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February 25, 2019

Germany Extends its Power to Review and Block Foreign Direct Investments: Catching 10% Investments and Adding Media as a Sector


As of December 29, 2018, new rules concerning foreign direct investments (FDI) in Germany came into effect. Germany, for the second time in two years, tightened its rules on FDI. The reform has the following effects:

  • The German Federal Ministry for Economic Affairs and Energy (BMWi) can block direct and indirect foreign investments when the investment applies to at least 10% of the voting rights of certain German target companies. This 10% threshold applies to companies operating in critical infrastructure, the defense sector or IT security products. For all other sectors, the 25% threshold will remain in place.
  • Certain German media companies also fall under FDI control. Such transactions have to be reported and can be blocked as well.

FDI Control in Germany

The new reform will significantly broaden the scope of FDI control in Germany, which is governed by the German Foreign Trade and Payments Ordinance (AWV). Prior to the amendments on December 29, 2018, the BMWi could review and potentially block a transaction, if a foreign investor directly or indirectly acquired at least 25% of the voting rights of a German entity active in certain sectors. Under the revised rules, the BMWi is entitled to scrutinize direct and indirect acquisitions of at least 10% of the voting rights of German companies that operate in the area of "critical infrastructure" or manufacture or develop certain defense-related products. For all other sectors, the current 25% threshold will remain in place. The list of critical sectors which fall under the German FDI control is extended to certain media companies as well. In addition, critical sectors include energy, telecommunications, transport, IT-security, healthcare, water, food, finance, insurances, and related software and technology.

The BMWi can initiate a formal review process within three months of notice of a FDI, but only up to five years after the deal had been signed, if the BMWi arrives at the conclusion that the acquisition may endanger the German public order or security (so called "cross-sectoral review"). The acquirer must make a notification, if the target is active in a "critical infrastructure" sector, and the target company is active in defense-related sectors. In the latter situation, the more stringent sector-specific review is triggered.

Where the parties do not have a mandatory obligation to notify, acquirers may voluntarily notify the BMWi of an acquisition in order to gain legal certainty, and the BMWi has two months from the date of notification to decide whether to open formal review proceedings. In case the BMWi opens formal review proceedings, it may block, clear, or clear under conditions, a transaction within four months.

Expanded Scrutiny on FDI Worldwide

The changes to the German rules occur against the background of increased FDI controls in Europe and in other jurisdictions around the globe. Various national legal frameworks concerning FDI remain in motion worldwide, as political pressure for an intensified screening of acquisitions of domestic companies in certain industry sectors by foreign investors and entities continues to mount.

In the European Union, political consensus has emerged on the 2017 proposal for an EU Regulation establishing a framework for screening of FDI into the EU (see Advisory here). Today, some 13 out of the currently 28 EU member states have FDI screening mechanisms. Those differ significantly in design and scope but a common theme includes a focus on sensitive industries, primarily computer and digital technology, defence and some essential infrastructures. The main focal point of likely reviews are investments particularly from China and Russia, although there is concern that this may be used more widely to revert to some form of public interest test (see Advisory here).

In the US, the Committee on Foreign Investment (CFIUS) has been active since 1975 and has similarly tightened the procedure further. In August 2018, the CFIUS significantly intensified its scrutiny under the Foreign Investment Risk Review Modernization Act (FIRRMA). Like the German concept, FIRRMA also extends FDI control to non-controlling investments (see Advisory here).

German Background

The German government already broadened the scope of FDI control in July 2017 when it introduced a filing obligation for investments in the area of critical infrastructure (see Advisory here).

Despite these amendments, certain cases raised national security concerns, but were outside the scope of the German FDI control because the investor did not reach the 25% threshold. One such notable case was a recent attempt by a Chinese investor to acquire a minority stake in German power grid operator 50Hertz. Against this background, lowering the threshold to 10% was the government's reaction to a hike in foreign acquisitions in certain sensitive sectors in Germany that are perceived as a potential threat.

Other reasons leading to these changes were politically highly contentious (attempted) acquisitions of German companies active in the cutting-edge technology sector (Kuka, Axitron, OSRAM Licht, among others) by Chinese companies.

