On 27 April 2021, the German Federal Government adopted the 17th Ordinance amending the Foreign Trade and Payments Ordinance (AWV). On the day after its public announcement on 30 April 2021, the amended AWV 2021 entered into force. The underlying objective is to adapt the national foreign trade and investment law to the EU law requirements recently set by the EU Screening Regulation 2019/425. This amendment significantly strengthens the review powers of the Federal Ministry for Economic Affairs and Energy (BMWi) with regard to foreign direct investments in the area of future and key technologies (so-called emerging technologies).
Accompanying extended notification requirements affect sectors such as artificial intelligence (AI), robotics, smart meter gateways and IT security products and will have a long-term impact on the transaction practice in Germany. A significant increase in notifiable acquisitions is to be expected in future.
Increased notification requirements in the cross-sectoral review procedure
Previously, the focus of the cross-sectoral review procedure of corporate acquisitions was on critical infrastructures, including telecoms and the energy sector. The amendment expanded the catalogue of activities potentially triggering a filing requirement from eleven to 27 items (cf. Section 55a (1) No. 12 to No. 27 AWV). The new case groups encompass various areas of emerging technologies for which interference with public order or security is deemed to be likely. The following list based on the new catalogue exemplifies these concerns pertaining to of foreign investments:
- certain AI applications that can (objectively) be misused for misinformation or observation purposes (No. 13);
- unmanned motor vehicles and aircrafts with automated or autonomous driving or navigation functions (No. 14); this case group covers, inter alia, self-driving cars, drones or air taxis;
- semiconductors and optoelectronics (No. 16);
- IT security products in the field of cyber security (No. 17);
- goods and essential components of quantum information technology and quantum communication (No. 20);
- smart meter gateways meeting the legal requirements under the Metering Point Operating Act for data protection and data security together with the (currently disputed) guidelines of the Federal Office for Information Security (BSI) (No. 23).
In addition to emerging technologies, the new notification requirements also affect companies that extract critical raw materials and ores (No. 25) as well as companies relevant to food security that cultivate an agricultural area of more than 10,000 hectares (No. 27).
If a notification duty applies, the transaction is subject to a standstill obligation and is temporarily suspended until final clearance by the BMWi (cf. Section 15 (3) AWG). In the event of a likely interference with the public order or the security of the Federal Republic of Germany or another EU member state, the BMWi may impose orders or, in extreme cases, prohibit the transaction.
Notification threshold for emerging technologies at 20 percent of voting rights
The AVW applies to investments involving an acquirer domiciled outside the European Union. It primarily captures the acquisition of voting rights exceeding certain thresholds.
As before, the acquisition of voting rights of 10 percent (in companies active in critical infrastructures) or 25 percent (in companies active in areas not expressly mentioned) qualifies as a relevant transaction. Henceforth, also the acquisition of 20% of the voting rights in a company that is active in one of the areas laid down in Nos. 8 to 27 of new Section 55a (1) AWV – including emerging technologies (Section 55a (1) Nos. 12 to 27 AWV) – qualifies as relevant transaction (Section 56 (1) no. 2 AWV).
The BMWi had dropped its initial plans documented in the draft bill of setting the new transaction threshold at 10 percent of voting rights. Concerns addressed by stakeholders during public consultation of the draft ordinance prevented a disproportionate burden imposed on international financing of German start-ups and high-tech companies.
Acquisitions by existing investors and “atypical acquisitions of control“
Section 56 (2) AWV clarifies that the acquisition of additional voting rights by foreign investors who already hold shares in the target company may also be subject to the investment screening (if the relevant thresholds are exceeded for the first time). In case of a notifiable (first) acquisition, a subsequent additional acquisition will require notification again if the subsequent acquisition exceeds certain further thresholds that are particularly relevant under corporate laws (e.g. 25, 50 or 75 percent).
To prevent circumvention by granting an investor – whose voting rights do not exceed any thresholds – a disproportionate weight or influence compared to his voting rights in separate agreements, Section 56 (3) sentence 2 AWV now also covers so-called “atypical acquisitions of control”. Such disproportionate means of exerting influence can be conveyed by additional seats in supervisory bodies or in the management, by veto rights in strategic decisions or even by granting information rights pursuant to Section 15 (4) No. 3 AWG. The atypical acquisition of control does not trigger a notification duty even if the target company is active in one of the areas listed in Section 55a (1) Nos. 12 to 27 AWV relating to emerging technologies. However, the BMWi may examine the matter ex officio upon gaining notice of the transaction.
Impact on ongoing transactions (signing being the relevant factor)
The amendments sketched above are eligible to affect currently planned or ongoing transactions with a foreign nexus. As a consequence, the question of when the new reporting obligations apply to such transactions is of high practical relevance.
Under Section 55a (4) AWV, the notification duty does not arise prior to the signing of the sale and purchase agreement. This means that all amendments, in particular the new reporting obligations under Section 55a (1) Nos. 12 to 27 AWV, in principle only apply to transactions not signed yet or in case signing occurred after the amendment has entered into force. This principle aligns with established practice of the BMWi and also found expression in the new Section 82a AWV. In case of public takeover bids, the publication of the takeover bid is the relevant factor.
However, even if there is no duty to notify, the BMWi may open an ex officio review procedure if no more than five years have passed since signing of the contractual agreement for the acquisition (cf. Section 14a AWG).
Sector-specific investment review
The BMWi’s sector-specific review powers also have been expanded to better secure special security interests of the Federal Republic of Germany. In line with the cross-sectoral review procedure, the lower degree of a “likely risk” is also the standard of review here. Based on the new Section 60 (1) No. 1 AWV, all military equipment as defined in Part I Section A of the Export List will be covered in future.
Conclusion and outlook
The further tightening of the investment screening by the significant expansion of case groups in the amended AWV will have a lasting impact on the transaction practice. As is evident from the draft bill, the BMWi expects a multiplication of review procedures. Thus, the investment review is likely to become an increasingly relevant factor as precondition for implementing deals in future, in addition to the review of merger control filing duties (while the latter have become less relevant due to the recent increase of the thresholds).
With the expansion of control competences, problems of interpretation and application should be expected in the next months. For example, the wording “can be used” in Section 55a (1) No. 13 AWV for AI applications allows for a possibly broad interpretation, according to which all potentially abusive application options would be covered. In view of the notification duty, which is subject to criminal penalties and sanctions, this legal uncertainty is unfortunate from the perspective of the companies and investors involved – but it is intended by the German legislator which is having in mind a stricter review of foreign investments in the area of emerging technologies.
Raue’s antitrust law team would be happy to answer any questions you may have on the amended AWV.
(7 May 2021)