On 18 June 2020, the German Parliament agreed to further rules on tightening foreign investment control by adopting the First Act on the amendment to the Foreign Trade and Payment Act (Außenwirtschaftsgesetz – AWG). The first amendment to the AWG was published in the Federal Gazette on 16 July 2020 and entered into force on 17 July 2020.

The amendment to the AWG is unique as it introduces for the first time a standstill obligation that is linked to a criminal sanction and administrative penalty. In addition, the amendment to the AWG implements a catalogue identifying actions that are prohibited during the period of review of a notifiable transaction, as well as unifies time-periods of cross-sectoral and sector-specific reviews.

The first amendment to the AWG is just one of various amendments to German foreign investment control in recent years and the second one after the 15th amendment to the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV), which entered into force in June this year.

I. Significant changes within the amendment to the AWG are as follows:

1. Criminal sanction for violation of the standstill obligation

  • The first amendment to the AWG provides for an overall standstill obligation: each transaction requiring notification is now provisionally suspended for the duration of the screening.
  • Pending clearance, the following activities may not be carried out to the benefit of the acquirer:
    • enabling to exercise voting rights,
    • granting distribution of profits associated with the acquisition,
    • providing information linked to the activities of the target that triggers the obligation to notify the acquisition
    • providing company-related information that the Federal Ministry for Economic Affairs and Energy has classified in an order as being important for the essential security interests of Germany or for public safety and order in Germany.
  • The first amendment to the AWG provides for an implementation of a criminal sanction of up to five years or a fine if the parties violate the provisions mentioned above.

2. Tightening up the sector-specific review

The sector-specific review is now being tightened up to cover not only companies that produce or develop military equipment and specific IT products for classified information, but also those companies that modify or have factual control over them.

3. Extension of the scope of ministerial oversight

The amendment to the AWG provides for an extension of the scope of ministerial oversight, insofar as foreign investment control reviews are now triggered where there is a likelihood that a foreign investment will impair security or public order. Previously, restrictions related to foreign investments required an actual threat to public security or order.

4. Focus on both European as well as German security interests

The scope of the Federal Ministry for Economic Affairs and Energy’s review is no longer limited to German security interests. The assessment also now focuses on the impact on other EU Member states and EU programmes, as well as EU projects.

5. Setting up a national contact point for EU-wide cooperation on foreign investment control

The Federal Ministry for Economic Affairs and Energy will establish – like other EU-Member States – a national contact point for EU-wide cooperation on foreign investment control to exchange information between Member States and the Commission, as well as to create the possibility for the Commission and Member States to issue opinions and comments on specific transactions.

6. Standardisation of time-periods for cross-sectoral and sector-specific reviews

So far, the time-periods for cross-sectoral and sector-specific reviews have not been consistent. The amendment now standardises these time-periods:

  • Instead of the previous time-period of three months for cross-sectoral investments in the context of preliminary reviews, the Federal Ministry for Economic Affairs and Energy is now required to decide within two months from when it gains knowledge of an acquisition whether to open a formal investigation (but no longer than five years after signing).
  • If the Federal Ministry for Economic Affairs and Energy opens a formal investigation, the first amendment to the AWG introduces a uniform time-period of four months from receipt of the complete documents. Within these four months, the Federal Ministry for Economic Affairs and Energy must then decide whether to clear the notification, or whether to prohibit or restrict the acquisition.
  • For the first time, the first amendment to the AWG introduces a provision whereby the period is suspended if the Federal Ministry for Economic Affairs and Energy requests further information or documents on the acquisition. To date, requests for information have restarted the time-period. The Federal Ministry for Economic Affairs and Energy may extend the time-period by three months if the review proceedings involve particular difficulties of a factual or legal nature. Further extensions of the time-period is possible if agreed by the purchaser and the seller.
  • The newly introduced time-periods apply to all transactions of which the Federal Ministry for Economic Affairs and Energy gained knowledge after the first amendment to the AWG entered into force.

II. Legal framework for German foreign investment control

The AWV and the AWG provide the legal basis for foreign investment control in Germany.

The AWV differentiates between cross-sector reviews pursuant to sections 55-59 of the AWV and sector-specific reviews pursuant to sections 60-62 of the AWV.

