19 December 2018, the German government has passed amendments to the
German Foreign Trade and Payments Act (“AWG”) and to the German
Foreign Trade and Payment Ordinance (“AWV”) whose compatibility
with European law is highly questionable.
structure and scope of investment review provided for under the AWG
in conjunction with the AWV is that the Federal Ministry of
Economics, the competent German authority, possesses an extensive
ex-post examination competence regarding the acquisition of shares of
German companies by third-country nationals. Of particular importance
for foreign direct investments (FDI) is the screening of sector
specific and cross-sectoral investments by third-country nationals
pursuant to Sec. 55 et seq. AWV.
this regard, the German legislator has lowered the threshold for the
screening of FDI to the acquisition of 10% of the voting rights of a
German company being active in the military and encryption sector and
of German companies which are operating in the field of critical
infrastructure according to the Regulation for Identifying Critical
the threshold to the acquisition of 10% of the voting rights raises
serious concerns about its compatibility with European law, in
particular with the fundamental principle of free movement of capital
pursuant to Article 63 of the Treaty on the Functioning of the
European Union (TFEU).
this context, the application ratio of freedom of establishment
pursuant to Article 49 TFEU and free movement of capital as well as
the possible existence of grounds of justification with regards to
restrictions to the scope of free movement of capital are the
of Free Movement of Capital pursuant to Article 63 TFEU
the competitive relationship between the freedom of establishment and
the free movement of capital needs to be addressed and must finally
European Court of Justice (ECJ), supported by legal commentators, has
been of the opinion that in certain situations the principle of free
movement of capital is superseded by the principle of freedom of
establishment. In particular, the freedom of establishment shall be
with regards to regulations which are “intended to apply only to
those shareholdings which enable the holder to exert a definite
influence on a company’s decisions and to determine its activities”
ECLI:EU:C:2012:707, para. 91). Furthermore, the ECJ has explained
that the relevant shareholder must obtain a “substantial holding in
the nominal capital of the company” (ECJ,
ECLI:EU:C:2007:273, para. 21).
movement of capital, contrary to freedom of establishment, explicitly
includes citizens and corporations of third countries in its scope of
protection. Therefore, a strict application of the previous ECJ
jurisprudence would, as a direct consequence, lead to the fact that
third-country nationals would rigidly be deprived of any protection
under European law, rendering Article 63 TFEU completely meaningless.
the intrinsic preconditions of “definite influence” and the
possibility of “determining company’s activities”, as
stipulated by the ECJ, underline the inapplicability of the relevant
cases for the circumstances of the present case.
with regards to German company law, the ECJ has generally linked the
aspects of “definite and dominant influence” to the acquisition
of at least 25% of the voting rights, giving the purchaser certain
rights to block corporate decisions such as amendments to the
articles of association and liquidation decisions (blocking
does the acquisition of a blocking minority really suffice to qualify
as purchasing “definite” and “dominant” influence of a
company? In any case, the acquisition of 10% of voting rights is, as
such, insufficient to assume a substantial holding in the nominal
capital of the company in the form of a controlling stake.
addition, the existing ECJ jurisprudence on the inapplicability of
free movement of capital finds its basis exclusively in cases dealing
with taxation, which does not constitute a generalizable field of law
that would then allow to prohibit third-country nationals to acquire
a result, I find it more convincing to apply the principle of free
movement of capital to the present case.
wide application of the principle of free movement of capital does
not exist without any legitimate restrictions. In particular,
according to Article 65(1)(b) TFEU, Member States are entitled to
take measures which are justified on grounds of public policy or
public security. The statutory concept of public policy or public
security within the AWG and AWV explicitly refers to Article 65(1)
TFEU and, hence, has to be interpreted and applied in accordance with
this regard, the ECJ has developed compulsory criteria which must be
met in order to justify any restrictions regarding the free movement
of capital by relying on the exemption of public policy or public
should be considered, first, in accordance with the ECJ judgement
that “public policy and public security may be relied on only if
there is a genuine and sufficiently serious threat to a fundamental
interest of society. Moreover, those derogations must not be
misapplied so as, in fact, to serve purely economic ends” (ECJ,
ECLI:EU:C:2000:124, para. 17).
any restrictions from the Member States must observe the legal
principle of proportionality, legal certainty, and predictability.
the unambiguous legal framework under which the ECJ permits
restrictions to the fundamental freedom of free movement of capital
it can well be concluded that the latest amendments to the AWV are in
violation of these mandatory requirements.
relevant provisions of the AWG and AWV merely speak of a risk for
public policy or public security without any sustainable and adequate
ascertainment. The AWV provides no reliable, precise and objective
indication as to the specific circumstances under which an
acquisition by a foreign investor will be prohibited due to the
constitution of a serious risk to fundamental public interests
(public policy or public security).
the German government has failed to determine which capabilities of
exerting influence and which specific corporate decisions, in the
context of “definite and dominant influence” are sufficient to
pose a risk to public policy or public security. The mere reference
to the definition of “critical infrastructure” according to the
Regulation for Identifying Critical Infrastructure (BSI-KritisV)
does, in any event, not suffice.
and most importantly, the German government has not provided any
explanations why the review triggering threshold has been lowered to
the acquisition of 10% of the relevant voting rights. Why not 20%?
Why not 5%?
German government explains in its very own reasons of the current AWV
amendments that the previous legal situation of a threshold of 25% of
foreign shareholding was justified due to the foreign shareholder
obtaining certain blocking rights, as described above (blocking
minority). In contrast, the German government does not provide
transparent reasons for establishing the 10% threshold.
vagueness of providing solid reasons for the determining the 10%
threshold must be considered intentional.
one possible explanation might be the expansion of political judicial
competence and decision-making scope in order to ensure the
compliance of third-country acquisitions with general
economic-political goals. Additionally, merely protectionist
considerations can also not be excluded. Ultimately, both potential
explanations are legally not appropriate to justify restrictions of
free movement of capital with the exemption of public policy or
addition, the ECJ has explicitly pointed out that the acquisition of
10% of shares of a company operating in a sensitive sector or any
other acquisition conferring significant influence on such a company
cannot, as a general rule, be regarded as a real and serious enough
threat to public policy or public security (ECJ,
ECLI:EU:C:2012:694, para. 69).
German government has constantly repeated in its political and legal
statements that the overriding aim of the various AWG and AWV
amendments has been to establish stricter review competences and to
expand possible prohibition powers with regard to the acquisition of
German companies by foreign stated-owned companies and state fonds.
Therefore, the amended AWV is supposed to primarily target only
acquisitions of stated-owned companies and state fonds from outside
the European Union, in particular China. However, the permissible
scope of investment review contained within the AWG and the AWV is by
no means limited to stated-owned companies and state fonds, but is
also explicitly applicable to private companies.
amending the AWV in its latest version the German government has
overstepped the mark in terms of what is needed in order to guarantee
public policy or security regarding the acquisition of German
companies by third-country nationals.
good and solid grounds exist to presume that those amendments are in
violation of fundamental principles of European law, namely the free
movement of capital.
particular, the lack of precision under which specific circumstances
an acquisition of voting rights might be prohibited does not enable
the concerned investors to be apprised of the scope of its respective
rights and obligations and, hence, constitutes a violation of the
principle of legal certainty. Furthermore, the manifestation of the
10% threshold without providing transparent reasons for it in
conjunction with the non-restriction of the screening competence to
state-owned companies and state fonds violates the principle of
of a legal policy perspective Germany is expending its economic
protectionism and thereby unfortunately creating a new “Berlin
Wall” for FDI. The concrete economic implications remain to be