Broadening the scope further – Latest revisions of German FDI rules go live

The latest amendment of the German FDI rules brings mandatory reviews for 16 additional "critical activities" – but also some welcomed clarifications. The amendment entered into force on May 1, 2021 and is applicable to all transactions signed as of the same day. It can be expected that the number of transactions subject to German FDI review will increase further.

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, lowering the threshold to 10% for mandatory reviews, the introduction of a standstill obligation outside of defense deals, and criminal sanctions for non-compliance), the 17th amendment to the German Foreign Trade and Payments Ordinance ("AWV") aligns the scope of review more closely with the EU Screening Regulation (EU) 2019/452 and casts the net of mandatory FDI reviews even wider. A number of last-minute revisions bring about much-needed clarity.

Extended Scope of review

In line with the draft revision published earlier this year (see our alert here), the revised AWV includes 16 new "critical activities" in addition to the list of 11 target activities already triggering a filing requirement and standstill obligation under the cross-sectoral review to date (which is relevant for all non-EU/EFTA buyers – which includes buyers from the UK following Brexit):

• 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 (last-minute revisions significantly reduced the scope of the new business to only include certain robotics, including for handling explosives, radiation, and other adverse conditions);
• 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 major 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 and input material) – following last-minute revisions limited to additive manufacturing based on metal or ceramic materials (and in particular not plastic);
• 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; relevant to all foreign buyers – even those from other EU Member States), the draft also proposes a number of revisions to broaden the scope of review, including:

• Lowering of the substantive intervention threshold from a "threat" to a "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).

Thresholds for Mandatory Filings

In an unexpected move during the final consultation process, the German government decided to apply the 10% threshold for mandatory filings (including standstill and criminal sanctions) only to critical infrastructure (no. 1-7 of the new section 55a AWV) and defense-related activities (sector-specific review).

For all other businesses – including the COVID-19-related activities and all 16 new businesses included in the current revision (no. 8-27 of the new section 55a AWV) – the relevant threshold for mandatory filings is now set at 20%. For the COVID-19-related activities introduced only last year, this means an increase of the threshold from 10% to now 20%.

Further, the new AWV brings about important clarifications regarding the acquisition of additional shareholdings after the initial threshold was already met. In particular, instead of the MOE’s current practice finding any additional acquisition to be reportable (as foreseen in the initial draft), the new AWV includes clearly defined thresholds for additional mandatory filings at 20% (in case the initial threshold was 10%), 25, 40, 50 and 75%. Whenever the next threshold is reached, an additional filing is required (including standstill and criminal sanctions). In addition, the new AWV codifies the practice of including reporting obligations for any additional acquisitions (irrespective of the new thresholds) in mitigation agreements.

Further Procedural Changes

In addition to the proposed broadening of the scope of the investment review and new thresholds, the amendment includes following procedural changes:

• Additional review possibilities for the MOE (but no standalone filing obligation) in cases of "atypical" control (influence beyond the shareholding, in particular additional board seats, veto rights, and access to certain information). While the previous draft covered any other kind of agreement in favor of the investor, the final rules are limited to the atypical means of control expressly listed;
• Rebuttable presumption of acting in concert for certain acquisition structures involving purchasers from the same country;
• 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;
• The (often simpler) certificate of non-objection procedure is no longer an option for transactions subject to a mandatory filing and all ex officio cases;
• Clarification that public takeovers must be notified to MOE directly after the publication of the intention to launch a takeover offer.

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 are subject to mandatory FDI review in Germany under the revised law will require significant additional scrutiny and planning. It is therefore 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.

Nevertheless, the good news for investors is the fact that the implementation of the European screening mechanism is now fully in place. With the last-minute revisions increasing the relevant shareholding thresholds, clarifying the approach to additional investments (which should at the same time serve as a reminder to investors not to lose sight of mandatory FDI filings after their initial investment), and limiting "atypical" control to clearly defined scenarios, the German government has shown that it follows a balanced approach and acts on its own promise that Germany wants to remain an attractive place for foreign investments.

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