Tougher rules for foreign investors – the ninth amendment to the Foreign Trade and Payments Ordinance
- The Amendment focuses on critical infrastructure, which particularly includes the energy sector. But other civil sectors with security relevance are also covered. One particular innovation is the obligation to notify Germany’s Federal Ministry for Economic Affairs and Energy (“Economic Affairs Ministry”) of investments in these sectors.
- The periods the Economic Affairs Ministry has for reviewing foreign investments have been noticeably lengthened. Previously, the period the Ministry had in which to review cross-sector investments began when the acquisition agreement was signed. This period will now only begin once the Ministry has obtained knowledge thereof.
- The changes will have significant effects on M&A practice.
Investment review’s legal situation to date
German law provides for two types of investment review, regulated by the Foreign Trade and Payments Ordinance. Investors whose registered office is in neither the EU nor a state in the European Free Trade Association and who directly or indirectly acquire a minimum 25% of voting rights in a German undertaking are subject to cross-sector investment review. This applies irrespective of the industry the German target undertaking belongs to. The situation is different for sectorspecific investment review. Such review only applies to German target undertakings in a particularly sensitive area, such as the manufacture or development of weapons of war. This sector-specific investment review also applies to EU-based investors from outside of Germany, however.
Changes in the energy sector
One of the most important changes made by the Amendment, which entered into force on 18 July 2017, is that for crosssector investment review, the Foreign Trade and Payments Ordinance now mentions examples of when in particular an investment may be prohibited or restricted: if the target undertaking operates critical infrastructure, develops or modifies software for critical infrastructure operation, if the undertaking is active in telecommunications surveillance, renders Cloud Computing services, or has a licence for telematics infrastructure. For investments in German undertakings working in These civil sectors with security relevance, the Economic Affairs Ministry will in future review particularly carefully whether or not the acquisition constitutes a risk to public safety and security. In other respects, a statutory duty to report also applies with immediate effect. In a new development, such transactions now need to be notified to the Economic Affairs Ministry in writing. This brings the procedure for mergers and acquisitions in civil sectors with security relevance more into line with sector-specific investment review that has had to be notified to the Ministry to date.
The operators of critical infrastructures also include in particular companies in the energy sector. This comprises the four fields of electricity, gas, fuel/heating oil and district heating, with the associated services in the areas of generation, Transport and distribution. What specific installations belong to the critical infrastructures can be derived from the Ordinance on the Determination of Critical Infrastructures pursuant to the Federal Office for Information Security Act (Verordnung zur Bestimmung Kritischer Infrastrukturen nach dem BSI-Gesetz). This Ordinance contains a list of installations which can represent critical infrastructures (for example generation facilities, storage facilities, electricity and gas grids, refineries, oil pipelines and oil inventories, filling station networks and thermal power plants). A threshold is set for each of these facilities – only facilities which achieve or exceed this threshold are actually critical infrastructures. A rule of thumb for the threshold is that a critical infrastructure will normally supply at least 500,000 people. Legally binding, however, are the individual thresholds given for the various categories of facilities. For example, the threshold for power generation plants is an installed
net rated power capacity of 420 MW, while for gas transmission networks it is an annual output of 5,190 GWh. It is not always possible to ascertain whether the threshold has been achieved merely by observing an individual installation, since together with other installations it may comprise a joint installation, with the consequence that the individual values would have to be added together for the threshold (e.g. in the case of two blocks of a power plant).
Other changes brought about by the ninth amendment to the Foreign Trade and Payments Ordinance
Along with other changes, in particular in the area of sector-specific investment review the Amendment primarily also extends the periods available to the Economic Affairs Ministry. Instead of one month, the Ministry now has two months to review an application for a certificate of non-objection. For sector-specific investment review, the Ministry now has three months rather than one month as previously before the investment is deemed to have been approved. For cross-sector
review, the periods for banning an acquisition or for official orders have been extended from two to four months; for sectorspecific review, from one to three months. An especially controversial point is that for cross-sector review this period used to begin when the acquisition agreement had been signed or the official takeover bid was delivered. Now, however, it will only begin once the Economic Affairs Ministry obtains knowledge thereof. So the Ministry can still ban an acquisition it was not aware of for a considerable period after the acquisition was completed. Stopping or restricting an investment will only be
ruled out after five years have elapsed since signing.
