The Seventeenth Ordinance Amending the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung), drafted by the Federal Ministry for Economic Affairs and Energy (FedMin) and recently adopted by the Federal Cabinet, has now entered into force. The amendment joins a chain of numerous reforms from the past year aimed at tightening controls on foreign direct investment in German companies. In view of its far-reaching impact on future transaction practice, the following article provides an overview of the most important changes.
Expansion of cross-sectoral investment control
The focus of the amendment is the expansion of so-called cross-sector investment control. In general, all corporate transactions by which non-EU investors acquire 25% or more of the voting rights of a German company can be subject to control by the FedMin. In this context, an examination takes places to determine whether the acquisition is likely to impair the public order or security of the Federal Republic of Germany or another EU member state. If the domestic target company is active in a particularly sensitive sector, lower review thresholds and notification requirements apply. The Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung) used to provide 11 cases that are particularly relevant for inspection. In these cases, the acquisition of 10% of all voting rights had to be reported to the FedMin. The newly inserted Sec. 55a Para. 1 of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung) increases these cases to 27. Consequently, the number of audit cases is likely to increase in the near future.
Focus on high technology sectors
These new cases are predominantly in the area of high technology (e.g. artificial intelligence, autonomous driving, semiconductors, optoelectronics and quantum technology). In addition, there will be a differentiation in the review thresholds. The previous threshold of 10% will be retained for the acquisition of voting shares in companies that operate critical infrastructure. However, the threshold for companies operating in other high-tech sectors will now be raised to 20%. This intends to relieve the burden on start-ups and financial investors, who typically operate in those sectors and will be affected by the expansion of foreign direct investment control in the future.
Clarification on the acquisition of additional voting shares
A further amendment relates to the acquisition of additional voting shares. The newly inserted Sec. 56 Para. 2 of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung) explicitly states that not only the first, but also subsequent, additional acquisitions of voting shares by the same acquirer trigger an examination by the FedMin. In the course of the most recent amendment, the examination relevance was limited to certain thresholds relevant under corporate law (20%, 25%, 40%, 50% or 75%). As a result, not every acquisition of minimal shareholdings beyond the audit threshold will trigger an obligation to notify the FedMin. Such obligation only arises if the additional acquisition is associated with an actual shift in the internal control of the company in favour of the acquirer.
Atypical control acquisitions also covered by foreig direct investment control
In the future, examinations will no longer be triggered when voting rights are (additionally) acquired. So-called atypical acquisitions of control are covered by an examination as well. These include arrangements giving the acquirer an opportunity to exert influence comparable to a higher share of voting rights. In particular, these are the assurance of further seats and majorities in supervisory bodies or the management as well as the granting of veto or information rights.
Effects on the future M&A-practice
By extending sector-specific investment control to high-tech sectors, the German government clearly showed its intention to make German economy future-proof and to increase the level of control over foreign investors. In this context, an important process change also took place. It will no longer be possible to apply for a clearance certificate in advance of an acquisition subject to notification. Until the FedMin has completed its examination, the acquisition will always remain pending invalid. This removes an important instrument for quickly obtaining clarity during a transaction. Although all these changes do not necessarily mean the FedMin will prohibit more foreign investments, time and costs involved in many transactions will increase. For foreign investors, these new circumstances will certainly have an impact on their future investment decisions.