Investing In... 2024 Comparisons

Germany is a traditional civil law jurisdiction with codified sets of rules applicable to contracts, corporate law and other commercial law matters. Regulation applicable to businesses operating in Germany is set at EU, national, state and local level, with the most relevant cornerstones of the legal framework for foreign direct investment (FDI) coming from the EU and national level.

Germany has a sophisticated court system with specialised courts for tax, social security matters, employment and public law, and the Federal Constitutional Court is the eminent court for matters of constitutional law. In addition, courts established at the EU level, in particular, the European High Court of Justice, have jurisdiction over certain matters concerning questions of EU law.

Germany introduced an FDI screening regime in 2009, having already introduced one in defence matters in 2004. The German Federal Ministry for Economic Affairs and Climate Action (MoE) carries out the FDI screenings and involves other ministries and authorities. A sector-specific screening applies for the defence (including items on the export control list) and IT encryption sector (for IT products used for classified information). The cross-sectoral screening applies to all other sectors.

Generally, the MoE can screen any FDI in the scope of the FDI screening, either upon FDI filing or on its own initiative (ex officio). The MoE may restrict or prohibit a transaction if it is likely to affect public order or security, and it may unwind completed transactions. If no filing is made, the possibility of an ex officio screening, and thereby, transaction insecurity, generally lasts for up to five years.

The FDI screening rules are regulated in the Foreign Trade Act and the Foreign Trade Ordinance, as well as in certain specific laws such as those on critical infrastructures. Certain aspects are further specified in a general ruling and the regulatory guidelines of the MoE. A new Investment Screening Act is in discussion and envisaged for end of 2024.

Reviewable Foreign Investments

In the defence (including items on the export control list) and IT encryption sector (producing, or having produced, authority-approved IT products for processing of classified information), the MoE can screen any direct or indirect investment of a non-German investor in a German company reaching or exceeding a screening threshold of 10% of the voting shares.

With respect to German target companies in any other sector, the MoE can screen any investment by a non-European (ie, non-EU/EFTA) investor reaching or exceeding applicable screening thresholds. A 10% or 20% (depending on the target’s activities) screening threshold applies to certain particularly security-relevant transactions, including investments in target companies holding listed critical infrastructure in the energy, water, nutrition, IT and telecommunications, finance and insurance, health, transport and traffic sectors, media and other particularly sensitive businesses, such as listed critical technologies in the areas of aerospace, artificial intelligence, quantum mechanics, robotics, and semiconductors. In other areas, the screening threshold is 25% of the voting shares.

The acquisition of a German company, or a specific business line of such company, by way of an asset deal is also within the scope of German FDI screening.

Follow-up investments by existing investors above the applicable 10/20/25% entry threshold are reviewable if the cumulated post-closing voting rights share reaches or exceeds subsequent thresholds of (20%, 25%), 40%, 50% or 75%.

FDI Filing and Clearance Requirement

An FDI filing and clearance requirement applies to any (particularly sensitive) transactions subject to the lower 10% or 20% entry screening thresholds. Such acquisitions only become fully effective upon FDI clearance of the transaction. The statutory filing and clearance requirement is complemented by criminally sanctioned gun-jumping prohibitions, including on the exercise of voting rights in the target company and information-sharing of particularly sensitive data of the target.

In recent years, Germany tightened its FDI screening regime. Currently, a further tightening of the FDI regime is being discussed. A new Investment Screening Act is envisaged for end of 2024.

2021 Tightening of German FDI Screening

In 2021, new categories of critical targets with mandatory filing and clearance requirements and a 20% entry review threshold were introduced. These categories are mainly based on critical technologies and inputs listed in the EU Foreign Investment Screening Regulation as relevant screening factors. From this, the MoE has identified specific activities and products of German targets as triggers of filing and clearance requirements. The new sensitive categories include developing or manufacturing of certain AI-based technologies for cyber-attacks or cybersurveillance, certain industrial robots including software and technology, a range of semiconductors, certain dual-use goods, goods for 3D printing, and certain critical components for 5G infrastructure.

