Mergers and Acquisitions
M&A-Update: High-tech sector targeted by reform of German foreign investment control regime
On 1 May 2021, the 17th amendment to the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – "AWV") entered into force. The German foreign investment control regime was amended to reflect the latest changes to the Foreign Trade and Payments Act (Außenwirtschaftsgesetz – "AWG") of July 2020 and to further implement the EU Screening Regulation 2019/452. It expands the notification requirements, in particular with regard to companies active in the high-tech sector, and subjects additional types of acquisitions to the German foreign investment control regime. At the same time, the 17th amendment excludes certain add-on acquisitions by existing shareholders and certain intragroup restructurings from the scope of the German foreign investment control regime. The changes affect pending transactions that have not been signed as of 1 May 2021.
German Foreign investment control regime
The statutory framework of the German foreign investment control regime, consisting of the AWG and the AWV, has already been amended three times in the last 12 months alone. The general aim of these reforms was to extend the scope and applicability of the German foreign investment control regime to an increasing number of acquisitions.
- The sector-specific screening regime applies to (direct or indirect) acquisitions by any foreign investor of 10% or more of the voting rights in German companies active in particularly sensitive sectors, such as the production or development of war weapons and military equipment as well as encryption technology. The Federal Ministry for Economic Affairs and Energy ("BMWi") must be notified of such acquisitions. Acquisitions are then reviewed and approval will be granted if the acquisition does not pose a threat to material security interests of the Federal Republic of Germany.
- Any other (direct or indirect) acquisitions of voting rights meeting certain thresholds in German companies by non-EU/EFTA investors are subject to the cross-sector screening regime. The BMWi may review, restrict or even prohibit acquisitions if they potentially impair the public order or security of the Federal Republic of Germany, another EU Member State or projects and programmes of interest to the European Union as a whole. The BMWi has to be notified of acquisitions in German companies active in certain sensitive business sectors, such as the operation of critical infrastructures ("Notifiable Acquisitions"). Any Notifiable Acquisition requires approval by the BMWi. Other foreign investments in German companies are not subject to a notification requirement but are still subject to the general review powers of the BMWi and may be restricted or prohibited if they have the potential to impair public order and security.
Acquisitions that fall within the scope of the sector-specific screening regime as well as Notifiable Acquisitions are provisionally ineffective and cannot be consummated without prior approval by the BMWi. More specifically, their consummation is subject to a statutory condition precedent of ministerial approval, meaning that any legal instruments aimed at closing the planned acquisition are void until the approval is granted. Additionally, certain closing-related measures are prohibited for the duration of the review process. Any violations of such prohibitions are subject to criminal sanctions including imprisonment of up to five years and monetary fines.
Expansion of sector-specific and cross-sector screening regimes
The 17th amendment significantly expands the scope of the sector-specific screening regime and the categories of Notifiable Acquisitions. As a result, a significantly larger number of foreign investments in German companies will be subject to notification requirements and the corresponding approval requirements. They will also be provisionally ineffective until the BMWi has cleared the transaction.
- The scope of the sector-specific screening regime covers acquisitions of German companies that develop, manufacture, modify or possess military equipment listed in Section A of Part I of the German Export List (Ausfuhrliste). Previously, only five of the twenty-two categories of items on this list were covered. Additionally, it will now be sufficient to trigger the sector-specific screening regime for the German company to have performed one of the aforementioned activities in the past if it still possesses knowledge of or has access to the necessary expertise and/or technology at the time of the acquisition.
- Sixteen new categories of Notifiable Acquisitions were added to the existing eleven categories under the cross-sector screening regime. Most of the technologies and economic activities are related to the high-tech business sectors listed in the EU Screening Regulation (EU) 2019/452. These key enabling technologies are now reflected in the AWV and subject to a notification and approval requirement, including inter alia artificial intelligence, semiconductors, autonomous driving, robotics, optoelectronics, additive manufacturing and cybersecurity.
Not all categories mentioned in the EU Screening Regulation (EU) 2019/452 have been included as Notifiable Acquisitions – activities relating to "personal data" are not mentioned for example. It was however explicitly pointed out in an explanatory statement that such activities have the potential to pose a threat to public order and security and therefore may be particularly in the focus of BMWi’s general review powers.
