Will (almost) every U.S. VC investment in German startups require FDI approval in the future?

The German Government is about to tighten the control of foreign direct investments (FDI) in German companies—again! The suggested changes might impede or at least delay non-EU (in reality mainly U.S.…) investments in German start-ups although such non-EU investments have in particular in the growth stage become vital for the developing German ecosystem over the last years…

In a nutshell:

• What’s new?

  • German Ministry for Economics once again proposes to broaden the scope of FDI control.
  • This time, German FDI control faces a major overhaul: the latest draft covers more than 27 business areas in which an investment can trigger a mandatory notification and standstill obligation for non-EU investors.
  • Many more minority investments, including VC investments, could be subject to the proposed FDI control if an investor acquires at least 10% of the voting rights. Unlike merger control, there is no turnover threshold for the FDI regime.

• The good

  • To be determined...

• The ugly

  • The proposed amendment will possibly lead to significant delays for non-EU investors.
  • Investors that already hold at least 10% of the voting rights and acquire additional voting rights can also trigger such a mandatory notification and standstill obligation.
  • In the future, non-EU investors will likely face a competitive disadvantage compared to their EU competitors.

• Action items for our clients

  • Check transactions that are currently being negotiated and determine if they can be completed before the proposed amendment becomes effective.
  • Review your plans for future acquisitions and investments to account for potential significant delays. Solid preparation will become even more critical.
  • Going forward: The Ministry has launched public consultations on the draft of the FDI amendment—keep an eye on this development! Of course, we will keep you posted.

In detail:

After the latest amendment of Foreign Trade and Payments Ordinance in October 2020, the now proposed amendment is the 4th amendment of the relevant German FDI regulation within the past 12 months. While prior amendments extended the review scope to specific business areas (e.g., companies active in the production of certain medical equipment due to the COVID pandemic), the proposed amendment specifies the requirements of the EU Screening Regulation. It will broaden the scope of German FDI control extensively, in particular with respect to critical technologies that are of (security) relevance.

Remember the good old times four amendments ago: While a year ago, the prohibition of an investment required a threat to the public order or security of the Federal Republic of Germany, it now suffices that public order or security of the Federal Republic of Germany or of another EU Member State is likely to be impaired as a result of the investment.

Investments in certain businesses in Germany that will result in the investor holding at least 10 percent of the voting rights can trigger a mandatory notification to the Ministry and a standstill obligation. This can include, among others, investments in companies that:

• Provide cloud computing services and the infrastructures used for this purpose;
• Develop or manufacture goods which solve specific application problems by means of artificial intelligence methods and are capable of independently optimizing their algorithm;
• Develop or manufacture motor vehicles or unmanned aerial vehicles that have technical equipment for the control of highly automated, fully automated or autonomous driving or navigation functions, or the components essential for the control of such driving or navigation functions or software required for this purpose;
• Develop or manufacture industrial robots, including software or technology therefor, or provides specific related IT services;
• Develop, manufacture or refine certain types of semiconductors, optical circuits and manufacturing or processing tools for such products;
• Develop or manufacture certain IT products or components of such products;
• Operate, develop or manufacture certain dual-use goods;
• Develop or manufacture goods used to produce components for industrial applications by means of additive manufacturing processes;
• Extract, process or refine critical raw materials or their ores.

Since the Ministry launched a public consultation, interested parties have the opportunity until 26 February 2021 to provide detailed comments on the proposed amendment. In view of the technical complexity of the aspects to be regulated, the Ministry attributes particular importance to the results of this consultation. Even though this should not be regarded as an indication for the Ministry narrowing the scope, it could result in a more precise description of the relevant business areas which will facilitate a prior assessment of the notification obligations.