The number of MoE FDI screening procedures has risen steeply in recent years (from approximately 40 in 2016, 65 in 2017, 80 in 2018, 105 in 2019, 160 in 2020, to more than 300 in 2021 and 2022). In 2023 and 2022, the German authorities intervened in several cases under the FDI regime, including several Chinese investments in the semiconductor, healthcare and infrastructure sectors, and with respect to a German subsidiary of Gazprom group that operates critical gas infrastructure.

Measures in Response to the COVID-19 Pandemic

Germany adopted various (legislative) measures in light of the COVID-19 pandemic in recent years. These include more flexible rules for the conduct of general meetings, eased tax rules on deferral of the due date for tax payments, waiver of enforcement measures, and liquidity assistance programmes.

As in most other jurisdictions, M&A transactions can be structured as share deals or asset deals.

Share Deals

In the case of large transactions, the share deal is the more frequently chosen transaction structure because the transfer of the target business is easier to implement since it does not entail an item-by-item transfer of all assets, contracts and liabilities pertaining to the business. Furthermore, the tax rate applicable on the seller’s profit from the transaction is often considerably lower than in an asset deal. Conversely, an asset deal can provide the purchaser with a rather simple option to select the assets, contracts and liabilities that will be acquired, while leaving other parts of the target business with the seller. In addition, an asset deal often results in a step-up of tax book values, creating a future tax shield for the buyer.

Statutory Mergers and Tender Offers

As an alternative to an acquisition of businesses by way of share deal or asset deal, a business combination can be implemented through a statutory merger or other measures pursuant to the German Transformation Act. At least in the event that minority shareholders are involved on both sides of a transaction, parties often avoid mergers or other measures pursuant to the German Transformation Act because they can be challenged by minority shareholders in court and, as a result, they do not provide the required transaction security and may result in protracted appraisal proceedings. For this reason, almost all public M&A deals are structured as tender offers, for cash or stock consideration, rather than as statutory mergers.

Demergers and Spin-Offs

Measures pursuant to the German Transformation Act, such as demergers or spin-offs are, however, frequently used as intercompany measures to implement corporate carve-outs in preparation for an M&A transaction that is implemented as a share deal.

In addition to FDI clearance, pursuant to the German Foreign Trade and Payments Act (AWG), the most relevant regulatory approval that may be required for the consummation of a domestic M&A transaction is merger clearance (see 6. Antitrust/Competition) and since October 2023 a foreign subsidies clearance for major concentrations. In addition, special clearances may be required for companies active in the financial services or insurance industry (see 8.1 Other Regimes).

For public M&A transactions, the German Securities Acquisition and Takeover Act provides a specific regulatory framework for tender offers. The most prominent cornerstones are:

• the obligation to make an offer for any and all shares as soon as a shareholder reaches the threshold of 30% of all voting rights in a listed company or makes an offer to acquire 30% or more of all voting rights; and
• the so-called best price rule, which requires the bidder to offer all shareholders the highest price that the bidder, or a party related to the bidder, has paid for any share in the target company in connection with the tender offer.

Public Companies

Publicly listed entities in Germany typically have the legal form of a German stock corporation or a European stock corporation (SE) with a seat in Germany or a German partnership limited by shares.

German stock corporation

A German stock corporation has a two-tier board with a management and a supervisory board. Members of the management board are appointed by the supervisory board and members of the supervisory board are elected by the shareholders. If the company or, subject to certain requirements, its subsidiaries, employ more than 500 employees in Germany on a regular basis, one third of the members of the supervisory board must be elected by employees (or one half, if there are more than 2,000 employees).

European stock corporation

An SE with a seat in Germany can have either a one-tier or a two-tier board. The rules on co-determination of employees are subject to negotiations between representatives of the employees and management. If no co-determination rules apply at the time of the formation of the SE, it is, as a practical matter, often possible to preserve the status quo without co-determination for the future in an SE structure.

