Tightening of investment control

May 4, 2020

  • The draft bill intends to align Germany’s investment auditing rules to the EU Screening Regulation.
  • The draft bill tightens the legal framework of the Foreign Trade and Payments Act; in addition, the Foreign Trade and Payments Ordinance will be amended in a second step.
  • The amendments of the Foreign Trade and Payments Act include lowering the endangerment threshold for restrictive measures, extending the scope of the audit and strengthening of the prevention of premature realisation activities.

At the end of 2019, the Federal Ministry for Economic Affairs and Energy (BMWi) presented its Industrial Strategy 2030, which announced an alignment of national investment audit law to new EU law as well as further amendments to foreign trade law to safeguard the technological sovereignty of German industry.

These planned changes have now been given a more concrete form by the BMWi’s draft bill for a “First Act to Amend the Foreign Trade and Payments Act” approved by the Federal Government on 8 April 2020 and submitted to German parliament, the Bundestag”, on 21 April 2020. This draft is expressly intended to be only the first step towards overhauling Germany’s investment screening law. Nevertheless, the draft bill already indicates how the BMWi intends to tighten German investment control.

Initial situation

The BMWi can examine the acquisition of and investments in German companies by foreign investors. Essential regulations for the German investment audit can be found in the Foreign Trade and Payments Act (AWG) and the Foreign Trade and Payments Ordinance (AWV).

Until 2009, this acquisition and investment control under foreign trade law was limited to particularly security-sensitive industries (so-called sector-specific investment review). With the 13th Act amending the AWG and AWV the existing power to review was extended to all branches of industry, thus introducing cross-sector investment reviews. The result of such an investment control can be either the approval (possibly subject to conditions) and the prohibition of an investment.

EU Screening Regulation

Within the European Union, the auditing of foreign investments is the responsibility of the individual member states. However, EU Regulation 2019/452 (the so-called EU Screening Regulation), which came into force in April 2019 and will take effect in October 2020, has provided a legal framework for screening within the Union.

The aim is to improve cooperation between the member states among themselves and with the EU Commission to safeguard security, public order and Europe’s strategic interests. To this end, a mutual exchange of information is to be established with the EU Commission acting as coordinator.

Essential amendments by the draft bill

The draft bill is intended to adapt the basic principles of the German investment review laid down in AWG to the requirements of the EU Screening Regulation and to make them more effective and more robust.

The main changes include:

  1. Lowering the endangerment threshold
    Up to now, the threshold for a restriction or prohibition of foreign investments by the BMWi has been whether the specific acquisition endangers the public order or security of the Federal Republic of Germany, i.e. whether there is an actual and sufficiently serious danger affecting a fundamental interest of society. The draft bill lowers this threshold for restrictive measurements significantly by replacing the current requirement of “endanger” with “likely to affect” the public order or security.
  2. Extension of the scope of the audit
    The draft bill also extends the scope of the German investment assessment. In future, not only impairments of public order or security in Germany are to be considered during the screening, but also the impact investments have on other EU Member States and on EU programmes and projects.
  3. Strengthening of the prevention of realisation activities
    In addition, the draft bill aims to strengthen measures to prevent activities serving the realisation of an acquisition before a required review procedure is concluded. Firstly, legal transactions underlying an investment subject to review will be provisionally suspended for the duration of the review in case of sector-specific and cross-sector reviews. So far, this only applies to transactions that are subject to a sector-specific review. Furthermore, certain realisation activities during an ongoing audit will be prohibited and punishable by a prison sentence of up to five years or a fine. This is intended to stop the acquisition parties from undermining the objectives of the investment review by implementing security-sensitive measures which might be banned by a possible subsequent prohibition or restriction.

Changes to the AWV

The BMWi has already announced its intention to amend the AWV in a second step. Under the impression of the Corona virus pandemic an initial draft was published on 28 April 2020 focusing on critical company acquisitions from third countries in the health sector in order to prevent medical know-how and production capacity from going abroad. This concerns acquisitions related to vaccines, medications and medical protective equipment, for example. Furthermore, the amendment clarifies in accordance with the EU Screening Regulation that investment auditing authorities may continue to take factors relating to the identity of the acquirer, in particular it being controlled directly or indirectly by a foreign state, into account when assessing whether there is a threat to public order or security.

Another amendment of the AWV was announced for autumn 2020. This second amendment will focus in particular on further specifying the investment screening for certain critical technologies. To this end, a catalogue of critical technologies is to be defined, which is to cover especially the areas of artificial intelligence, robotics, semiconductors, biotechnology and quantum technology.

Conclusion and outlook

It remains to be seen whether the Bundestag will revise the content of the draft bill during the legislative process and when it will be passed into law. However, it reflects the tendency that has been observed for some time now to constantly expand the scope of investment control. In the introduction to the draft bill, the BMWi emphasized that the strengthening of the German investment control regime should be done with a sense of proportion and in awareness of the importance of foreign direct investments for the economic development in Germany. The attractiveness of Germany as an investment location is therefore not meant to be affected. However, it remains uncertain what effects the amendment will have on foreign investments in practice. Possible implications should therefore already be considered when planning cross-border corporate transactions.