I. Overview of the substantial changes in German law

1. Preliminary note

The regulations on review of foreign investments in German companies are still predominantly to be found under §§ 2, 4, 5 and 15 of the German Foreign Trade and Payment Law (Außenwirtschaftsgesetz, “AWG”) as well as under §§ 55 to 62 of the German Foreign Trade Ordinance (Außenwirtschaftsverordnung, “AWV”). The threshold for review of foreign investments remains at 25 percent of the voting rights (directly or indirectly) in the target company. Those who participate in a foreign investment should, however, keep in mind that the threshold may also be relevant e.g. for acquisitions through mergers, contributions of existing companies into joint ventures or asset deals (in any case with respect to an acquisition of 25 percent of all assets of a target). The substantial changes brought by the ninth amendment ordinance to the AWV are briefly described below:

2.Expansion of the material scope (target company)

2.1 Defense and security sector

The material scope of investment reviews in companies active in the defense and security sector (see § 60 AWV) was expanded particularly to such companies which manufacture or develop goods or necessary equipment for sensor technology, reconnaissance or electronic warfare. These may include e.g. manufacturers or developers of encryption systems, identification systems, cameras or infrared and thermal image equipment.

2.2 Civil sector – general

For the civil sector an exemplary and non-exhaustive list of companies was established in § 55 AWV, which are considered significant for the public security and order can fall within the material scope of the investment review. Those companies are particularly operators of so-called “critical infrastructures” as well as software developers or processors for their operation, cloud computing provider as of a certain size, and certain companies in the areas of telecommunications (§ 55 AWV refers to § 110 German Telecommunications Act) or telematics infrastructure (§ 55 AWV refers in this regard to companies with approvals according to § 291 para. 1a or 1e German Social Security Code SGB Volume V).

2.3 Civil sector – critical infrastructure

Which facilities are to be considered „critical infrastructures“ is further defined under §§ 2 para. 10, 10 para. 1 sentence 1 of the Act on the Federal Office for Information Security (“BSI law“) and the ordinance (passed on the basis of the previous law) for identifying critical infrastructures (“BSI CritisO“). Critical Infrastructure includes pursuant to § 2 para. 10 BSI law “establishments, facilities and parts of it, which firstly, belong to the sectors energy, information technology and telecommunication, transport, health, nutrition, as well as finance and insurance and secondly, are of high importance for the functioning of the community, as considerable supply shortages or threats to the public security would occur as a reason of their absence or their impairment.“ The BSI CritisO as amended by the first amendment ordinance dated 21 June 2017 substantiates the facilities and other related services of different sectors which are considered to be critical infrastructures. The following is a brief extract and overview:

Sector	In accordance with more detailed provisions of the BSI CritisO, critical infrastructures can e.g. be
Energy	Electricity-generating plants with an installed net nominal capacity (electrical) of 420 MW or a petrol station network with an output of 420,000 tons per annum
Water	Waste water facilities for more than 500,000 residents or water treatment plants for at least 22 million m³
Nutrition	Facilities with an annual production of 434,500 tons of food or 350 million liters of beverages
Information technology and communication	IT hosting with a server farm of an annual average of 25,000 running instances
Transport	Facilities or systems for passenger handling on airfields for 20,000,000 passengers annually or facilities or systems for operating a logistics center in the logistics segments of bulk cargo, general cargo, contract, sea and air freight with a quantity of goods of at least 17,000,000 tons per annum
Healt	Hospitals with a number of stationary cases of 30,000 per annum or production plants for certain pharmaceuticals with an annual turnover of approx. EUR 90.68 million
Finance and insurance	Operators of settlement or clearing systems for the cash supply with at least 18,000,000 transaction annually or operators of contract management and payment systems of statutory health and nursing care insurance for at least 3,000,000 insured persons

In addition, the BSI provides further assistance on its homepage in the form of “frequently asked questions” (“FAQ”) for the interpretation of the BSI CritisO.

3. Clarification on investors which are subject to an investment review

In principal, only investments by – simplified – „foreigners“ are subject to an investment screening. In the defense sector, still each investment by non-German investors may be subject to a review. In the civil sector, in principle only investments by an investor who is neither located in the (customs) area of the European Union (“EU”), nor – and this has now been clarified – in the area of the European Free Trade Association (“EFTA”) (§ 55 para. 2 sentence 5 AWV) may be subject to a review. However, in order to prevent a circumvention, it was clarified for all sectors that e.g. with respect to pure special purpose vehicles (no other business than the investment in the target) not its seat but the origin of its (ultimate) shareholders is decisive so that also investments by – again simplified – “residents” may be subject to a review (anti-circumvention provision pursuant to §§55 para. 2 sentence 2, 60 para. 1 sentences 2ff. AWV).

