Corona – Catalyst for an even stricter investment control

The Corona pandemic has accelerated a trend of recent years: the further tightening of controls on foreign direct investment in German companies. In just one year, numerous legislative acts have been come into force. Modifications already planned and initiated by the EU-Screening-Regulation (Regulation 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments in the EU) were pushed through and the screening regime significantly expanded. On 22 January 2021, the Federal Ministry of Economics and Technology presented the last component for the time being in a whole series of amendments: The 17th Amendment to the Foreign Trade Ordinance (draft bill) includes additional companies that are subject to audits and notification requirements to the Foreign Trade Ordinance (Außenwirtschaftsverordnung, AWV), particularly in the context of cross-sectoral investment control, and clarifies the legal consequences of an investment audit.

We provide an overview of the most recent and important changes. For further details and assessments, in particular for transactional practice, please refer to the German article André Lippert, BetriebsBerater 2021, S. 194.

Companies subject to auditing and notification requirements 

The catalogue of companies subject to audits and notification requirements is supplemented by sixteen additional case groups in Section 55a (1) AWV as amended. These are largely innovative key technologies, such as artificial intelligence, automated driving, robotics, aeronautical and satellite technology and cyber security. The direct acquisition of at least 10% of the shares – regardless of whether directly or indirectly – is now relevant for auditing and subject to notification in relation to companies that develop and manufacture the products set out below:

• Operators of earth remote sensing systems (no. 12) – this case group was taken over from the Satellite Data Security Act and may overlap with the sector-specific investment review for defence equipment,
• Certain AI procedures that could objectively be used for abusive purposes, e.g. cyber-attacks (no. 13),
• Motor vehicles and drones (no. 14),
• Industrial robots (no. 15), 
• Semiconductors (no. 16),
• IT products in the field of cyber security, e.g. virus protection programmes or firewalls (no. 17), 
• special air carriers (no. 18),
• Nuclear technology (no. 19),
• Quantum technology (no. 20), 
• Components for additive manufacturing processes (no. 21),
• Goods used for the operation of certain wireless or wireline data networks (no. 22),
• Smart-Meter-Gateways (no. 23),
• Companies employing persons working in essential facilities and in safety-sensitive positions (no. 24),
• Companies that extract, process or refine so-called critical raw materials or their ores (no. 25),
• Goods on the basis of a secret patent or utility model (no. 26), 
• Enterprises that are of fundamental importance for food security and cultivate more than 10,000 hectares (no. 27).

The case groups have thus more than quadrupled. The Federal Ministry for Economic Affairs and Energy (Bundeswirtschaftsministerium, BMWi) therefore expects a significant increase in the number of audit cases; conservative calculations come to a number of 150 – instead of the previous 20 – new notifiable acquisitions per year. This will increasingly affect small and medium-sized enterprises and especially innovative start-ups.

Prohibition of execution and de facto execution

Instead of a mere condition subsequent, there is now a prohibition of execution for all acquisitions subject to notification. The acquisition transaction under the law of obligations is provisionally ineffective until the release or the expiry of the auditing period. Thus, the legal consequence for the listed companies of the new Section 55a (1) AWV corresponds to the sector-specific investment control in the area of military and armament goods.

The amendment to the AWG also standardised prohibitions that are intended to prevent the de facto execution until the release (or prohibition) of a share acquisition. The aim is to prevent a de facto outflow of potentially regulatory and security-relevant information and technologies of an acquired company during ongoing investment review proceedings. It is prohibited to enable the purchaser to exercise voting rights directly or indirectly (in particular by handing over bearer securities, voting agreements or accepting instructions to exercise voting rights, etc.) or to grant profit payment claims or an economic equivalent. Company-related information relevant to the respective investment control may no longer be provided or disclosed. In future, this must be observed during a transaction.

Clearance certificate no longer required for acquisitions subject to notification requirements 

In future, it will no longer be possible to apply for a clearance certificate for acquisitions subject to reporting requirements (i.e. those of the listed companies). This means that an important instrument for obtaining legal clarity more quickly in the context of a transaction is no longer available. The background to this is the change in the legal consequence: In the case of pending ineffectiveness and the reservation of release, the effectiveness of the legal transaction cannot be established through a preceding clearance certificate. 

Foreseeable interference as a criterion for taking action 

A further central tightening of the auditing regime concerns the standard of examination: Whereas previously a threat to public order or security was required, now – also as in the area of sector-specific investment control – a “foreseeable interference” is sufficient. Previously, a sufficiently serious threat affecting a fundamental interest of society was considered sufficient. 

The extension to the interference with public order or security of other EU member states now allows for an even quicker and more comprehensive intervention in industrially undesirable acquisitions. In addition, by means of Section 55a (3) AWV as amended, investor-related criteria have been included and the circumstances justifying the control, such as the control of the third country on the purchaser, have been concretised. According to the interpretative guidelines, small start-ups, for example, could be of strategic importance despite their low value in terms of research or technology, so that they are subject to scrutiny for reasons of security or public policy and, to that extent, measures can be taken by Member States to address specific risks.

Further insights into this subject can be found here.