29
Sep
2020

Critical technology at a critical stage: Expansion of German FDI screening postponed

For months, speculation about further tightening of German foreign investment control rules has been going on. The Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie – BMWi) has been discussing with the other Federal Ministries whether and how to include “critical technologies” into the scope of German FDI rules. Today, the Ministry announced in a letter to the German trade and industry associations that it decided to postpone the decision about this important topic without any new time-line for the process. However, this decision makes it unlikely that the reform would be implemented before 2021.

The current Status

To date, only critical infrastructure, software specifically designed for operating such critical infrastructure and certain expressly identified industry sectors such as telecommunications used for surveillance, cloud-computing services and media companies fall into the catalogue of the mandatory so-called cross-sectoral foreign investment control. Recently, in light of the COVID-19 pandemic Germany also included several activities in the health sector in the FDI rules if they concern pharmaceuticals and medical devices relating to highly infectious diseases or personal protective equipment. Acquisitions in these industry sectors are subject to mandatory foreign investment filings in Germany. Since a recent reform closing of such transactions is also subject to a stand-still obligation pending clearance by the Federal Government.

The Road ahead

The EU FDI Framework Regulation (EU) 2019/452 of 19 March 2019 (available here), which starts applying in less than two weeks on 11 October, mentions “critical technology” as relevant for Member States when screening FDI. According to the FDI Framework Regulation, critical technology includes “artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies”.

As almost all industries are affected by digitalisation and automation and work on implementing AI and robotics solutions, the broad notion of critical technologies could potentially make almost the entire German industry subject to mandatory foreign investment control screenings if such procedure would only refer to “critical technology”. Against this background, the German government is working on striking the right balance between the free market principle and national security and public order. Today’s announcement of a delay demonstrates that no consensus within the government has been reached yet.

Thus, the next 16th amendment to the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV) will only implement the pre-agreed tightening of the substantive test for the Federal Government’s FDI assessment. Going forward and as already amended in the overarching Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG), the AWV will only require a potential threat to public order and security without the need for the government to prove an actual danger. The Federal cabinet has already agreed on this reform which is expected to be published shortly.

The EU FDI Framework Regulation also provides for a “cooperation mechanism” according to which screening Member States have to inform the EU Commission and other Member States if they review a transaction. The basic principles to address this cooperation mechanism by the German government have already been implemented in the AWG (see here for our earlier coverage) and will not be addressed separately in the AWV. Instead, the BMWi only intends to set-up internal procedural rules that deal with how Germany interacts with other screening authorities. It is unclear whether such intra-ministerial administrative rules will be published.

Take Aways

With today’s announcement, two important aspects of the German FDI rules remain unclear: how exactly the German Federal Government will handle the EU cooperation mechanism and how far-reaching the potential inclusion of critical technologies will be. Taking this into account, it is important for parties to M&A transactions in Germany to analyse whether the activities of the target in particular in the area of critical technology might trigger FDI filing requirements abroad that might become relevant due to the EU cooperation mechanism. This is particularly relevant as other European governments, such as in the UK, France, Italy and Spain, are also tightening their FDI screening rules and including critical technologies in their review (see here for our earlier coverage). For an in-depth review of these and other legislative developments, see our earlier blog on the first draft of the adopted AWG amendment as well as the further intended German FDI reforms.

 

Read our previous blogs on related topics here: