Broadening the scope further – Draft revision of German FDI rules published for further consultation

On January 22, 2021, the German Federal Ministry for Economic Affairs and Energy has published the anticipated draft revision of the German Foreign Trade and Payments Ordinance to align the scope of review more closely with the EU Screening Regulation. The Ministry launched a consultation process the same day and is giving the associations and companies potentially affected the opportunity to discuss their views and propose further revisions.

Following a number of revisions of the German foreign direct investment rules throughout 2020 (including a COVID-19-related broadening of the scope of review, the introduction of a standstill obligation outside of defense deals, and criminal sanctions for non-compliance), the German Federal Ministry for Economic Affairs and Energy ("MOE") has published the anticipated draft revision of the German Foreign Trade and Payments Ordinance ("AWV") on 22 January 2021 to align the scope of review more closely with the EU Screening Regulation (Regulation (EU) 2019/452), which came into force in October 2020. Please refer to the linked convenience compare version that we have prepared and that reflects the proposed changes to the AWV embedded here.

Scope of review will be extended

In addition to the list of 11 businesses already triggering a filing requirement and standstill obligation under the cross-sectoral review to date (provided that a non-EU/EFTA buyer – which now includes buyers from the UK – acquires 10% or more of the voting rights in a German entity), the draft proposes a broadening of the scope of review to include 16 additional areas in line with the EU Screening Regulation:

• High-quality remote earth sensing equipment (as defined in the German Satellite Data Security law);
• AI systems (including for automatic cyber-attacks; impersonating others; generating targeted false information; analyzing verbal communication or biometric identification for surveillance or retaliation measures; analyzing movement, positioning or traffic data for similar purposes);
• Automated driving and aviation (vehicles or unmanned aircraft with highly automated steering or navigation including components and software);
• Industrial robotics (including software, technology and specific IT services);
• Semiconductor products (micro- or nano-electronic circuits (optical and non-optical, integrated and discrete) including all relevant production and processing equipment (including crystal pulling, lithography, epitaxy, grinding, cutting, etching, doping, testing, etc.), but not input material more broadly);
• Cybersecurity (IT products or components with the primary function of (i) securing the availability, integrity, authenticity and confidentiality of IT systems/components/processes; (ii) defending against attacks on IT systems (including damage analysis and recovery); (iii) detecting and investigating criminal offences/securing evidence by law enforcement);
• Certain aviation and aerospace activities (including systems and components);
• Nuclear technology;
• Quantum technology (including quantum computers, sensors, metrics crypto-technology, communication and simulation);
• Additive manufacturing (i.e., 3D-printing, including major components);
• Products specifically for operating cable or wireless data networks (including cable or optical fiber transmission, network connection, signal amplification, control, management, etc.)
• Smart-metering;
• Personnel with detailed information regarding vital parts of the federal IT infrastructure;
• Critical raw materials (including lithium, gallium, silicon metal, rare earth minerals, etc.);
• Products based on restricted patents or utility models (e.g., for nuclear or crypto technology or the production of banknotes, etc.);
• Security of food supply (cultivated area of 10,000 hectares or more).

Regarding the sector-specific review (in particular defense-related activities; review in case of acquisitions of 10% or more of the voting right in a German entity by a foreign buyer), the draft also proposes a number of revisions to broaden the scope of review, including:

• Lowering of the assessment criterion from "threat" to "probable impediment" of essential security interests;
• Inclusion of all products in Part I Section A of the Export List (instead of the limited numbers thereof under the old law) and now also including the modification or handling of such products (in addition to development and manufacturing);
• Inclusion of military goods/technologies that are based on restricted patents or utility models (including the modification and handling of such products);
• Inclusion of so-called defense-critical facilities (e.g., entities active in the production of military equipment if they are necessary to safeguard the defense-readiness and cannot readily be replaced).

Proposed Procedural Changes

In addition to the proposed broadening of the scope of the investment review, the draft proposes the following procedural changes:

• Clarification of the MOE's current practice that once the pertinent threshold is crossed, the acquisition of any additional shareholding is subject to FDI review (and will trigger a filing requirement (including standstill obligation) in case the target is active in any of the areas listed above) prior to the new acquisition. Despite some ambiguity in the wording, the draft does not include a de minimis threshold (which would lead to the disproportionate result of a filing requirement with criminally sanctioned standstill obligation even for immaterial acquisitions); this will obviously be a topic for discussion during the consultation;
• Additional review possibilities for the MOE (but no standalone filing obligation) in cases of "atypical" control (influence beyond the shareholding, e.g., additional board seats, veto rights, access to information, etc.). This new concept refers to any other kind of agreement in favor of the investor instead of focusing exclusively the investor's percentage of voting rights;
• Rebuttable presumption of acting in concert for certain acquisition structures involving purchasers from the same country;
• Exclusion of the (often simpler) certificate of non-objection procedure for mandatory filing and ex officio cases;
• Introduction of criteria for using external advisors for the review and reporting on the increasing number of mitigation agreements entered into by the MOE to mitigate concerns.

More generally, the draft proposes a number of edits to align the procedures for the cross-sectoral and sector-specific review, and clarifies the possibility of switching between both review schemes. Finally, the draft includes a statutory evaluation of all recent amendments to the German Foreign Trade and Payments Ordinance until July 2022 (in line with the evaluation of the German Foreign Trade and Payments Act).

Impact for foreign investors

The significant expansion of the list of activities – no less than 16 additional, and now a total of 27 areas for the cross-sectoral review alone – that would be subject to mandatory FDI review in Germany under the revised law will require significant additional scrutiny and planning. It will be more important than ever to get clarity on all of the target's activities early in the process and factor in sufficient time and resources for FDI review in the transaction timetable.

For the MOE and other agencies typically involved in the review process, the draft expressly notes a need to beef up the staff further in light of the expected impact on case numbers: Based on 159 German cases in 2020 – an increase of more than 50 cases from 2019 – the MOE expects at least 150 additional for the cross-sectoral review alone (instead of the previously anticipated 20 additional cases). The MOE further expects a doubling of the sector-specific review cases from 14 in 2019 to around 30. In addition, the European Cooperation Mechanism is causing significantly more work than anticipated (with almost 50 cases notified by other Member States in the first two months of operation alone, and the (future) need to notify all German cases instead of only those where formal in-depth proceedings are initiated). All this may ultimately result in an even longer review duration.

While the revision is only in draft form at this point and will likely take some time before it enters into force, probably in a somewhat revised version, the amended list of critical activities is a clear indication of where to expect intense additional scrutiny in future transactions. The draft does a good job in narrowing down the high level list of critical activities in the EU Screening Regulation and trying to make it concrete, but a number of ambiguities remain, and the legislative materials are clear that even activities in the critical sectors per the EU Screening Regulation that are not covered by the narrower list of the German amendment may well be viewed as critical (and just not trigger a filing obligation). Moreover, some practical issues remain, such as a lack of an exemption from the standstill obligation for public takeovers (such exemptions exist, e.g., under the EU and German merger control regimes).

Finally, the MOE considers that the revisions will not affect the attractiveness of foreign direct investments into Germany. The application of the new rules in practice will be a decisive factor. It is therefore encouraging that – in addition to broadening the scope of review – the MOE is also working on ways to make the process as such less burdensome, including by digitizing filings and providing more transparency and guidance, including on its website.

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