Another example for the newly intensified practice of the German BMWi is the Leifeld case from August 2018 which is also the first case in which a transaction would have been blocked, if the parties had not walked away just before that decision was rendered. Leifeld Metal Spinning is a producer of industrial heavy machinery used for the forming of solid materials. The products, manufactured with Leifeld equipment, end up in the automotive industry, in the civil and military aerospace industry (propeller covers and other turbine elements), and also in the nuclear industry. The French Manoir Group had signaled interest in acquiring Leifeld. Manoir is controlled by the Chinese Yantai Taihai Group. After the parties had notified the proposed transaction to the BMWi, it opened a review procedure, which continued from mid-2017 until 1 August 2018. After rumors had emerged that the BMWi intended to oppose the transaction, the parties withdrew their notification and refrained from the transaction. Nevertheless, the BMWi, upon receiving the respective confirmation of the Federal Government, intended to prohibit the concentration on national security grounds. The new vigor with which the BMWi implements its authority is illustrated in this case, since Leifeld contested being active in the military sector. Furthermore, Leifeld's activities did not fall under any of the predefined case groups under the AWV. Since those are only exemplary in nature, the BMWi was formally within its jurisdiction to block the deal. This illustrates, however, the broad discretion that it has, when defining the relevant sectors. Furthermore, it remains open, to what extent an acquisition, intermediated by an European entity in which a non-EU investor holds controlling shares, should be tried against the background of the European fundamental freedoms of establishment and capital movement.

Another case, which prompted the BMWi to take rather unorthodox action, was the proposed 20%-share acquisition of 50Hertz, an operator of a 10.000-kmelectricity power grid in eastern Germany by the State Grid Corporation of China in the summer of 2018. Since the Chinese operator intended to acquire only 20%, the threshold for a review by the BMWi was not triggered. The Federal Government, therefore, resorted to an elaborate scheme, where another shareholder of 50Hertz exercised a preemptive option right and acquired the shares and subsequently sold them to the state-owned German Reconstruction Credit Institute (KfW), which was directed by the Federal Government to acquire the shares.

In addition, the acquisition of a share package of just below 10% of Daimler shares, by the Chinese owner of Geely, Li Shufu, which initially went unnoticed, prompted stirring public reactions in Germany.

Under consideration of the aforementioned cases, and in particular the latter two, which triggered neither the German competition merger control thresholds, nor the thresholds for a FDI review by the BMWi, and also taking into consideration the remarks in legal literature, explaining that a controlling influence may be established by another entity well below the 25%threshold, the German government announced a further tightening of the AWV. On 29 December 2018, the current AWV was amended and the review threshold was lowered from 25% to 10% of the acquired voting shares for both critical infrastructure (cross-sector review: relevant to non-EU investors), and the defense-related areas (sector-specific review: relevant to all non-German investors).

Media Sector

The general scope of application of the AWV has been extended to companies active in the media sector, for which the new 10% threshold also applies. The German government explicitly cites concerns, stemming from recent coordinated disinformation strategies and "hybrid threats." With the inclusion, the government intend to reduce the danger of targeted influence by foreign actors which may be facilitated by the acquisition of national broadcasting companies and printed media companies which contribute to the shaping of public opinion. For this purpose, entities which are a part of the media industry are added as a separate example within the list of sectors of critical infrastructure which may be reviewed under the cross-sector procedure.


The lower thresholds and the inclusion of the media sector have significant effects on investments and transactions in Germany. In addition, the acquisition of shares in publicly listed companies is caught under the regime, regardless of whether shares are acquired via the stock exchange or in block trades This also applies to capital increases from authorized share capital.

For certain targets in the media sector, FDI control should be added to the regulatory checklist such as competition merger control proceedings and others (i.e., the media ownership control by the Commission on Concentration in the Media Industry (KEK); the KEK can intervene in TV media/broadcasting transactions in order to secure that the diversity of opinions is represented in the sector, and to prevent the concentration of power which can be used to influence public opinion).

The recent amendments to the German AWV will certainly increase the number of transactions subject to FDI control in Germany. Considering tighter FDI controls around the world, cross-border transactions will often require separate FDI reviews in several jurisdictions. With regard to transaction-planning, companies, legal and financial advisors should build additional time into their closing schedules and agree on sufficiently flexible closing conditions taking into account potential parallel FDI reviews and other regulatory requirements.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.