4. Reporting obligation

The foreign investment in a company in the civil sector now also has to be notified (§ 55 para. 4 AWV). The extension of the mandatory notification also to the civil sector, however, did not change the so far applying legal concepts under public and civil law. Under public law foreign investments in the civil sector are still permitted in general unless prohibited which translates to the civil law concept of the acquisition agreement being (i) valid and (ii) subject to the condition subsequent of a prohibition of the investment (§ 15 para. 2 AWG). In contrast thereto, investments in companies in the defense sector are still prohibited unless approved meaning that the respective acquisition agreement under civil law   is provisionally invalid (in other words: its legal validity is suspended) and will become valid only upon approval with retrospective effect from the date of its execution (§ 15 para. 3 AWG).

5. Review procedure

The deadline for the screening or the (deemed) approval of a foreign investment in a company in the defense or security sector was extended from 1 to 3 months (§§ 61, 62 AWV). The deadline for the prohibition of an investment in a company in the civil sector upon initiating an investment review was now increased from 2 to 4 months as of receipt of the complete documentation. A binding certificate of non-objection shall be deemed granted henceforth only 2 months after submission of the application (previously 1 month), provided that no review procedure was initiated. A graphical overview of the process can be found here.
Under consideration of the above changes it may take more than 3 or 4 months in the event of opening of a review procedure until there is certainty about the approval or the prohibition of an investment.
In addition it was clarified for investments in companies in all sectors that the Federal Ministry for Economic Affairs and Energy (“BMWiE“) can hold negotiations with the parties involved in an investment under review on the amendment of the acquisition documentation as to the BMWiE’s concerns, but that during that time the lapse of the respective review deadline is suspended.

6. Expected number of cases per annum

As a result of the expansion of the scope of the investment review and the introduction of the mandatory notification of investments in the civil sector, as well, the Federal Government forecasts a low two-digit number of additional notifications per year of which the majority is expected to relate to investments in the civil sector. Whether or not these expectations are really met, will ultimately depend on the manageability of the criteria for determining the scope of investment reviews in practice. Should it not be clearly determinable in an individual case whether or not the foreign investment falls into the scope of the investment review, legal security could be gained (if possible – see III.) by applying for a binding certificate of non-objection.

II. Outlook

Germany promotes the amendment of EU law on a European level (see BMiE’s homepage), so that industrial policy criteria in the framework of investment reviews can be taken into consideration and can possibly be considered for the prohibition of investments. This is especially considered in such cases where (i) the freedom of investment does not exist for German or European companies in a comparable scope in the country of origin of the investor as it exists for the investor in Germany or the EU or where (ii) an acquisition is ultimately supported and/or financed by a foreign state for strategic reasons and runs counter to the legitimate interests of the EU or a member state. In the meantime, the European commission has submitted a draft regulation for a European framework for investment reviews (COM (2017) 487 final), which shall set the framework for the national regulations on investment reviews. In this draft the European commission seizes the German proposal at least to that extent that whether or not the investor is controlled or substantially financed by the government of a foreign country can be taken into consideration as an additional criterion for the prohibition of an investment (article 4 of the draft). Furthermore, each member state shall report any investment reviews to all other member states and the European commission without undue delay. In addition, the European commission shall obtain an own  examination right if an investment effects certain EU infrastructure programs such as e.g. Galileo, EGNOS, Copernicus, Horizon 2020, Trans-European Networks for Transport, Energy or Telecommunication. Even though the European Commission shall be entitled only to submit a recommendation to the respective national authority / member state but not to prohibit the foreign investment in question, the member state has to explain any deviation from the European Commission’s recommendation (see article 9 of the draft). The national review deadlines shall allow for sufficient time to take any European Commission’s recommendation into consideration within the framework of the investment screening. It remains to be seen whether and in which form the draft will become “law”, as well as if and which amendments of the current German regulations will be required in the end.

III. Excursion: compliance with foreign investment reviews in case of an acquisition of German companies with business activities in foreign countries

Regulations for the screening of foreign investments also exist, inter alia, in Australia, Canada, China, France, India, Japan, Russia, Great Britain, United Arab Emirates and the US. These provisions, too, may be of relevance when it comes to acquisitions of German companies with business activities in one or more of the aforementioned countries and may lead to – similarly to the intended acquisition of AIXTRON SE by a Chinese investor – a failure of the acquisition in case of the prohibition of the (indirect) acquisition. Moreover, in connection with the failed acquisition of AIXTRON SE it was remarkable that the BMWiE initially granted a binding certificate of non-objection, but revoked it even before the prohibition of the (indirect) acquisition of the US business and ordered the reopening of the review procedure under the AWG and AWV (see ad hoc announcement published by AIXTRON SE of 24 October 2016).