Germany Further Tightens Its National Foreign Direct Investment Screening Regime

July 16, 2020

The updated German Foreign Trade and Payments Act enters into effect on July 17 and is the second of three major steps planned for 2020 to reform Germany’s foreign direct investment regime.

The updated German Foreign Trade and Payments Act (Außenwirtschaftsgesetz (AWG)) includes the necessary changes for alignment with the EU FDI Screening Regulation, which sets the stage for a more coherent foreign direct investment (FDI) regime across the European Union. Further, and of high practical relevance, the updated AWG extends the notification obligations for foreign investors investing in companies domiciled in Germany and introduces sanction mechanisms in case of noncompliance.

Earlier this year, Germany already strengthened its FDI rules in the attempt to more effectively protect German assets and technology against the possible impact from the coronavirus (COVID-19) pandemic. The underlying amendment of the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung (AWV)), in particular, extended the catalogue of critical infrastructures subject to German FDI review.

We expect another reform of the AWV later this year, which would likely add sectors and industries to the catalogue of critical infrastructures.

Broadened Standard of Review

The updated AWG broadens the substantive test with regard to the definition of “public order and security,” as well as the concept of endangerment.

Under the old AWG, “the public order and security of the Federal Republic of Germany” was the relevant standard under which the Federal Ministry of Economics and Energy (Bundesministerium für Wirtschaft und Energie (BMWi)) had to assess relevant transactions in substance.

The updated AWG refers to “the public order or security of the Federal Republic of Germany, of another EU Member State or in relation to projects or programs of Union interest according to the EU Screening Regulation.” As every EU member state can only assess its own public order and security interests, the EU FDI Screening Regulation provides for a consultation mechanism allowing other EU member states and the EU Commission to comment on the transaction under review by the BMWi.

In addition, the standard of review for the public order and security has been extended. Under the old law, it was required that an acquisition by a foreign investor would lead to an endangerment of Germany’s public order and security. The updated AWG replaces the concept of “actual endangerment” with “likely impairment.” Such change implies that the BMWi can take actions against FDIs at a lower degree of risk for Germany’s public order and security.


The updated AWG stipulates that any acquisition of more than 10% of the voting rights in, or assets of, a German entity subject to a notification obligation is provisionally ineffective until receipt of FDI clearance. Such notification obligation relates to investments in (1) the armory/defense/weapons industry or the IT security sector regarding state-classified information, and (2) businesses operating critical infrastructures.

The updated AWG flanks the provisional ineffectiveness of the investment with a consummation prohibition. Until the BMWi has cleared a specific investment subject to a notification obligation, it is prohibited to enable the acquirer to (1) exercise voting rights directly or indirectly, (2) receive profit-distribution entitlements associated with the acquisition, or (3) provide or disclose any security-sensitive information to the acquirer.

Criminal Penalties

A willful violation of the consummation prohibition shall be subject to criminal sanctions, i.e., imprisonment of up to five years or a monetary fine. A negligent infringement of the consummation prohibition shall constitute an administrative offense (Ordnungswidrigkeit) subject to a monetary fine.


The updated AWG reforms the procedural rules for the relevant FDI screening mechanisms. The updated AWG stipulates uniform deadlines for the preliminary examination procedure (Vorprüfverfahren, or Phase 1 Review), both for the sector-specific (armory/defense, weapons, classified IT security) and the cross-sector FDI review (including critical infrastructures). The new Phase 1 Review deadline is up to two months in either case, irrespective of whether the BMWi initiates a Phase 1 Review on the basis of a notification or the application for a statement of non-objection (Unbedenklichkeitsbescheinigung) by the investor. Typically, in uncomplicated cases, the Phase 1 Review is sufficient for the BMWi to clear a transaction.

In complex cases, the BMWi may initiate an in-depth investigation (Hauptprüfverfahren, or Phase 2 Review). The duration of the Phase 2 Review is up to an additional four months, both for the sector-specific and the cross-sector FDI review. The Phase 2 Review deadline only starts when the BMWi considers the filing complete. The BMWi may further extend the Phase 2 Review by up to three additional months (or, in cases where Germany’s defense interests are concerned, up to four additional months), or in case of consent of the parties. In any event, the Phase 2 Review provides for stop-the-clock mechanisms, e.g., in case of negotiations on remedies.


The updated AWG applies to all acquisitions the BMWi becomes aware of after July 17, 2020. In case the BMWi became aware of any investment before July 17, 2020, the AWV in the version of July 16 is applicable.

The BMWi, in particular, becomes aware of an acquisition (1) if it is notified of the acquisition by the acquirer or (2) if the acquirer applies for a statement of non-objection (Unbedenklichkeitsbescheinigung) with regard to the relevant acquisition. Conceptually, the BMWi may also become aware of an acquisition through other channels, e.g., other authorities such as the German Federal Cartel Office (Bundeskartellamt) or the German Federal Financial Supervisory Authority (BaFin), or the media. However, particularly in cases in which the BMWi becomes aware of the acquisition through the media, it may be difficult in practice to determine the exact date when the BMWi actually became aware of the acquisition.

Outlook: Envisaged Changes of the AWV

The upcoming reform of the AWV, which is scheduled for later this year, will most likely add sectors to the catalogue of critical infrastructures (in particular, but not limited to, the sectors of (1) artificial intelligence, (2) robotics, (3) semiconductors, (4) biotechnology, and (5) quantum technology). This means that acquisitions of at least 10% of the shares or assets of an entity domiciled in Germany and operating in these sectors would be subject to a notification obligation.

Impact on Foreign Investors

Foreign investors will have to undertake prudent due diligence as to whether its proposed acquisition of voting rights in or assets of an entity domiciled in Germany is subject to the updated German FDI regime. We expect that the number of cases, which will be subject to the notification obligation with the BMWi, will significantly increase given the introduction of the statutory consummation prohibition and the risk of severe criminal penalties in case of gun-jumping.

Early in the transaction process, investors should consider the impact from a German FDI review on transaction certainty and timing. In addition to the impact from the transaction on the domestic public order and security, the investor’s risk assessment should comprise potential effects in other EU member states and at the EU level.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Michael Masling

Izzet Sinan
Christina Renner

Frances Murphy
Omar Shah
Joanna Christoforou

CFIUS Contacts

Washington, DC
Kenneth Nunnenkamp
Giovanna Cinelli
Ulises Pin

Carl Valenstein