German partnership limited by shares

A German partnership limited by shares has a very different governance structure, with a general partner who manages the company through its management body. This governance allows for a separation of ownership and control and is therefore sometimes chosen by listed family businesses.

Private Companies

German limited liability company

The most frequent legal form of private companies in Germany is a German limited liability company. The governance set-up is simpler and more flexible than a German stock corporation and therefore lends itself better to being used as a subsidiary in a corporate group or acquisition structure, in particular for a foreign investor who is less experienced in German corporate law.

Partnerships

German companies can also be organised as partnerships, including as limited partnerships with a German limited liability company as a general partner. Partnerships are sometimes used by foreign investors for tax reasons and are typically treated as transparent for income tax purposes.

The rights of minority investors depend on the legal form of the company.

In the case of a German stock corporation, the rights are mainly limited to asking questions, voting in general meetings and challenging shareholder resolutions in the case of (alleged) violations of applicable corporate law. Certain corporate decisions, such as the amendment of the by-laws, or the approval of the sale of all or substantially all assets of the company, require a qualified majority of 75% of the capital present at the general meeting. Hence, a veto position to block major corporate transactions requires a participation of at least 25%. A squeeze-out is only available if a shareholder holds 95% or, subject to certain requirements, 90% of the capital.

In the case of a German limited liability company, material additional minority protection rights apply, most notably, a comprehensive right to require the managing directors to answer questions and inspect the corporate records of a company.

Certain foreign investors are required to submit an FDI filing to the MoE for investments in a German company under the German FDI screening regime (see 1.2 Regulatory Framework for FDI).

The FDI filing is typically submitted by the direct acquirer (often a special purpose vehicle for the acquisition) shortly after signing. The filing needs to contain information on the planned acquisition, the acquirer, the German target and their respective business areas.

When disposing of a German investment, this transaction may trigger a mandatory FDI filing for the acquirer (see 7.2 Criteria for Review).

Further disclosure obligations may result from securities law requirements (see 5.2 Securities Regulation) and regulations of financial services or insurance companies (see 8. Other Reviews/Approvals).

Traditionally, bank financing constituted the main financing source for German businesses, especially in the SME sector, which plays an important role in the German economy. Banks are expected to remain important financing partners. However, the role of alternative financing sources has grown and is expected to grow further, resulting in a healthy diversification of external financing sources.

In 2022 and 2023, the capital markets were heavily affected by geopolitical tensions and relatively high interest levels with negative impact on valuations for potential IPOs. While the bond market remained open for issuer, following a relatively short slowdown upon the outbreak of the Russia–Ukraine war in 2022, this led to a sharp decline of activity in the equity markets in 2022. In 2023, the environment for IPO did not improve, but as market participants expect that the interest peak has been reached and interest levels should start to decline in 2024, the outlook for late 2024 is positive.

Many IPO candidates postponed in 2022 and 2023 but did not cancel their IPO plans entirely. An additional push may result in 2024 and 2025 from sponsors seeking an IPO exit for their portfolio companies. Furthermore, the high investment and financing demand associated with the energy transformation coupled with investors’ appetite and support from politics should fuel the capital markets in the coming years.

Primary Markets Regulation

Primary markets legislation in Germany includes the German Stock Exchange Act, the German Stock Exchange Admissions Regulation, the EU Prospectus Regulation and the German Securities Prospectus Act.

Secondary Markets Regulation

Secondary markets legislation includes the German Securities Trading Act (GSTA), the EU’s Market Abuse Regulation (MAR) and post-admission obligations imposed by the securities exchanges.

Major holdings’ notification obligations

Under the GSTA, holders of shares trading on a regulated market must notify the relevant issuer when reaching, exceeding or falling below certain voting rights thresholds. In addition to direct and indirect holdings of voting rights, financial instruments which allow the holder to access voting rights or combinations of such holdings are taken into consideration.

Failure to comply with these notification requirements may result in the loss of rights attached to the (underlying) shares, in particular voting and dividend rights, for the period during which the requirements are not met and (under certain circumstances) even for an additional period of six months.

