The German FDI regime has undergone numerous revisions over the past years, significantly tightening the review of foreign direct investments into Germany. In 2023, the government took a break from the incremental piece-meal updates to evaluate the status quo more holistically. It found the current rules to provide effective protection of German and European security interests without calling into question Germany's general openness toward foreign investors.

However, the German Federal Ministry for Economic Affairs and Climate Action (BMWK) is planning significant updates of German FDI rules to meet evolving geo-political concerns and reflect its practical experience from reviewing hundreds of cases per year. There were exactly 306 cases reviewed in both 2021 and 2022, but the vast majority are cleared swiftly, with an average review time of fewer than 40 days.

At the same time, the BMWK continues to take a strong stance on investments from Russia and China, and has increased its scrutiny of investments by state-owned entities, particularly from the Middle East.

Summary of major changes in 2023

• There have been no major changes regarding the German FDI framework in 2023. The most important revisions relate to information to be provided in a filing, as well as switching to a digital filing system
• The BMWK is evaluating the current German FDI regime, with significant updates expected later in 2024
• As of January 2024, the BMWK will charge a fee for FDI filings. For simple cases cleared in phase I, the fee will be €800, and can be up to €36,000 for complex and time-consuming matters. It is not yet clear whether the fee is to be paid upon filing or at a later point in time, such as the conclusion of the matter
• As part of its China Strategy published in 2023, the German government highlighted the specific issues faced when assessing Chinese investments due to China's civil-military integration. The German government coordinates with other FDI authorities globally to identify and respond to changes in the investment strategies applied. The German China Strategy also expressly mentions the need for outbound investment control measures to complement the existing FDI regime, as other jurisdictions have flagged as well
• The BMWK has identified increased investment activity from the Middle East, in particular by state-owned investors. While the general posture remains positive, deals are subject to increased scrutiny, especially with a new focus on the security of German citizens' personal data, which can lead to longer review duration
• 2023 has brought the first major court losses for the BMWK. Upon appeal, the Administrative Court of Berlin annulled the BMWK's prohibition of medicinal products manufacturer Heyer Medical's acquisition by Chinese competitor Aenomed on procedural grounds. In the same vein, the court found that – without the investor's consent—there was no legal provision allowing the BMWK to close review proceedings without deciding on the notified investment in a German refinery. The court further found that the investment was deemed cleared because the BMWK failed to open in-depth review proceedings in time—which the BMWK had not done because it considered the transaction was unlikely to proceed due to contractual limitations. The court found that a filing still triggers the review period in such a situation, unless it is "obvious" that the transaction cannot go ahead.

Who files?

The direct acquirer is obliged to submit the filing, even if it is a mere special purpose vehicle (SPV) or located in Germany. BMWK accepts filings by legal counsel on behalf of the direct acquirer with proper power of attorney. If the direct acquirer has not yet been determined or established (for example, in cases of a shelf company or a new SPV), the BMWK normally accepts the filing by the indirect acquirer. An electronic filing procedure was implemented in autumn 2023.

Types of deals reviewed

The activities of the target and the "nationality" of the investor determine the review process. German FDI review covers both direct and indirect acquisitions by foreign investors. Further, the BMWK is entitled to review all types of acquisitions, including share deals and asset deals.

Regarding certain highly sensitive industries such as arms and military equipment, encryption technologies and other key defense technologies, acquisitions of at least 10 percent of the voting rights by any foreign (non-German) investor are subject to a mandatory "sector-specific review" and trigger a filing (and a standstill) obligation.

Any other type of investment may only be scrutinized if the investor is based outside the EU or EFTA (a "cross-sectoral review") and acquires a share of at least 10, 20 or 25 percent of the voting rights depending on the industry in question. Whether a filing is required, and a standstill applies, depends on the target's activities.

Sectors that trigger a mandatory cross-sectoral filing inter alia include: critical infrastructure and software for critical infrastructure; telecommunications monitoring; cloud computing; telematics infrastructure; the media industry; services for state communication infrastructure; the medical and pharmaceutical industries; other critical industries (including AI, robotics, semiconductors, nuclear, aviation and aerospace, quantum, satellite, additive manufacturing and IT); critical raw materials; and security of food supply (greater than 1,000 hectares).

In all other cases, the government has a call-in right for any transactions involving the direct or indirect acquisition of at least 25 percent of a German company's voting rights by a non-EU/EFTA investor if the government is concerned that the transaction may impede public security or order in Germany, another EU Member State or certain EU programs.