1. Rules governing sector-specific reviews

The German Ministry for Economic Affairs and Energy can commence a sector-specific review when:

(1) a non-German purchaser (including from another EU Member State) acquires at least 10 percent of the shares and voting rights in a domestic company; and

(2) the target company develops or produces:

  • goods that are listed in a detailed annex to the Military Weapons Control Act (Kriegswaffenkontrollgesetz – KWG);
  • products with IT security features that are used to process government-classified information; or
  • certain products that fall within the scope of specific foreign trade regulations.

2. Rules governing cross-sector reviews

The AWV authorises the German Ministry for Economic Affairs and Energy to review acquisitions by any purchaser from outside the EU (or EFTA) of 10 percent of the voting rights in a domestic company active in a security-critical industry such as:

  • operators of critical infrastructure;
  • developers of software for the operation of critical infrastructure;
  • companies active in the telecommunications and surveillance technology sectors;
  • providers of certain cloud computing services;
  • companies active in the area of telematics; and
  • media companies that are in a position to influence public opinion through broadcasting, other media services or print products that provide news and services of a topical nature and have a broad social impact. The following amendments were implemented:

The threshold of 25 percent is applicable to acquisitions of companies in the public sector that do not fall under section 55 paragraph 1 sentence 2 of the AWV, but whose activities relate to public safety or order.

a) Changes under the fifteenth amendment to the AWV

Due to the COVID-19 pandemic, the Federal Ministry for Economic Affairs and Energy considered it necessary to accelerate the implementation of those parts of the European provisions relating to the health care sector, and in particular infection prevention and control. The Federal Ministry for Economic Affairs and Energy highlighted the fact that, due to the COVID-19 outbreak, it had become clear that  Germany’s health care sector was highly sensitive and required explicit regulation.

On 20 May 2020, the federal cabinet adopted the amendment to the AWV. The amendment entered into force upon its publication in the Federal Gazette on 3 June 2020.

The 15th amendment broadens the scope of application of cross-sector reviews. In particular, the development and manufacture of the following products are covered by the cross-sectoral reviews:

  • personal protective equipment, such as face masks;
  • essential medicines such as vaccines (and including raw materials and active ingredients);
  • medical products used for diagnosing, preventing, monitoring, predicting, forecasting, treating, or alleviating life-threatening and highly contagious infectious diseases; or
  • in vitro diagnostics that are used to provide information on physiological or pathological processes or conditions, or for determining or monitoring therapeutic measures in connection with life-threatening and highly contagious infectious diseases.

Manufacturing facilities or technologies, as well as components or primary products used in the manufacture of these critical products, are not subject to the  15th amendment to the AWV.

The amendment authorises the Federal Ministry for Economic Affairs and Energy to review the planned acquisition by any purchaser from outside the EU (or EFTA) of 10 percent or more of the voting rights in any domestic health care company active in the sectors mentioned above. Under the amendment, companies are required to notify the Federal Ministry for Economic Affairs and Energy of any such planned acquisition.

b) Changes within the AWV that are not related to the COVID-19 pandemic

In addition, the amendments to the AWV also provide for new rules that are unrelated to the COVID-19 pandemic. In particular:

  • companies that provide services necessary to ensure the continuity and functioning of state communication infrastructure are considered as security-critical infrastructure for the purposes of cross-sector reviews;
  • asset deals are now also explicitly covered by the AWV; and

when assessing public safety or order, the Federal Ministry for Economic Affairs and Energy shall take into account whether (i) the purchaser is directly or indirectly controlled by governments, state bodies or armed forces, (ii) the purchaser has been involved in activities that have a detrimental effect on Germany or any other EU Member State, or (iii) the purchaser has been found in violation of the AWG, the German Military Weapons Control Act, or offences which would lead to an exclusion from public procurement tenders under section 123 of the German Competition Act.

The amendments to the AWV and the AWG are based on the EU Screening Regulation, which was adopted in 2019 and will fully apply as of 11 October 2020. It is the first time that rules relating to foreign investment control have been adopted at the European level to promote the exchange of information and cooperation between EU Member States in the field of foreign investment control.

III. Further changes within the 16th amendment to the AWV

The German Federal Government intends to further tighten German foreign investment control rules through the 16th amendment to the AWV by adding companies that are operating in the area of critical-technologies, such as artificial intelligence, robotics, semiconductors as well a biotech and quantum technology. The amendment is expected to enter into force in autumn 2020.