Germany remains open for foreign investors. However, the German Federal Ministry for Economic Affairs and Climate Action (the BMWK) has significantly tightened its FDI review, particularly for PRC and Russian investors. Investors should therefore carefully consider potential FDI restrictions at an early stage of the transaction when pursuing investment opportunities in Germany.

Recent updates

• Germany's new coalition government took office at the end of 2021 with the Green party taking over the Foreign Ministry and—for the first time—the BMWK. Since then, the BMWK intervened in a record number of transactions, particularly by Chinese Investors
• The BMWK has significantly bolstered its FDI resources. In 2022, it has grown from one unit to two units, with more than 20 government officials working on FDI cases
• Clearance decisions in cases without national security concerns remain swift. Defense-related cases and cases in the tech industry typically require more time
• Sensitive industries for Germany's production (e.g., semiconductors and other high-tech products) and investments in critical infrastructure are under particularly tight scrutiny
• Germany significantly broadened the scope of its FDI regime in 2021. In 2022, it further expanded its definition of critical infrastructures and will likely continue on this path
• BMWK continues to interpret German FDI rules broadly both in terms of its scope of application and potential national security concerns

Who files

The direct acquirer is obliged to submit the filing, even if it is a mere SPV and/or located in Germany. BMWK accepts filings by legal counsel on behalf of the direct acquirer with proper power of attorney. If the direct acquirer has not yet been determined or established (e.g., in cases of a shelf company or a new SPV), the BMWK normally accepts the filing by the indirect acquirer.

Types of deals reviewed

The activities of the target and the "nationality" of the investor determine the review process. German FDI review covers both direct and indirect acquisitions by foreign investors. Further, the BMWK is entitled to review all types of acquisitions, including share deals and asset deals.

Regarding certain highly sensitive industries such as arms and military equipment, encryption technologies and other key defense technologies, acquisitions of at least 10 percent of the voting rights by any foreign (i.e., non-German) investor are subject to a mandatory review (so-called "sector-specific review") and trigger a filing (and a standstill) obligation.

Any other type of investment may only be scrutinized if the investor is based outside the EU/EFTA (so-called "cross-sectoral review") and acquires a share of at least 10, 20 or 25 percent of the voting rights depending on the industry at-issue. Whether a filing is required (and a standstill applies) depends on the target's activities. Sectors that trigger a mandatory cross-sectoral filing inter alia include (as defined in great detail):

• Critical infrastructure
• Software for critical infrastructure
• Telecommunications monitoring
• Cloud computing
• Telematics infrastructure
• Media industry
• Services for state communication infrastructures
• Medical/Pharmaceutical industry
• Other critical industries (AI, robotics, semiconductors, nuclear, aviation and aerospace, quantum, satellite, additive manufacturing, IT, etc.)
• Critical raw materials
• Security of food supply (>1,000 hectares)

In all other cases, the government has a call-in right for any transactions involving the direct or indirect acquisition of at least 25 percent of a German company's voting rights by a non-EU/EFTA investor if the government is concerned the transaction may impede public security or order in Germany, another EU Member State, or certain EU programs.

Scope of the review

A transaction must be filed to the BMWK if the foreign investor acquires (i) voting rights in a German entity active in a critical business sector and reaches certain investment thresholds (10 percent or 20 percent, depending on the industry at-issue) or (ii) a certain scope of assets of such entity. In assessing the investment thresholds, the BMWK takes a broad approach and looks at all entities in the entire acquisition chain (without any dilution of the shareholding) from the direct acquirer to the ultimate parent, and arguably also at shareholders such as limited partners (to be assessed on a case-by-case basis). Additional mandatory filings are triggered when subsequently reaching thresholds of 20 percent (in case the initial threshold was 10 percent), 25, 40, 50 and 75 percent. All transactions triggering mandatory filings are subject to a standstill obligation, i.e., the transaction must not be consummated before it is cleared by the BMWK. In particular, it is prohibited to allow the acquirer to directly or indirectly exercise voting rights or grant the acquirer access to certain sensitive data before clearance has been or is deemed to be granted.