Introduction of new screening thresholds
Up to now, the German foreign investment control regime was subject to two screening thresholds: In the case of acquisitions subject to the sector-specific screening regime and Notifiable Acquisitions, at least 10% of the voting rights had to be acquired. For all other acquisitions, an acquisition of at least 25% of the voting rights was required. The 17th amendment introduces an additional threshold – namely 20% of the voting rights – for a specific category of acquisitions.
- The screening threshold of 10% of the voting rights still applies to any acquisition subject to the sector-specific screening regime. In the case of Notifiable Acquisitions, it will now only apply to acquisitions of companies active in business sectors relevant for civil security, such as the operation of critical infrastructures, the development of sectoral software for such infrastructures, and cloud computing services.
- The new screening threshold of 20% of the voting rights applies to Notifiable Acquisitions of companies active in healthcare and infection control, which were first subjected to a notification requirement in the summer of 2020 due to the COVID-19 pandemic, and high-tech business sectors.
- The screening threshold of 25% of the voting rights continues to apply to all non-notifiable acquisitions subject to the cross-sector screening regime.
The 17th amendment clarifies that add-on acquisitions of further voting rights by foreign investors who already hold shares in a German company are also subject to the foreign investment control regime. However, depending on the type of transaction and the pre-transaction shareholding, certain new thresholds (20%, 25%, 40%, 50% or 75% of the voting rights) will now have to be exceeded in order for the transaction to trigger German foreign investment controls.
Screening powers for the atypical acquisition of control
The 17th amendment furthermore enables the BMWi to review certain investments that fall below the aforementioned thresholds. For these so-called atypical acquisitions of control, a foreign investor will have to acquire some voting rights below the relevant screening thresholds and at the same time attain control and management rights that afford him a comparable level of influence over the target company to an acquisition of voting rights reaching or exceeding the relevant screening thresholds. Specifically, the granting of additional seats on or majorities in supervisory bodies, management positions, veto rights regarding strategic business or personnel decisions or information rights may confer such influence over the target company.
The relevant provisions are primarily aimed at investor and shareholder agreements and the possibilities of exerting influence on the German company granted therein. The vagueness of the statutory criteria for atypical acquisitions of control is likely to lead to considerable difficulties in M&A practice. It is therefore to be welcomed that such atypical acquisitions of control are not subject to any notification requirements.
Exception for intragroup restructurings
The 17th amendment partially exempts intragroup restructurings from the scope of the German foreign investment control regime. The exemption applies if the ultimate parent company remains the same and if the transaction is executed between two intermediate holding companies, which both have their place of management in the same non-EU/EFTA country.
Implications for M&A practice
The 17th amendment of the AWV has been in effect since 1 May 2021 and will have significant impact on cross-border M&A practice. Foreign investors will need to be even more thorough in examining potential foreign investment control risks in order to avoid potential obstacles to closing the transaction, unexpected delays in the transaction schedule, post-closing deal uncertainty or even criminal sanctions. In addition, the expansion of the sector-specific screening regime and the increased number of Notifiable Acquisitions will lead to even more cross-border M&A transactions being subject to notification obligations and review procedures. Due to the vague statutory wording regarding some of the new business sectors and acquisitions subject to the reformed screening regimes, there will also be numerous cases in which the assessment of notification requirements will hardly be possible with any degree of certainty. In view of the risks of invalidity and criminal sanctions, it could be advisable in a number of transactions to notify the BMWi of the acquisition as a precautionary measure.
The new provisions on atypical acquisitions of control are likely to further increase the number of acquisitions to be reviewed by the BMWi. The vagueness of the relevant provision will probably result in considerable uncertainty, a circumstance that has been expressly acknowledged by the legislator in its explanatory statement. Against this background, it is a positive sign that the new categories of Notifiable Acquisitions relating to companies active in the high-tech sector are not subject to the lower screening threshold of 10% of the voting rights and that a threshold of 20% applies instead. This will facilitate smaller minority shareholdings by foreign investors and will be particularly beneficial for investors participating in financing rounds for start-ups.
Lastly, it is worth pointing out that the 17th amendment limits the far-reaching screening practice of the BMWi in some areas, e.g. with regard to acquisitions of additional shares and intragroup restructurings.