Revision of the Foreign Trade Ordinance adopted
Further tightening of investment screening in Germany
Sooner than expected, the Federal Government adopted the 17th revision to the Foreign Trade Ordinance (“Revision”) on 27 April 2021. The Revision entered into force on 1 May 2021. The Revision is based on a draft by the Federal Ministry for Economic Affairs and Energy (“BMWi”) that was published on 22 January 2021 (see our alert here). The Federal Government essentially holds on to measures that substantially tighten and expand the scope of German foreign direct investment screening – for the fourth time in only less than 12 months –, but in certain aspects it does not go as far as BMWi originally proposed in its ministerial draft.
Core elements of the Revision
In essence, the Revision contains four key changes:
- Firstly, the Revision introduces additional case groups of target company activities that are subject to a notification requirement under the provisions on cross-sectoral review (cf. section 4(1) no. 4, section 5(2) AWG and sections 55 to 59 AWV); the number of case groups subject to the stricter rules increases from 11 to 27. The new case groups concern future and key technologies, such as artificial intelligence, autonomous driving, robotics or cyber-security. The Federal Government deserves praise for not adopting these case groups verbatim from the EU Screening Regulation, but specifying them in more detail, and defining their scope more narrowly. However, many case groups remain broadly and vaguely defined. Hence, we expect the number of reportable acquisitions to increase significantly. Compared with the ministerial draft, the Revision contains only partly raised voting share thresholds: For target company activities identified in no. 8 to 27 (in particular relating to the health sector and to emerging technologies), the applicable threshold of voting rights triggering a notification requirement is 20% – and therefore higher than the 10% thresholds proposed in the ministerial draft. We consider this good news, in particular for private equity and venture capital investors. For target company activities identified in no. 1 to 7 (in particular relating to critical infrastructure) the threshold remains at 10%. Please note that foreign investments from outside the EU or EFTA into target companies falling under the case groups are not only subject to a notification requirement, but also to a closing prohibition until BMWi has cleared the transaction.
- Secondly, the Revision expands the sector-specific review (section 4(1) no. 1 and section 5(3) AWG and sections 60 to 62 AWV) to all acquisitions of companies which develop, manufacture, modify or have de facto control over listed military technology and equipment. For targets that fall under this description, any foreign investment must be notified, regardless of whether the acquirer is from the EU or any other third country, if controlled voting rights of 10% or more (previously 25%) will be acquired. In particular in relation to target companies that supply manufacturers of military goods, the Revision greatly increases the number of reportable acquisitions – probably more than twice as estimated by the ministerial draft. According to the applicable export control rules, the list of controlled items also includes “specially designed” components for listed military equipment. What is noteworthy here is that the competent export control authority in Germany (Federal Office for Economic Affairs and Export Control) interprets the characteristic of special design in a quite broad manner.
- Thirdly, special attention should be paid to a provision according to which the acquisition of control and management rights also triggers the scope of application of the rules. It is for the first time since inception of the German foreign direct investment screening rules that in addition to the acquisition of voting rights an alternative triggering event may lead to applicability of the rules. According to the Revision, it will be sufficient for the acquirer to acquire a voting share below the relevant threshold if it is accompanied by the “additional seats or majorities on supervisory committees or in the management”, the “granting of veto rights in strategic business or personnel decisions” or the “granting of rights to information within the meaning of section 15(4) sentence 1 number 3 AWG”. The Government may have good (political) reasons to capture as many transactions as possible, including scenarios where the investor acquires the possibility to exert de facto influence. However, we note that thereby, the BMWi’s jurisdiction loses a clearly defined criterion that may lead to legal uncertainty and practical issues. Unlike the precise percentage of voting rights, “influence” is a qualitative criterion that cannot be easily described. There is a real concern that it cannot be reliably ascertained whether the acquirer’s influence is comparable to the applicable voting share threshold. This concern is real taking into account the similar, well-known issue in the space of German merger control. The catch-all criterion of “the acquisition of competitively significant influence” below the formal shareholding threshold of 25% (section 37(2) no. 4 of the German Act against Restraints of Competition) also harbours uncertainties. In practice, its applicability can often only be clarified by formally consulting the German Federal Cartel Office. A similar situation may well arise from the Revision for FDI notifications. In the interests of transaction certainty, foreign investors are likely to apply to the BMWi for certificates of non-objection more often, or to consult the BMWi in advance regarding its jurisdiction, with corresponding effects on the transaction timetable.
- Finally, the Revision contains a newly introduced provision for the additional acquisition of voting rights in case the acquirer has received a certificate of non-objection or approval from the BMWi for its previous share purchases. This provision constitutes an amendment to the ministerial draft and the current practice according to which every additional share purchase may trigger the scope of application of the rules again. The Revision now introduces specific thresholds for the additional acquisition of voting rights that have to be met or exceeded. Nevertheless, the Revision explicitly grants the BMWi the competence to establish further reporting obligations in a clearance certificate even below the specified thresholds. Despite this new competence for the BMWi, the provision contains an improvement to the ministerial draft as well as to the current practice as it differentiates according to the importance of additional share purchases. The BMWi cannot automatically review minimal changes in shareholdings or even intra-group restructurings any more.
Impact on transaction practice
While the relaxations in comparison with the ministerial draft are a welcome development, the impact of the Revision on the transaction practice remains considerable. The Revision significantly expands the ambit of German FDI. It widens the overall scope of the rules and allows BMWi to review more transactions in general. Further, it expands the scope of the notification requirements and corresponding closing prohibitions. With its focus on target companies active in emerging technologies it will have impact on venture capital transactions, and, due to the fact that more transactions fall under the thresholds lowered from 25% to 10 or 20%, also on private equity transactions. For investors, the Revision further increases the need to identify notification obligations during the due diligence process at the latest and to evaluate all risks related with investment controls. The latter, of course, is also true for sellers, who will have to increasingly price in the nationality and reliability of their business partners.
Any questions? Please contact: Dr Bärbel Sachs, Dr Florian Becker, Dr Thomas Schulz, Dr Jens Peter Schmidt, Dr Till Steinvorth, Dr Dr Claus Zimmermann, Dr Max Helleberg or Philipp Studt-Tartarotti
Practice groups: Regulatory & Governmental Affairs, Corporate/Mergers & Acquisitions, Antitrust & Competition