Outside the scope of mandatory review, the BMWK can call in acquisitions of at least 25 percent subject to cross-sector review, in cases of "atypical" control (a somewhat vague threshold that takes into account any influence beyond the shareholding acquired by the investor, in particular by means of additional board seats, veto rights or access to certain information), or in certain settings that allow for an aggregation of shareholdings, e.g., in case of shareholdings by several different investors controlled by the same foreign state.

The standard of German FDI review is to ensure public order and (essential) security interests. In its assessment, the BMWK will in particular consider the origin of the investor, the foreign government influence on the investor, and the track record of the involved parties with BMWK filings. Further, general political considerations like securing supply chains or industrial policy play an increasing role.

In order to safeguard public order or security, the BMWK may—in accordance with other Federal Ministries—prohibit transactions or clear a transaction subject to mitigation measures or "remedies." These typically take the form of a trilateral agreement between the ultimate acquirer parent, target and the German Federal Government ("mitigation agreement"), but the government could also impose certain measures unilaterally. The contents of the measures will depend on the concerns to be resolved, and can include safeguarding pre-transaction volumes of supply, not relocating facilities/know-how, reporting obligations, etc. To enforce a prohibition, the BMWK can prohibit or restrict the exercise of voting rights in the acquired company, or appoint a trustee to bring about the unwinding of a completed acquisition at the expense of the acquirer.

Review process timeline

The review process timeline is split into two phases.

Phase I begins with the BMWK obtaining knowledge of the transaction (either by notification or by other means) and lasts up to two months, during which the BMWK will determine whether to open a formal review (phase II) or clear the transaction.

Phase II begins with the BMWK opening a formal review and requesting further documentation regarding the transaction, the scope of which lies within the broad discretion of the BMWK. The formal review starts upon receipt of that documentation and lasts another four months; however, the BMWK can extend it by another three months in exceptionally complex cases (plus another additional month in case of defense deals). In addition, the timeline is suspended in case of additional information requests by the BMWK, and for as long as negotiations on mitigation measures are conducted between the BMWK and the parties involved. Such considerations outside the official review timeline can therefore have a significant impact on the transaction timetables.

If at the end of phase I or II the BMWK has not issued a decision, the transaction is legally deemed to be cleared (for phase II, only in cases subject to cross-sectoral review).

How foreign investors can protect themselves

Parties to transactions should carefully consider the risk of foreign investment control procedures early in the process (ideally starting at the front end of the due diligence process). Given the potential for considerable FDI review risks, it may be appropriate for the parties to initiate discussions with the BMWK even before the signing and/or announcement of a binding agreement. In any event, parties should factor in sufficient time for the (German and potentially other) FDI reviews when negotiating long-stop dates. For example, in critical cases the BMWK has a tendency to wait until PRC merger clearance has been obtained (to factor in any implications of PRC remedies)—which had previously been the long pole in many transaction timetables.

Clearance provides a safe harbor for any transaction. In case no filing was submitted, the BMWK can take action ex officio for acquisitions in scope of German FDI review within a maximum period of five years from signing (but no later than two months after receiving knowledge of the acquisition) and even prohibit them retrospectively.

In order to protect oneself from such retrospective review in cases without filing obligation and to obtain legal certainty (in particular where German FDI clearance is a closing condition), foreign investors can voluntarily apply for a certificate of non-objection (Unbedenklichkeitsbescheinigung) as a safe harbor. Outside the scope of German FDI review, the investor can request an informal notice of non-applicability by the BMWK. The BMWK typically issues such notices as an administrative practice without binding effect or legal basis.

Lastly, any BMWK decision can be challenged before a German court. However, court action often is not a practical option for the parties (sometimes in light of timing or publicity concerns), and the BMWK enjoys broad discretion as to the interpretation of the legal provisions.

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2023 White & Case LLP}