Investment Control in Germany

by Felix Nikodem, Ferdinand Netsch, and Maximilian Zabel

Introduction

In recent years, the German government, along with the EU and its other partners, has seen the need to balance economic and geostrategic interests by raising barriers for non-European foreign investors. This new approach stems from the fear that foreign companies and governments will currently hold decisive stakes in key German companies, undermining German interests.

The following paragraphs will discuss the regulatory approach of the German government while looking into the respective parameters applied in the initiation of regulatory procedures and investigations.

The General Approach

The Federal Republic of Germany defines itself as an open economy. Foreign direct investment is welcome in all areas within the framework of the respective laws. However, in order to avoid security threats, the BMWK can review the acquisition of domestic companies by foreign buyers on a case-by-case basis. In order to examine whether the specific acquisition is likely to impair public order or security or essential security interests of the Federal Republic of Germany. Here so-called cross-sectoral or sector-specific investment reviews are carried out, the latter applies to specific companies within the defence and IT security industries. In principle, the federal government has 27 security-related investment areas.

Assessment of the German Approach

Government investment audits are a necessary instrument for ensuring public order and security. However, restrictions on investment are always a serious encroachment on private property and freedom of contract, as well as a restriction on the openness of Germany as an investment location. Therefore the German government will need to employ its newly acquired powers carefully in a proportional and measured manner. This decision links to the greater picture of increasing investment protectionism worldwide. At 139 active or closed proceedings, the United States is the country which has faced the most investment enquiry procedures by part of German authorities in 2021, followed by China at 37. In a sector comparison, in 2021 there were 76 proceedings in IT, 66 in Health & Biotechnology, 18 in Energy, 17 in Engineering, 13 in Financial Services, 11 each in Logistics and Automotives, 10 each in Media and Semiconductors, 9 in Defence, and 7 in Aerospace. Of the 306 audit cases, there were only six cases of employment-restricting measures in Germany, representing 2% of the total number of audit cases.

The general aim here is to better protect public safety and while preserving order, for instance as it relates to foreign investments in key infrastructure across Germany. If investors from countries outside the European Free Trade Association want to invest in German companies, the transaction must be cleared by the Federal Ministry of Economics and Technology if certain thresholds are surpassed in terms of voting shares or control rights.

Investment Audit Procedure

At least one of the following criteria for the initiation of a cross-sectoral investment audit.

Purchase of more than 10% of voting rights if the purchased company is included in the list of companies relevant for critical infrastructure.
Purchase of more than 25% of voting rights in any company.
Purchase of more than 20% of the voting rights in critical technologies such as semiconductors, AI, 3D printing, and quantum technology.
If the direct or indirect acquirer already holds 10-25% of the voting rights in the domestic target company, an additional acquisition of further voting rights is subject to review, provided that it leads to a total of 20%, 25%, 40%, 50% or 75% of the voting rights in the respective individual case.
An auditable acquisition transaction can also take place if all essential operating resources of a domestic enterprise or a separable part of a domestic enterprise that are necessary for the maintenance of the operation of the enterprise are acquired.
Furthermore, the Federal Ministry of Economics and Technology can also examine acquisitions if there are indications that an abusive arrangement or a circumvention transaction has at least been carried out in order to circumvent an examination by the Federal Ministry of Economics and Technology.

The sector-specific review procedure also consists of two parts. First a preliminary audit, which is subject to notification, and, if necessary, an in-depth audit procedure. Once the complete documentation has been submitted, the acquisition can be restricted or prohibited within four months, whereof the first audit phase only entails 2 months, of which 80% of investment decisions are granted. The BMWK is the leading agency in the sector-specific investment review procedure.

In the 15^th amendment to the Foreign Trade and Payments Act (“Außenwirtschaftsgesetz” or AWG), the focus is on the healthcare sector. Vaccine and antibiotics manufacturers, manufacturers of medical protective equipment and manufacturers of medical goods for the treatment of highly contagious diseases are included in the list of companies with particular security relevance. Since then, acquisitions of these companies must be reported to the Federal Ministry of Economics. This also applies to share acquisitions above a participation threshold of 20 percent (until the Seventeenth Ordinance Amending the Foreign Trade and Payments Ordinance came into force, a threshold of 10 percent applied). The 15^th amendment went into effect in June 2020, which is why this regulation was coined the “Corona-amendment”. A few days before, economics minister Peter Altmaier announced that Berlin would plough more than €300m into the biotechnology company CureVac which was proceeding into clinical trials for its mRNA Covid-19 vaccine without ever having produced a marketable product .

The most far-reaching of these changes was the 17^th amendment to the AWG, which expanded the standard of review so that the German government can examine and prohibit foreign investments as soon as they “may affect” public order or security. This gave the federal government an active veto right. One example in which the right of veto or influence was used is the sale of Costco’s stake. The federal cabinet had previously cleared the way for a stake by Cosco despite massive concerns. Instead of the planned 35% stake in HHLA’s container terminal, the federal government only approved a 24.9% share for the Chinese. In addition, special rights are prohibited. In this way, the German government wants to prevent a strategic participation by the Chinese and reduce the share acquisition to a purely financial participation. Further ahead, the German government is also using another means of intervention. The German government has instructed KfW to take a 20% stake in the high-voltage grid operator 50Hertz in order to block a government-owned Chinese investor. The 17^th adjustment has led to further steps taken to implement the expansion of competences. Parallel adjustments were also made in EU law. The 17th AWV amendment will contribute to a further expansion of the government’s investment screening process. The delineation of the sub sectors has been reviewed at regular intervals since then. Recent changes in the 17^th Amendment have significantly reduced the flow of capital compared to the 2010s, while the capital stock of US$51.39 bn has more than quintupled since 2015 alone. The planned takeover of the German chip supplier Siltronic by the larger Taiwanese competitor GlobalWafers also failed due to the veto of the German government. The reason for this is the relevance of the semiconductor industry. The €4.35 bn deal is failing because of fears of losing control over key technologies.

Summary

As the largest economy in Europe, Germany is an attractive destination for foreign investment due to its innovative and technological strength. In general, investments are highly welcome and important for a prospering economy. However, there may also be investments that would be detrimental to the political security of the country. Therefore, the German government and the BMWK have developed a mechanism that restricts or tightens control and regulation of foreign direct investment. The measures taken have had an impact on direct investment from China, among others, and suggest that non-European private equity boutiques will face stronger regulatory hurdles in certain deals. These hurdles depend mainly on the share of voting rights that will be acquired and on the industry that the target company operates in. Especially in the recent two years, regulation was increasingly tightened, causing public debates about whether certain investments should be granted or refused. Furthermore, the European Union, not only the countries that are home to the target companies, now has a say in whether investments will be granted and under what circumstances.