In addition, issuers may request information from intermediaries to determine the ultimate holders of shares pursuant to the German Stock Corporation Act.

Takeover regulation

As mentioned in 3.2 Regulation of Domestic M&A Transactions, the German Securities Acquisition and Takeover Act regulates acquisitions or takeovers which reach or exceed the 30% threshold in the target’s voting rights.

The German FDI screening regime applies to foreign investors structured as investment funds and to limited partners investing in investment funds – see 1.2 Regulatory Framework for FDI. Indirect shareholding is typically attributed to the fund’s foreign top holding company, and in some cases, even to the fund’s limited partners (investors). Limited partners who indirectly hold an investment in a German company can generally avoid FDI screening if their voting rights fall below the FDI screening thresholds – 10% or 20% for critical targets and 25% otherwise (see 7.1 Applicable Regulator and Process Overview).

The German merger control regime is contained in Sections 35–43 Gesetz gegen Wettbewerbsbeschränkungen (Act against Restraints of Competition or ARC). FDI – like any other investment – must be notified to the Bundeskartellamt (Federal Cartel Office or FCO) prior to being implemented if the following jurisdictional requirements are met. Firstly, the transaction must amount to a “concentration”, which may be triggered by various events:

• acquisition of – sole or joint – control over another undertaking;
• acquisition of all, or a substantial part, of the assets of another undertaking;
• acquisition of shares in another undertaking of 25% or more, or 50% or more; and/or
• any other combination enabling one or several undertakings to exercise a material competitive influence over another undertaking.

Notably, in contrast to many other jurisdictions, German merger control captures the acquisition of a non-controlling minority shareholding if the threshold of 25% is reached, or even below 25% if the acquirer will have a material competitive influence over the target post-merger.

Secondly, at least one of the following two thresholds must be met.

• Turnover threshold:
1. combined aggregate worldwide turnover of the undertakings concerned exceeds EUR500 million;
2. turnover of at least one of the undertakings concerned exceeds EUR50 million within Germany; and
3. turnover of another of the undertakings concerned exceeds EUR17.5 million within Germany.
• Transaction value threshold:
1. combined worldwide turnover of all the undertakings concerned exceeds EUR500 million;
2. turnover of at least one of the undertakings concerned exceeds EUR50 million within Germany;
3. the total transaction value amounts to more than EUR400 million; and
4. the target has significant activities in Germany.

Thirdly, the concentration must not meet the jurisdictional requirements of the European merger control regulation. In this case, the transaction only requires notification to the European Commission (“one-stop shop”).

Fourthly, the concentration must have sufficient effect within Germany, which may require a more detailed analysis in the case of foreign-to-foreign mergers.

Informal pre-notification consultation with the FCO is not mandatory, but may be advisable in complex cases. After formal notification, the FCO has a “Phase I” review period of up to one month to determine whether it either unconditionally clears the transaction, or opens “Phase II” proceedings due to competition concerns based on the substantive criteria set out in 6.2 Criteria for Review. Phase II extends the Phase I review period by four additional months, ie, a total of five months from the date of filing. This period may be extended by an additional month if the parties offer commitments, and by any further period with the parties’ consent.

The FCO is empowered to prohibit a concentration if it would significantly impede effective competition, in particular, as a result of the creation or strengthening of a dominant position.

The competitive analysis normally begins with the market shares of the merging parties and their competitors. The ARC provides for a rebuttable presumption of single dominance where one undertaking has a market share of at least 40%, and collective dominance where three or fewer undertakings have an aggregate market share of at least 50%, or five or fewer undertakings have an aggregate market share of at least 66.6%. These thresholds indicate a market share level where the FCO would typically carry out a thorough investigation, as opposed to a rather straightforward clearance based merely on the parties’ low-to-moderate market shares.

