Germany Amends its Foreign Investment Control Regime

On 27 April 2021, the German Federal Government passed the 17th Ordinance amending the Foreign Trade Ordinance (the 17th FTO Amendment). The 17th FTO Amendment aims to conclude the reforms of Germany’s national investment control legislation that began in the year 2020 (see our Client Information dated 7 February 2020, Client Information dated 9 April 2020, and Client Information dated 22 May 2020).

At the center of the 17th FTO Amendment is an expansion of the notification requirements to an additional 16 economic sectors, including future-oriented and high-technology sectors such as artificial intelligence, robotics, cybersecurity, air and space travel and semiconductors. In addition, the amendment introduces thresholds relating to increases in existing investment holdings and clarifies when intragroup restructurings are subject to a notification requirement. Lastly, the Federal Ministry for Economic Affairs and Energy (BMWi) is to receive the authority to initiate review proceedings ex officio in the case of “atypical acquisitions of control” not meeting the thresholds.

The 17th FTO Amendment is to enter into force in the near future. The provisions apply to contractual transactions entered into starting on the day the 17th FTO Amendment enters into force.

Executive Summary

• Significant Expansion of the Sectors Subject to Notification Requirements
• Thresholds for Notification Requirements for Increases in Existing Investment Holdings
• Clarification of Notification Requirements for Internal Restructurings
• Potential BMWi Review of “Atypical Acquisitions of Control”

We have summarized below in more detail the most important changes.

1. New notification requirements in sensitive high-tech sectors

The number of sectors subject to notification requirements has been increased from 11 to 27. A positive aspect is that the regulation defines the new sectors significantly more narrowly than does the EU FDI Screening Regulation. In addition, the threshold (20% of voting rights) has been set higher than originally planned to ease the regulatory burden, in particular on start-ups and financial investors.

Sector-specific investment control has been expanded as well. In particular, a new notification requirement has been introduced for investments in companies with goods subject to export controls.

a) Cross-Sector Investment Review

New notification requirements will apply in the future for direct and indirect holdings by non-EU/EFTA purchasers of at least 20% of German companies active in the following sectors:

Satellite systems: Operators of high-quality terrestrial remote sensing systems as defined in § 2 para. 1 no. 4 of the Act on Satellite Data Security.

Artificial intelligence: A company that develops or manufactures products that employ artificial intelligence techniques to solve specific applied problems and are capable of independently optimizing their own algorithms and which can be used to automatically

• carry out cyber-attacks;
• imitate persons to disseminate targeted misinformation;
• assess speech communications or biometric distance identification of persons for purposes of surveillance in a manner objectively suitable as well for use in internal repression; or
• analyze data regarding movements, locations, transportation or events relating to persons for purposes of surveillance in a manner objectively suitable as well for use in internal repression.

The ordinance’s explanatory statement declares that the objective usability of an application for the aforementioned improper purposes is to be decisive, whereby it will suffice if the totality of the circumstances make it appear possible that an improper use could occur following acquisition.

Automatized or autonomous driving or flying: A company manufacturing vehicles or unmanned aircraft technically equipped to be controlled via automatized or autonomous driving or navigation functions or producing or developing key components or necessary software for the control of such driving and navigation functions.

The ordinance’s explanatory statement notes that this category should provide protection against unauthorized potential interference or manipulation, including via the development and production of key components and necessary software for the control of such driving and navigation functions.

Robotics: A developer or manufacturer of robots, including automatized and autonomously mobile robots, with the following characteristics:

• specially constructed for handling of high explosives;
• specially constructed or configured to be radiation-resistant and to withstand, with no loss of functionality, a radiation dose of in excess of 5 x 10³ Gy (silicon);
• specially constructed for operability at altitudes in excess of 30,000 meters, or
• specially constructed for underwater operability at depths of over 200 meters.

Semiconductors: A developer, manufacturer or finisher of

• microelectronic or nanoelectronic non-optical circuits (integrated circuits) on a substrate as well as discrete semiconductors;
• microstructured or nanostructured optical circuits on a substrate as well as discrete optical components (optoelectronics); or
• manufacturing or processing tools, in particular crystal growing, light exposure, mask production, fibre drawing or coating equipment, grinding, etching, metal finishing or sawing equipment, or clean room transport equipment, test tools and masks for the aforementioned products.

Cybersecurity: A company that develops or manufactures IT products or components of products with the goal of third-party sales that have as their key functionality

• the protection of the availability, integrity, authenticity or confidentiality of information technology systems, components or processes;
• defence against attacks on IT systems, including damage analysis and restoration of affected IT systems; or
• the electronic investigation of crimes and preservation of evidence by law enforcement authorities.

According to the ordinance’s explanatory statement, IT security products and IT forensic products are to be covered which are primarily intended to serve one of the aforementioned areas of application. In the field of IT security, specified examples include antivirus programs and firewalls.

Air and space travel: An aeronautical company with an operating licence or another company developing or manufacturing certain goods covered by the EU Dual-Use Regulation (subcategories 7A, 7B, 7D, 7E, 9A, 9B, 9D or 9E of Annex I) or goods or technologies intended for use in space or space infrastructure systems in the field of avionics and navigation.

Nuclear Technology: A company that develops, manufactures, modifies or uses certain goods covered by the EU Dual-Use Regulation (Category 0 or list items 1B225, 1B226, 1B228, 1B231, 1B232, 1B233 or 1B235 of Annex I).

Quantum Technology: A company that develops or manufactures goods and key components of

• quantum computing, in particular quantum computers and quantum simulation;
• quantum communication, in particular quantum cryptography, or
• quantum-based measuring technology, in particular quantum sensors and quantum metrology products.

