Have there been any recent changes to the Foreign Investment rules in Germany?
The most recent changes to the German Foreign Investment Act (the GFI Act) were adopted by the German parliament on 17 June 2020 and came into force on 16 July 2020, when the GFI Act was published in the Federal Law Gazette. The changes to the GFI Act are the latest in a series of amendments which have been made to the German foreign direct investment (FDI) regime, consisting mainly of the GFI Act and the German Foreign Trade Regulation (the GFTR). For background, a detailed summary of the changes that were made in 2017 can be found here, as well as an update on our experiences with the laws here. The applicable laws were amended and tightened once again in December 2018, which is discussed in our article here.
Further, an amendment of the GFTR is expected to be passed and come into force in Q4/2020. The updated GFTR will likely designate sectors that are considered to be critical and thus subject to a notification duty. These changes are intended to protect critical assets and technology by expanding the scope of national investment review (for example, not only cover critical infrastructure but also investments regarding critical technologies such as artificial intelligence and semi-conductors). Please note that due to the COVID-19 pandemic, one new section of the GFTR has already come into effect, which already allows for additional review possibilities relating to companies that are active in the healthcare sector.
If yes, please provide a brief summary of the changes
In summary, the changes to the GFI Act are two-pronged: they introduce additional procedural requirements for FDI in Germany and they expand the Federal Ministry for Economic Affairs and Energy Ministry’s (the Ministry) regulatory ambit. These changes, together with the new GFTR amendments that are expected to come into force in Q4/2020, will broaden the scope of transactions subject to a notification duty. The new changes mean that:
- certain ministries will always have to be involved in any kind of transaction;
- a prohibition of certain transactions will require the consent of the government of Germany while the prohibition of most other transactions will (merely) require an internal joint approval between the ministries which always need to be involved in a process;
- the issuance of any decrees or orders in connection with an approval of any kind of transaction will always require an internal joint approval between the ministries which always need to be involved in a process; and
- any measures relating to a foreign investment may, in principle, only be implemented within two months after the competent Ministry has obtained knowledge of a transaction or within an additional four months (2+4 principle) after a full FDI review has been initiated (however, in difficult cases the time period may be extended by up to three (in some cases four) months);
- a review of a foreign investment in German will not only consider effects of the transaction on German interests but also on European interests;
- the Ministry will be entitled to implement actions relating to the foreign investment if a threat to the interests protected by German law is merely likely (currently, such threat must actually be identified, a likely threat is not sufficient); and
- all transactions which are subject to a notification duty will be subject to a prohibition to close the transaction without a prior approval of the Ministry and this prohibition will be complemented by a prohibition to implement any actions which may circumvent the prohibition to close (which may also include a limitation to share certain critical information in a due diligence process).
What was the rationale for the changes?
The main purpose of the changes to the GFI Act is to adapt the German law to a European Regulation for foreign investments in the EU which was passed in the spring of 2019. However, the changes also contain some provisions which are more restrictive than the standards set out in the European Regulation.
Are these changes temporary and if yes, when are they likely to be reviewed again? If not, are they part of a bigger reform (ie have there been any other recent developments, and are you expecting any further changes)?
The amendments to the GFI Act and the proposed amendments to the GTFR are not subject to any time limitation and will be in force until they are updated by a new set of rules or abolished and replaced by other provisions.
Further changes to German law in the near future (even in addition to the amendments to the GFTR that are expected in Q4/2020) are not unlikely, although we would expect that future changes will likely not affect the GFI Act. However, it is likely that the German government may pass secondary laws, which regulate certain aspects of the GFI Act. In addition, we would expect and hope that the speed of amendments (three material adaptions in three years) will slow down now that German law has been considerably expanded and a European Regulation has been passed and will have to be considered in the future.
It should be noted that foreign investments in Germany and Europe are subject to intensive discussions on various levels and even if German foreign investment law itself is not adapted in the near future, there are likely to be adaptions of other sets of laws which will also affect foreign investments. For example, the European Commission on 17 June 2020 published a white paper on levelling the playing field as regards foreign subsidies, which is expected to tie foreign investors to European subsidies law. Accordingly, we expect that the legal environment for foreign investments will likely continue to be volatile for some time to come.
Are there any particular sectors that are affected the most?
German foreign investment law applies regardless of the sector in which the investments occurs and regardless of the size of the transaction.
However, certain sectors are currently already being identified as critical sectors where investments are deemed to principally carry a higher risk for German/European interests and which are consequently subject to more scrutiny than other sectors. These sectors, inter alia, include telecommunication, healthcare, banking and financial sector, logistics.
In addition, the revised GFTR, which is expected to come into force in Q4/2020, will identify considerably more business sectors as being critical, such as aerospace, aviation, semiconductors, artificial intelligence and robotics. However, a final determination of the relevant sectors will only be possible once the German government has published its proposal for the amended law.
What is the outlook for foreign investment in Germany?
The outlook for foreign investment in Germany is likely to remain volatile for some time as there are initiatives on numerous levels which are aimed at protecting German and European companies from what are perceived as unfair competitive advantages for foreign investors (in particular those investors with a state background or state-backing). In addition, the current trend in public opinion and political discussions indicates a willingness to implement measures which are necessary to protect German high-tech companies from being acquired by foreign investors and to preserve key technologies and know-how in Germany.
Notwithstanding these developments, overall Germany continues to be a country which welcomes foreign investment and which also relies on such investments to drive economic growth in the German economy.
What it is your advice to foreign investors in Germany?
Foreign investors in Germany will need to observe the additional regulatory requirements and transactions in very critical sectors will be subject to an increased risk of a prohibition by the Ministry. Foreign investors should obtain advice as early as possible in the investment process and should include a foreign investment control analysis in their investment plans and structure their investment strategy (including timing considerations) accordingly.
Investors should be aware that the investment review process will include a review of the investor and the business strategy of the investor for the German target following the closing of the transaction. German authorities generally expect a detailed business plan covering short-term, mid-term, and long-term plans, which specifies the benefits the investor expects will be realised from the transaction and the measures by which these benefits will be obtained. The preparation and presentation of the business strategy is in our experience often neglected by foreign investors which regularly only provide very generic and interchangeable business plans, thus missing the opportunity to potentially disperse certain reservations of the Ministry concerning the transaction.
Finally, it should be noted that the Ministry has recently shown that it will apply a review-friendly approach to foreign investments in order to enable the Ministry to process as many transactions as it deems necessary. In addition, foreign investors should be aware that German law has an explicit provision that addresses potential circumventions of German foreign investment control law, and so we would recommend against employing an investment structure which is designed to circumvent German foreign investment laws that would otherwise apply.
Does the Ministry coordinate with other government agencies, including the antitrust regulator?
In Germany, the first (and basically only) point of contact is the Federal Ministry for Economic Affairs and Energy (BMWi) where you file applications and which ultimately passes the decision.
However, the BMWi always has a co-ordinating task, meaning it is obliged to involve any other Ministries which may be affected by the transaction. In addition, the new GFI Act explicitly mentions certain other ministries which always have to be involved. The BMWi is also likely to reach out to all other authorities which may have information regarding the transaction and the parties involved (such as the cartel authority or export control authority).
As such, any decision will always be the result of a co-operation and co-ordination mechanism between various authorities and ministries. The BMWi will have access to any information which has ever been registered with regard to the parties in Germany (and abroad sometimes if they involve their embassies).
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