Foreign investment rules have been on the rise for a few years but the COVID-19-pandemic as well as recent European initiatives act as a strong “boost” to a further tightening of regimes across Europe. Over the past weeks, we have seen reforms being enacted in France, Italy, Spain and several other European countries including the UK, Poland and Hungary are working on legislative initiatives.

Yesterday, the German parliament has adopted, despite strong criticism from the German industry, a notable next reform to the country’s regime.

Shielding sensitive German companies

German foreign investment controls already underwent a range of changes over the past three years including a lowering of applicable thresholds down to acquisitions of 10% of voting rights and the introduction of mandatory filings in a wide range of sectors such as the defence and security sector and, for acquisitions by non-EEA investors, in critical infrastructures where a target company’s activities exceed certain thresholds which are designed by reference to the demand of c. 500,000 people, a relatively low threshold when considering that this represents just 0.6% of the German population. The list of sectors to which this 10%-threshold applies was extended to comprehensively cover the healthcare sector only one month ago in light of the COVID-19-pandemic.

Further, German foreign investment control provides for a voluntary regime for all transactions in other sectors, which kicks in for participations of 25% of voting rights or more. This gives the government the power to initiate an ex officio review of non-notified transactions within five years after signing.

Further notable changes to bloster the regime

With yesterday’s reform a range of notable adjustments have been implemented:

1. Lowering the substantive test to a mere “likely adverse effect” compared to the previous “actual and serious danger”, which brings the German law in line with the (optional) proposal of the EU FI Screening Regulation. Further, beyond effects in Germany, the competent Ministry of Economic and Energy may also consider effects in other EU Member States and regarding certain Union-projects and programmes.
2. Introduction of a significantly wider prohibition on gun jumping. While previously, this only applied to transactions in the defence and security sector, now all transactions in critical sectors to which the 10%-threshold relates, are in scope of this prohibition. Consequently, closing will be invalid from a civil law perspective until clearance has been obtained.
3. Criminal sanctions in case of a violation of the gun jumping prohibition as well as in case of a flow of sensitive information to the purchaser prior to clearance which can be up to five years imprisonment (!) in case of intent and monetary sanctions in case of negligence.
4. Extension of the timeline for proceedings: While the regular timelines of two months for Phase I and four months for Phase II remain in place, the latter may now be extended by a further four months for complex cases and may be extended even beyond with the Parties’ consent. Coupled with the “stop the clock”-regime which applies between Phase I and II, this may mean even longer processes

Yesterday, the government emphasised that Germany remains open for investment and that the new rules will be applied in a proportionate manner. However, the reform clearly shows that German foreign investment (as well as the regimes in other countries) should not be taken lightly. Even more so in light of the general industry policy push in Europe, including the proposal by Commissioner Vestager earlier this week regarding the treatment of foreign subsidies (see here).

It is more important than ever that companies engaged in M&A should:

1. consider the potential applicability of any foreign investment regime early on and conduct a thorough risk assessment;
2. factor in the highly dynamic landscape and reforms which may be enacted and could have an impact on ongoing projects;
3. take care as regards information exchange, not only in a competition law context but also under restrictions imposed by foreign investment rules;
4. allow for lengthier approval processes and assess how best to mitigate risks and delays associated with increased uncertainty and complexity of the review process.

Finally, a further extension of the sectors in scope of the 10%-threshold regime is looming on the horizon and will likely be implemented later this year and get a list of even more sectors in scope of the regime – a list largely aligned with the German industry policy agenda and covering many activities from cybersecurity via AI to biotech.