According to the ordinance’s explanatory statement, the intent is to cover second-generation quantum technology, as distinguished from first-generation quantum technology by the active manipulation of quantum states (for example entanglement and superposition).

Additive manufacturing: A company that develops or manufactures

• goods with which components for industrial applications and made from metallic or ceramic raw materials are manufactured by means of additive manufacturing processes (in particular powder-based manufacturing processes which have an inert gas atmosphere and use a laser or electron beam as the energy source);
• key components of the aforementioned goods; or
• powder materials employed in the aforementioned manufacturing processes.

Network technologies: A company that develops or manufactures goods specifically supporting the operation of wireless or wireline data networks, in particular wireline or lightwave transmission technologies, network coupling elements, signal amplifiers, network monitoring, network management and network control products.

According to the ordinance’s explanatory statement, this new group is intended to enable the review of foreign direct investments with potential impact on important 5G facilities and equipment.

Access to Smart Meter Gateways: Manufacturer of a

• smart meter gateway within the meaning of § 2 sentence 1 no. 19 of the Metering Point Operating Act which has been certified by the Federal Office for Information Security pursuant to section 19 sub-section 3 in conjunction with section 24 of the Act or of a gateway in the process of obtaining certification, or
• a security module for smart meter gateways, either certified by the Federal Office for Information Security or in the process of obtaining certification, to ensure compliance with the security requirements pursuant to section 22(1) and (2) of the Metering Systems Operation Act.

According to the ordinance’s explanatory statement, such companies are key companies for ensuring the high legal standards for data protection and data security of smart metering systems under the Metering Point Operation Act.

Access to vital facilities: A company employing persons who work in vital facilities in accordance with §§ 5a, 5b or § 9a of the Security Screening Ordinance at security-sensitive locations within the meaning of § 1 para. 5 sentence 3 of the Security Screening Act.

This group covers companies that provide important goods and services to the Federal Republic of Germany in the fields of information technology and communication technology.

Critical raw materials: A company that extracts, processes or refines raw materials or their ores that have been included, a spart of the Raw Materials Initiative of the European Commission, on the List of Critical Raw Materials as an annex to the current Commission communication and which the Federal Ministry for Economic Affairs and Energy has published in the Federal Gazette.

Access to sensitive information: A company which develops or manufactures goods covered by the scope of protection of a patent classified under § 50 of the German Patent Act or a utility model classified under § 9 of the German Utility Model Act.

Food Security: A company that directly or indirectly manages an agricultural area of more than 10,000 hectares.

The review thresholds for certain already covered sectors will be increased from 10% to 20% of voting rights: (i) personal protective equipment, (ii) certain medicinal products and vaccines, (iii) medical devices for the treatment of highly contagious diseases and (iv) certain in vitro diagnostic medical devices. For the other sectors already covered (critical infrastructures, etc.), the 10% threshold remains unchanged.

b) Sector-Specific Investment Review

New notification requirements in the sector-specific investment review areas will apply in the future to direct and indirect shareholdings of at least 10% by acquirers from outside of Germany in German companies that are active in the following sectors.

Export controls: A company that develops, manufactures, modifies or has effective control over goods as defined in Part I Section A of the Export List.

Military Technology: A company that develops, manufactures or modifies goods in the field of military technology or which has effective control over such goods, in each case to which the scope of protection extends of a patent classified under § 50 of the German Patent Act or a utility model classified under § 9 of the German Utility Model Act.

Key Defence Institutions: A company that is a key defence institution within the meaning of § 1 para. 5 sentence 2 no. 1 of the Security Screening Act.

For companies active in the areas of export controls and military technology, this also applies to companies that in the past have developed, manufactured, modified or had actual control over such goods and still have knowledge of, or other access to, the underlying technology of such goods.

2. Thresholds for Top-Ups (Additional Acquisitions)

Notification requirements apply not only if the first threshold (of at least 10% or 20% of the voting rights, depending on the sector) is met, but also if subsequent acquisitions reach further voting rights thresholds.

For sectors with a threshold (as of initial acquisition) of 10% (e.g., critical infrastructure), the further (additional acquisition) notification thresholds are 20%, 25%, 40%, 50% and 75%.

For sectors with a threshold (as of initial acquisition) of 20% (e.g., the newly covered sectors, cf. 1.a) above), the further (additional acquisition) notification thresholds are 25%, 40%, 50% and 75%.

3. Internal Restructurings

Intra-group restructurings are only exempted from notification requirements and the BMWi’s right of review within a very narrow framework. An exemption applies only if contractual transactions concerning the acquisition of a German company are concluded exclusively between companies with shares held entirely by the same controlling company and all parties to the contract have their place of management in the same third country.

In other words, intra-group restructurings are exempted from review only if two wholly-owned subsidiaries of a parent company are involved and these subsidiaries are incorporated under the same legal system.

All other internal restructurings may be subject to a notification requirement or a right of review by the BMWi.

4. Right of Review regarding Atypical Acquisitions of Control

Although a notification requirement does not apply, the Federal Ministry of Economic Affairs and Energy has the right to examine “atypical acquisitions of control” ex officio. An “atypical acquisition of control” exists if a non-EU acquirer acquires an effective shareholding in a way other than by reaching a relevant threshold. This is the case if an acquisition of voting rights is accompanied by

• the assurance of additional seats or majorities on supervisory bodies or in management;
• the granting of veto rights in strategic business or personnel decisions, or
• granting information rights within the meaning of § 15 para. 4 sentence 1 no. 3 AWG.