Besides market shares, additional factors may be relevant for the competitive assessment, including factors such as closeness of competition between the merging parties, barriers to entry and potential competition, the parties’ financial strength, and the countervailing buyer power of customers, among others.

In the context of FDIs, the FCO pointed out in its clearance decision (04/2020), regarding the acquisition of German-based Vossloh Locomotives GmbH by Chinese state-owned manufacturer CRRC Zhuzhou Locomotives Co Ltd, that certain particularities need to be taken into account when assessing the market position of state-owned companies originating from centrally planned economies. In particular, the FCO considered that companies ultimately controlled by the Chinese state form a large corporate group, which benefits from economies of scale and a high level of vertical integration along the supply chain. Furthermore, Chinese state-owned companies are more likely to be able and willing to engage in a low-price strategy that is not based on comparable cost advantages and may therefore damage competitive structures in the long run. In this regard, the FCO also took into account that Chinese state-owned companies have access to financial resources through subsidies from the Chinese state and loans from state banks.

In the vast majority of cases, the FCO grants an unconditional clearance within Phase I. The parties may offer commitments to address competition concerns raised by the FCO during a Phase II investigation. Various types of remedies may – depending on the specific circumstances in the individual case – provide a feasible solution from the FCO’s perspective, eg, the divestiture of a “standalone” business to a suitable purchaser, removal of links with competitors, or other remedies, such as commitments to grant access to the infrastructure, networks or key technologies. The FCO has a clear preference for divestments, leading to a direct change in the market structure, as opposed to remedies regarding the future market behaviour of the merging parties.

If the FCO is able to demonstrate a significant impediment of effective competition, it can block a transaction or subject its clearance to commitments.

At the parties’ request, the Federal Minister for Economic Affairs and Energy may overrule the FCO’s prohibition decision if the anti-competitive effects of the transaction are outweighed by advantages to the economy as a whole resulting from the concentration or overriding public interest. In practice, there have very rarely been cases where the parties applied for such ministerial authorisation.

Furthermore, decisions of the FCO are subject to judicial review by the Higher Regional Court in Düsseldorf. Decisions of the Higher Regional Court in Düsseldorf can be appealed to the Federal Court of Justice.

Completion of a transaction before approval has been granted (“gun-jumping”) may lead to severe sanctions, in particular:

• measures implementing the transaction are regarded as provisionally invalid until the FCO or court grants approval;
• the FCO may order the dissolution of the transaction or any other remedy considered necessary to restore effective competition; and
• the FCO may impose fines on the undertakings (maximum: 10% of an undertaking’s worldwide group turnover) and/or individuals (maximum: EUR1 million) involved.

As mentioned in 1.2 Regulatory Framework for FDI, Germany has an FDI screening regime that includes share deals at or above the applicable screening thresholds (10% or 20% of the voting shares for critical targets, otherwise 25%) and equivalent asset deals.

Critical Targets (10% or 20% FDI Screening Threshold)

A 10% screening threshold and the mandatory FDI filing and clearance requirement triggered by it apply to any foreign acquisition of a German defence company (including items on the export control list) and certain IT encryption companies, as well as to the acquisition of critical targets in other sectors by non-European investors (cross-sectoral screening). Such further critical targets with a 10% screening threshold include companies:

• holding listed critical infrastructure above certain thresholds in the energy, water, nutrition, IT and telecommunications, finance and insurance, health, transport and traffic sectors;
• producing sector-specific software for the operation of critical infrastructure;
• providing certain critical services for public communications infrastructures, as well as media companies with broad reach; and
• developing and producing certain medicinal products, medical devices, personal protective equipment, and diagnostics for highly contagious diseases.

In addition, a 20% screening threshold and the mandatory FDI filing and clearance requirement triggered by it apply to the following critical targets, among others:

• developers or manufacturers of certain AI-based goods for certain listed activities, such as cyber-attacks or cybersurveillance;
• developers or manufacturers of automated or autonomous motor vehicles, unmanned aerial vehicles or essential components or essential software therefor;
• developers or manufacturers of industrial robots, including software and technology, or providers of specific IT services therefor;
• developers, manufacturers or refiners of certain semiconductors;
• developers or manufacturers of goods that specifically serve the operation of wireless or wire-bound data networks; and
• companies that extract, treat or refine critical raw materials and their ores.