Scope of the review

A transaction must be filed with the BMWK if the foreign investor acquires voting rights in a German entity active in a critical business sector and reaches certain investment thresholds (10 or 20 percent, depending on the industry), or a certain scope of assets of such an entity.

In assessing the investment thresholds, the BMWK takes a broad approach and looks at all entities in the entire acquisition chain (without any dilution of the shareholding) from the direct acquirer to the ultimate parent, and arguably also at shareholders such as limited partners, to be assessed on a case-by-case basis.

Additional mandatory filings are triggered when subsequently reaching thresholds of 20 percent (if the initial threshold was 10 percent), 25, 40, 50 and 75 percent. All transactions triggering mandatory filings are subject to a standstill obligation: the transaction must not be consummated before it is cleared by the BMWK. In particular, it is prohibited to allow the acquirer to directly or indirectly exercise voting rights or grant the acquirer access to certain sensitive data before clearance has been or is deemed to be granted.

Outside the scope of mandatory review, the BMWK can call in acquisitions of at least 25 percent subject to cross-sector review, in cases of "atypical" control—a somewhat vague threshold that takes into account any influence beyond the shareholding acquired by the investor, in particular by means of additional board seats, veto rights or access to certain information. It can also call in acquisitions in certain settings that allow for an aggregation of shareholdings, such as shareholdings by several different investors controlled by the same foreign state.

The standard of German FDI review is to ensure public order and (essential) security interests. In its assessment, the BMWK will in particular consider the origin of the investor, the foreign government influence on the investor, and the track record of the involved parties with BMWK filings. Further, general political considerations like securing supply chains or industrial policy play an increasing role.

In order to safeguard public order or security, the BMWK may—in accordance with other federal ministries—prohibit transactions or clear a transaction subject to mitigation measures or remedies. These typically take the form of a trilateral agreement between the ultimate acquirer parent, target and the German Federal Government, but the government could also impose certain measures unilaterally. The contents of the measures will depend on the concerns to be resolved, and can include safeguarding pre-transaction volumes of supply, not relocating facilities/know-how, reporting obligations and so on. To enforce a prohibition, the BMWK can prohibit or restrict the exercise of voting rights in the acquired company, or appoint a trustee to bring about the unwinding of a completed acquisition at the expense of the acquirer.

Review process timeline

The review process timeline is split into two phases.

Phase I begins with the BMWK obtaining knowledge of the transaction, either by notification or by other means, and lasts up to two months, during which the BMWK will determine whether to open a formal review (phase II) or clear the transaction.

Phase II begins with the BMWK opening a formal review and requesting further documentation regarding the transaction, the scope of which lies within the broad discretion of the BMWK. The formal review starts upon receipt of that documentation and lasts another four months; however, the BMWK can extend it by another three months in exceptionally complex cases, plus another additional month for defense deals. In addition, the timeline is suspended if there are additional information requests by the BMWK, and for as long as negotiations on mitigation measures are conducted between the BMWK and the parties involved. Such considerations outside the official review timeline can therefore have a significant impact on the transaction timetables.

If at the end of phase I or II the BMWK has not issued a decision, the transaction is legally deemed to be cleared (for phase II, only in cases subject to cross-sectoral review).

How foreign investors can protect themselves

Parties to transactions should carefully consider the risk of foreign investment control procedures early in the process, ideally starting at the front end of the due diligence process. Given the potential for considerable FDI review risks, it may be appropriate for the parties to initiate discussions with the BMWK even before the signing or announcement of a binding agreement.

In any event, parties should factor in sufficient time for German, and potentially other, FDI reviews when negotiating long-stop dates. For example, in critical cases the BMWK has a tendency to wait until Chinese merger clearance has been obtained to factor in any implications of Chinese remedies, which had previously been the long pole in many transaction timetables.

Clearance provides a safe harbor for any transaction. If no filing was submitted, the BMWK can take action ex officio for acquisitions in scope of German FDI review within a maximum period of five years from signing —but no later than two months after receiving knowledge of the acquisition—and even prohibit them retrospectively.

In order to protect themselves from such retrospective review in cases without filing obligation and to obtain legal certainty (in particular where German FDI clearance is a closing condition), foreign investors can voluntarily apply for a certificate of non-objection (Unbedenklichkeitsbescheinigung) as a safe harbor. Outside the scope of German FDI review, the investor can request an informal notice of non-applicability by the BMWK. The BMWK typically issues such notices as an administrative practice without binding effect or legal basis.

Lastly, any BMWK decision can be challenged before a German court. However, court action often is not a practical option for the parties, sometimes in light of timing or publicity concerns, and the BMWK enjoys broad discretion as to the interpretation of the legal provisions.

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