No Christmas Presents for Foreign Investors

The German Government tightens regulations on Foreign Investment Control (again) and amends the anti-boycott provision

Shortly before Christmas, on 19 December 2018, the German Federal Government passed an amendment to the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung (AWV)) that will, among other things, further tighten the regulations for foreign direct investment (FDI) control by lowering their thresholds and widening their scope to include mass media. In addition, the government has amended the scope of the German anti-boycott provision, which recently attracted public attention because of the US's decision to re-introduce sanctions against Iran. These changes will come into effect shortly, pending publication in the Federal Gazette.

Changes to Foreign Investment Control

The first and most important change is the lowering of the threshold for reviews of transactions by the Federal Ministry of Economics (Bundesministerium für Wirtschaft und Energie (BMWi)) from 25% to 10%.This new threshold applies to specific cases of cross-sectoral review (i.e. critical infrastructure and media) requiring a notification to the BMWi and to all cases of sector-specific review (e.g. certain military items). Going forward, acquisitions in these sectors of 10% or more of the shares in a German company can be reviewed and potentially blocked by the BMWi. The blanket clause contained in section 55 AWV for non-sector specific and non-critical infrastructure transactions will retain a 25% threshold.

The second change is the expansion of the catalogue of transactions subject to the new 10% threshold to include acquisitions of mass media enterprises. However, the German regulation requires that the target can influence the public opinion, provides current news and reaches a broad audience. This amendment means that German foreign investment control will, for the first time, explicitly extend to transactions in the media sector. It is likely that this change was made in anticipation of the recently confirmed EU regulation to coordinate and establish foreign investment control at the European level which, as of next year, will also apply to the media sector. The unspecific terms of the new German regulation will likely raise questions in particular in case of transactions regarding digital players.

Changes to the boycott declaration prohibition

In addition to the foreign investment control provisions mentioned above, another change has been made to German sanctions law. The boycott declaration prohibition contained in section 7 AWV prohibits German entities and nationals from complying with sanctions imposed by jurisdictions other than the UN, EU and Germany. In various circumstances, such conduct could be considered an illegal (implicit) call to boycott the target of third party sanctions.

Third party sanctions, notably imposed by the US, have recently caused concern and require the difficult balancing of, on the one hand, not infringing the US Iran sanctions and, on the other hand, complying with German anti-boycott legislation. Section 7 AWV has therefore created significant uncertainty and led to potential compliance issues – not to mention the issues created by the EU Blocking Statute – as the EU and US have parted ways on the Iran sanctions (see here for our blog in German on the practical lessons learned from the EU Blocking Statute).

Section 7 AWV has now been amended to allow German entities and person to comply with sanctions imposed by third party states, as long as the UN, EU or Germany have imposed sanctions against the same target, even in cases where third party sanctions are more far-reaching and don’t share the same political goal (as regarding Iran). This amendment has been expressly made because the Federal Government considers the EU Blocking Statute as sufficient to deal with the extraterritorial scope of US sanctions. The amendment therefore aims at lifting the threat to companies following US Iran sanctions to be specifically prosecuted in Germany – without solving the conflict between US Iran sanctions and the EU blockings statute, and without changing the German government's position via-à-vis the US Iran sanctions.

Looking Ahead

The lowering of the FDI threshold does not come as a surprise. Indeed, rumours regarding its introduction have been swirling since at least the summer, when the Federal Government blocked the acquisition by Chinese investors of a 20% share in the electricity transmission operator 50Hertz. As the existing foreign investment control thresholds of 25% had not been reached in that case, the government had to use a creative structure involving the state owned bank KfW, which stepped in as a "White Knight" to prevent the sale to the Chinese investors. However, the speed at which the government has since lowered the threshold to only 10% is remarkable. The reasoning of the reform clarifies that the threshold is derived from an OECD benchmark definition from 2008.

The inclusion of mass media companies in the catalogue for cross-sectoral review is also unsurprising. Many foreign investment control regimes already cover such companies and we are witnessing a greater push towards European harmonisation in this area. The rationale provided by the Federal Government for this amendment is the importance of protecting the German public against disinformation spread by foreign stakeholders.

The practical importance of the change of the German anti-boycott law remains to be seen. In light of the re-introduction of Iran sanctions by the US, it is likely that German companies will still carefully consider the consequences of doing business in Iran.

The changes of the FDI screening process swill enable the Federal Government to review many more transactions involving acquisitions of German companies. This may create capacity issues at the BMWi, although the government has no estimates regarding the number of future reviews. These changes closely follow the last reform to foreign investment control which only dates back to 2017. Together with the recently announced EU regulation on foreign investments and, more globally, with, among other things, the expansion of the CFIUS regime via FIRRMA, these changes paint a clear picture for investors: Regulation of free trade and investments has tightened globally, despite many governments distancing themselves from protectionism. International players should therefore update their compliance rules and pay close attention to relevant regulation when conducting cross-border transactions.

For further Hogan Lovells commentary on foreign investment screening, please see:

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