GERMANY | MERGERS & ACQUISITION | Strengthening of Investment Controls in Germany and Europe
Over the last two years, investment control rules were strengthened throughout Europe, or for the first time adopted, and a common framework for the assessment of foreign direct investments created by the European Union. The current health crisis which leads to lower stock values of publicly traded companies and generally weakened company values, stokes fears of foreign companies buying the control of EU companies “on the cheap”.
It is against this background that Germany formally submitted amendments to the national investment control rules to its parliament, that France created a special investment fund and that the EU Commissioner for competition intimated in an interview that EU countries could build up stakes in important companies.
As regards Germany the submission of draft amendments to the parliament by the German Federal Ministry for Economic Affairs and Energy (BMWi) follows the ministry’s review of the national framework for investment control and the enactment of the EU-wide framework for investment control. The BMWi had presented its concept for an “Industrial Strategy 2030 – Guidelines for a German and European Industrial Policy” in spring of last year and published a first set of draft amendments early this year. (See our Blogs “Germany will Increase the Screening of Foreign Investments” and “Strengthening of Investment Controls in Germany“.
In Germany, the German Foreign Trade Act (Außenwirtschaftsgesetz, AWG) and the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV) form the legal basis for the control of foreign investments. Such an investigation can result in the prohibition or approval of a certain transaction, where necessary, provided that further requirements and legal obligations are fulfilled. German foreign trade law has been reformed several times in the past years.
The most recent amendment is the Twelfth Amendment of the German Foreign Trade and Payments Ordinance, which was adopted on 19 December 2018 and lowered the shareholding threshold for acquisitions from non EU/EFTA countries from 25 % to a minimum of 10 %: Investments in areas relevant to security and defence now require examination when this 10 % threshold is exceeded (see our Blog “Germany’s Tighter FDI Regime and the EU`s Path to Uniform Standards“). The draft amendment of the German Foreign Trade Act should now lead to more specific rules and potentially to the strengthening of the control of investments.
In addition, the draft amendments implement the EU screening regulation. Within the EU, the control of foreign investment remains a national matter. Until the entry into force of the EU regulation, foreign investments have not been examined in all EU Member States, the national assessment criteria differ a lot and they do not necessarily take the interests of other EU Member States and the EU into account.
Over the last years, a framework for the assessment of direct foreign investments in all countries of the EU was developed and adopted in March 2019 (Regulation (EU) 2019/452 of 19 March 2019 (EU Screening Regulation) – see our Blog “New EU Uniform and Stricter Standards for Screening Foreign Investments“). This Regulation aims to safeguard the security or public order as well as the strategic interests of the entire European Union, by requiring the EU Member States to create the framework for the assessment and control of foreign direct investments in key sectors and in relation to critical infrastructure, and to cooperate with other EU Member States and the European Commission when carrying out their screening.
Legally unrelated but politically connected are the remarks made by Commissioner Vestager in a recent interview with the Financial Times with the tacky title “Vestager urges stake building to block Chinese takeovers“. The Commissioner emphasizes that EU Member States may act as shareholders in companies and that this may constitute a means to fend off foreign takeovers. France has already created a fund with the French bank BPIFrance called Lac d’Argent or Silver Lake.
In the wider context, we can also mention the revival of plans to strengthen the rules that govern procurement.
1.) Draft amendments to the German Foreign Trade Act
The German draft amendments aim to provide the German investment control regime with an efficient tool for protecting the public order or security in case of critical acquisitions by investors from non-EU/EFTA countries. At the same time, however, the BMWi considers it important to find a balance between protecting public order or security on the one hand, and not endanger the attractiveness of Germany as an investment location on the other. By taking the following important points into account, the BMWi is trying to do justice to this balancing act.
a) New approach to the “degree of risk” requirement
According to the current legal framework, restrictions or commitments may only be imposed if the acquisition poses an “actual danger” to the public order or security of the Federal Republic of Germany. Instead of an “actual threat”, a “probable impediment” of public order or security will be sufficient in the future. According to the draft law, this requirement will also not be limited to the Federal Republic of Germany and will allow investment controls which are affecting public order or security of another EU Member State or in regard to projects and programmes of EU interest within the meaning of Article 8 of the EU Screening Regulation.
b) Extension of the ban against implementing the acquisition before clearance
Under current administrative practice, investors may complete their acquisition even before the acquisition’s investigation has been completed. As a result, the relevant authority is faced with a fait accompli before the investigation is concluded, undermining the sense and purpose of the investigation. The draft seeks to prevent this by extending the suspension effect until the completion of the investigation – including any cross-sector investigation.
c) Establishment of a National Liaison Office
Besides the amendments of the purely legal nature, the draft’s intention is to establish a national liaison office within the BMWI as part of the EU-wide cooperation mechanism. The liaison office is supposed to serve as the German link between national and European bodies in order to ensure the exchange of information throughout the EU.
2.) Other Planned Amendments
The second step will consist in amending the German Foreign Trade and Payments Ordi-nance in order to determine which technologies are “critical” so that a shareholding of just 10 % will trigger a notification requirement and a possible investigation. Such technologies are expected to include artificial intelligence, robotics, semiconductors, biotechnology and quantum technology.
The declared objectives of the draft law are to make the German investment control procedures more effective and to provide more specific rules for exercising this control. Whether the amendments will actually achieve the first objective is still a controversial issue. One criticism is that the regulation’s wording is too broad and unclear. Other interested parties consider that the rules are not wide-reaching enough. One consequence is certain: The number of foreign investments to be screened will significantly increase.