Recent Developments on Review of Foreign Investment into Germany: Is the German Government Tightening the Rules?

A brief orientation on the German foreign investment approval procedure 

Highlights 

• For the first time ever the German Federal Ministry for Economic Affairs and Energy has withdrawn an already granted investment approval. 
• Chinese investments in German key industries increased rapidly and have raised to the forefront of political attention. It is a governmental concern that know-how of national security interest were wandering into unwanted hands. 
• Certain initiatives aim to tighten the current German and EU foreign investment review regulations in order to prevent a "sell-out" of German and European high-tech companies to foreign investors. 
• Foreign investors must be prepared for a stricter foreign investment review on any of their attempted investments into Germany. We may assume that investments will take longer to achieve final certainty and full closing and foreign investors will have to address any potential concern early on. 

1. Background – Current Political Situation 

The German Federal Ministry for Economic Affairs and Energy (BMWi) recently withdrew its approval (the so called “clearance certificate”) to the EUR 670 million public takeover of German semiconductor producer Aixtron AG by Grand Chip Investment, a Chinese bidder, as newly emerged information led to national security concerns. This is the first time ever the BMWi has withdrawn an already granted investment approval. This week, CFIUS reportedly issued a recommendation to the US president to block the US part of the proposed transaction. 

So far Germany has pursued a relatively relaxed attitude towards foreign investment. However, the picture has changed and, in particular, Chinese investors today face significant scrutiny. Even though Chinese investments into Germany are not new, the rapidly increasing amounts of investments (from USD 2.6 billion in 2014 to currently USD 11 billion in 2016 so far) and a dramatic change in focus of such investments (from ailing businesses to the German industry and technology crown jewels) have brought the public interest back onto such subject. To name a few, high-profile takeovers in recent times include the acquisition of German industrial robot maker Kuka by Chinese household appliance manufacturer Midea (EUR 4.5 billion), the pending acquisitions of aviation equipment manufacturer BAW by China’s Shanghai Electronic Group (USD 219 million) and ALBA Services Group business by Chengdu Techcent Environment’s (~EUR 300 million). The latest Chinese move towards German technology is Chinese chipmaker Sanan Optoelectronics showing interest in German lighting firm Osram. Due to the monetary value and industry sector of these transactions, they were considered to be of greater public interest than most other examples of inward foreign investment. 

Such foreign investments in German key industries have raised to the forefront of political attention. Even though the political attitude remains liberal, it is a governmental concern that know-how of national security interest were wandering into unwanted hands. Furthermore, excessive foreign investment is viewed to possibly lead - in a long-term perspective - to a loss of know-how and employment and may as such be detrimental to the German industry. With its large amount of highly advanced midsize businesses (many of which are considered to be hidden world champions) Germany is particularly vulnerable to foreign investors buying into the market. 

The BMWi’s Aixtron revocation may be a singular case and might not represent a paradigm shift. However, there is - in light of a so far German welcoming culture towards foreign investment - a certain level of concern when it comes to investments into German key industries by entities controlled by or affiliated with foreign governments. A much-discussed example was the attempt by the German Minister for Economic Affairs and Energy to orchestrate a “western” counter offer to the Chinese Kuka takeover offer mid 2016. 

It is, thus, not remarkable that the German Minister for Economic Affairs and Energy recently called for a Europe-wide safeguard regime, which shall prevent foreign investors to takeover companies whose technology is deemed to be of strategic importance for the future economic success of Europe. 

2. Review of German Foreign Investment – Requirements and Procedure 

The German foreign investment regulation provides for the following review procedure: The BMWi may prohibit transactions under the German Foreign Trade and Payments Act (AWG) and the German Foreign Trade and Payments Ordinance (AWV) if at least 25% of the voting rights in a German entity are acquired by a foreign investor and such acquisition constitutes a threat to public order or security. Thus, in more detail the following requirements have to be examined: 

a) Investment in German based Target Investments of at least 25% of the voting rights in German based targets are subject to the review. German based targets are: 

- companies with corporate seat or place of management in Germany, 

- branches of foreign companies with management in Germany and separate accounting, 

- production sites of foreign companies with place of management in Germany. 