Impact on M&A practice
The changes to the Foreign Trade and Payments Ordinance will have a major impact on M&A practice. Extending the Review periods will mean that more time needs to be planned in between signing and closing for the review procedure at the Economic Affairs Ministry. There could also be practical difficulties in that periods under antitrust and foreign trade law will no longer run in parallel. In future, the Economic Affairs Ministry’s review period will not begin when the acquisition agreement is concluded but only when the Ministry becomes aware thereof. It is therefore likely that parties involved will obtain significantly more certificates of non-objection than hitherto in order to limit the risk of official action in terms of time. The substantive requirements the Economic Affairs Ministry places on such applications will presumably become yet more stringent. In many cases, notifying at least the Economic Affairs Ministry of a transaction subject to investment review will be recommended.
Ultimately, the number of investments stopped or restricted by the Economic Affairs Ministry is likely to change little in the new legal situation. In spite of the new focus on critical infrastructure and other civil areas with security relevance, it will still be the case that the Ministry can only stop a transaction falling under cross-sector investment review if Germany’s public safety or security are at risk. Primarily, therefore, the Amendment is a sign to foreign investors. Although the procedures the latter face will in certain respects be stricter than before, the Amendment does not tackle the crucial issue of which investments are permitted without restriction and which can be banned.
Developments in Europe and other countries
The reason for this can be found in European law. Non-EU undertakings can also claim free movement of capital, and this stops Germany from restricting foreign investments as it pleases. Together with France and Italy, therefore, Germany’s Federal Government recently proposed on the European level that the EU be given powers to intervene in the area of foreign investments. This proposal is aimed primarily at investments financed by state funds or intended to obtained key technology. But to date, many other EU Member States have reservations in this regard.
The changes sought by Germany, France and Italy as well as the Foreign Trade and Payments Ordinance amendment form part of a global tendency towards increasingly tough reviews of foreign investments, especially when the investor is controlled by a foreign state. In 2014, for example, France increased its list of strategically important sectors in which foreign investors need prior approval. In late 2016, the then US President Barack Obama stopped a Chinese investor’s takeover of the German machinery manufacturer Aixtron, and in February 2017 Infineon’s takeover of US chip manufacturer Wolfspeed failed owing to US authorities’ concerns. Likewise, Canada subjects all acquisitions of Canadian entities by non-Canadians, as well as the establishment of new Canadian entities by non-Canadians, to potential national security review, regardless of the size of the investment, where the responsible Minister believes that the investment may be injurious to Canada’s national security. In addition, the direct acquisition of control of a Canadian business by a non-Canadian entity is subject to review and approval on grounds of net benefit to Canada if certain monetary thresholds are met, with thresholds for state investors being significantly lower than those for non-state investors. Australia takes a somewhat similar approach. There, state investors face an investment review from a company value of only A$ 10 million (around EUR 7 million).
Gleiss Lutz commentary
So the Amendment fits into the international trend to review foreign investments more strictly. Essentially, however, and owing to the stipulations of EU law, the German Federal Government has limited itself to amending procedures. Although these are likely to make review procedures longer and more complicated, the preconditions for the Federal Ministry for Economic Affairs and Energy to stop or restrict a transaction - including in the energy sector - have remained practically the
Citation: von Andreae, Grimmeiß, Tougher rules for foreign investors – the ninth amendment to the Foreign Trade and Payments Ordinance and their impact on the energy sector, Gleiss Lutz Energy News #12/2017 as of 21 August 2017.