cautious, and the exercise of prolonged review periods is a realistic risk where investments in certain sensitive areas are concerned, with a resulting impact on overall transaction timelines and transaction certainty.

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Investment_control_in_Germany_TheLawReview2020.pdf 360 KB