Investments concerned comprise direct and indirect acquisitions leading to a 25% control of voting rights as well as the agreed upon joint exercise of voting rights, if combined voting rights aggregate to the threshold. 

b) Foreign Investor In general, all investors located outside the territory of the EU or the EFTA are threatened to have their investments into Germany be reviewed by the BMWi. Indications for a circumvention of the clearing procedure, for example the use of German purchase vehicles, will not free the ultimate investor from the clearing procedure. Furthermore, and even applicable to EU and EFTA investors, any foreign investor’s buying into German defence and IT-security companies will be subject to review. 

c) Threat to Public Order or Security The BMWi may prohibit an investment only if such investment were to constitute a threat to public order or security, which is deemed to be the case if the investment represents a sufficiently serious and current threat to affect the fundamental interest of German society. The existence of a threat to the public order or security is decided on a case by case basis. The assumption of a threat to public order or security is under a very high threshold. A prohibition of an investment shall only be declared, if it is essential to uphold the public order and security and remains the weakest of all possible actions. As such, it is generally recognized that public security may be affected by investments into sectors securing supply in crisis situations, telecommunication or electricity, or delivering services of strategic importance. 

d) Procedural Steps to be Taken by Foreign Investors Generally, investors are not required to obtain approval for or notify any investment undertaken prior to its completion. However, the BMWi may on its own authority conduct a review within three months from the day of the conclusion of the acquisition agreement or publication of the public takeover offer. Should the BMWi initiate a review, the acquisition may be restricted or prohibited within a two months period starting with the submission of a complete documentation of the transaction. The review period’s commencing starts with the receipt of the confirmation of completeness of submitted documents. 

To obtain a higher level of transaction security the investor may request a binding “clearance certificate” from the BMWi prior to the execution of a planned investment (eg by making the clearance a closing condition). If the BMWi does not open an in-depth review within one month from the receipt of the buyer’s written application for such clearance, the approval is deemed to have been issued. 

However, it is worthwhile noting that investments in certain defence and IT security sectors trigger an obligation for any Non-German investor to obtain prior clearance from the BMWi for any such investment. Such relevant sectors include the manufacturing and development of weapons, specially designed engines or gearboxes for military tracked armoured vehicles, products with IT security features used for processing classified government information, and high-grade earth remote sensing systems. Investments into such defence and IT security sectors trigger a considerably different review process: The investment is deemed to have been approved if the BMWi does not initiate a formal review procedure within one month upon the receipt of buyer’s written notification. In the event an in-depth review is opened, the investment may be restricted or prohibited only within one month after the full set of documents has been submitted and confirmed. In these cases the investor may not request a prior “clearance certificate”. 

e) Judicial Review 

Actions of the BMWi are subject to judicial review. In particular, any decision to refuse foreign investment approval may be contested by way of an investor’s action of annulment before the Administrative Court of Berlin. Likewise, any rescission of a granted foreign investment approval by BMWi may be contested. In any of these cases the court will examine whether the refusal to approve the foreign investment was essential to secure the German public order or security. In this regard the court will fully review the decision and its legal grounds as brought forward by the BMWi. 

3. Envisaged changes to German/EU Foreign Investment Regulation Procedure 

As mentioned before, certain initiatives aim to tighten the current German and EU foreign investment review regulations in order to prevent a “sell-out” of German and European high-tech companies to foreign investors. According to the daily press, within the BMWi a key issues paper has already been drafted. This key issues paper is said to suggest that the EU and the national governments of the EU member states shall be entitled to prohibit investments in their respective companies, if – further to the existing requirements: 

- the investment is motivated by a foreign industrial policy; or 

- the investor is subsidized by a foreign government; or 

- the investment is being carried out by a foreign state-owned (or partly state-owned) enterprise or foreign sovereign wealth fund; or 

- the investment is being carried out by companies from countries which grant only limited market access to German/EU companies. 

It is our understanding so far that in the event any of the aforementioned suggestions were to be implemented into law, a notification obligation by foreign investors would become mandatory and the competent authorities will have to decide each and any case on whether such investment shall be prohibited or approved in consideration of possible threats to national public order or security. It must be further assumed that foreign investors will no longer be entitled to request for a “clearance certificate”. However, as to date not even the key issue paper has become public, the tightening of the foreign investment approval procedure is unlikely to be implemented in the nearer future. 

4. What do Investors need to know now? 

The growing political attention has led to a changing governmental approach. Therefore, foreign investors must be prepared for a stricter foreign investment review on any of their attempted investments into Germany. It is unlikely that clearance certificates will be issued easily and investors will face the BMWi to open formal review proceedings more often. As a result, parties to the transactions will have to submit rather extensive information to the BMWi and await – in certain cases for several months – the final clearance by the BMWi. While such review does not stay the completion of the transaction, the review poses a certain risk to the transaction. A later non-approval will force the parties to unwind the transaction already closed. Thus, this risk will render financing of such transaction and even the eligibility of a foreign investor as the preferred bidder in any process problematic. In consequence we may assume that investments will take longer to achieve final certainty and full closing and foreign investor will have to address any potential concern early on. 

It may be anticipated that in the long-term foreign investment reviews will become a regular step in any cross border transaction. Potential investors should be prepared and become sensitive when it comes to strategic planning of investments into Germany. We will be happy to assist you in your considerations hereto.