Furthermore, follow-up investments and attribution of voting rights raise typical transaction issues on the scope of the FDI screening.

Follow-Up Investments

Follow-up investment leading to an increase in the shareholding of a German company at or above the applicable entry screening threshold (10%, 20% or 25%) is reviewable in the FDI screening if the cumulated post-closing voting rights share meets or exceeds subsequent thresholds of (20%, 25%), 40%, 50% or 75%.

Clearance Exemption for Public Acquisitions

Acquisitions of publicly listed critical targets via a stock exchange must be notified like other acquisitions, but may be closed prior to FDI clearance. However, the parties must observe the gun-jumping prohibitions until FDI clearance has been issued (see 7.4 Enforcement).

Attribution of Voting Rights and Atypical Acquisitions

In certain circumstances, voting rights held by a third party are attributed to a foreign investor. This is, in particular, the case if the investor holds at least the required 10%, 20% or 25% of the voting rights in the third party or if the investor and the third party have agreed to jointly exercise the voting rights in the German target company (voting rights agreement). The term “voting rights agreement” includes agreements concluded post-closing.

In addition, the FDI regime extends to transactions in which the investor obtains other forms of effective participation in the target’s management, ie, in the following circumstances:

• the purchaser acquires voting rights;
• this is accompanied by special rights (eg, additional board seats/majorities or veto rights for strategic decisions); and
• this provides a level of control comparable to that provided by the respective applicable threshold of voting rights.

FDI Exemption for Greenfield Investments

On the other hand, the creation of a new German company (a so-called greenfield investment) is not (yet) subject to any restrictions under the German FDI regime. Potential extensions of the FDI regime are under discussion. By contrast, however, the contribution of existing German businesses to a new joint venture (entity) is in the scope of the FDI screening, if the foreign investor holds voting shares above the applicable screening threshold.

FDI Filing: Clearance and Certificate of Non-objection

An FDI filing by the direct acquirer of the German target company (acquisition entity) is mandatory in the case of a critical target (10% or 20% screening threshold applies). For other acquisitions, the acquirer may voluntarily submit an application for a so-called certificate of non-objection. Such a certificate confirms that the transaction endangers neither security nor public order. In both cases, the FDI submission to the MoE must contain information on the planned acquisition, the acquirer and the German target company, as well as their respective business areas.

The FDI filing is typically submitted promptly after the conclusion of the acquisition, but can also be submitted prior to signing if the transaction parameters are sufficiently concrete.

Screening Periods

The deadline for the MoE’s initial FDI review (Phase I) is two months. The FDI certificate is deemed to have been issued after the expiry of the two-month period if the MoE does not open an investigation procedure. However, it is MoE practice to actively issue the FDI certificate or to open the in-depth screening within this period.

The deadline for the in-depth screening (Phase II) is four months from submission of the information requested by the MoE at the opening of Phase II. The MoE opens Phase II if the authorities involved have security-related concerns or require further information to assess security aspects.

The MoE may extend the four-month period by three months in the case of special factual or legal difficulties. The period may be extended by another month if the Federal Ministry of Defence claims that the transaction specifically affects German defence interests. The periods are suspended in the case of an information request by the MoE or the negotiation of a mitigation agreement. All deadlines are extendable with the acquirer’s and seller’s consent. Recent FDI litigation underlines that FDI clearance is deemed to have been issued if applicable deadlines are not met by the MoE.

Under the FDI screening standard, a ban of the acquisition or security-related orders by the MoE require that the acquisition is likely to affect public order or security in Germany, or in another EU member state, or in relation to certain EU projects or programmes. This standard is in line with the EU Foreign Investment Screening Regulation. Under former German FDI laws, there had to be a current threat to essential German public interests.

General economic policy objectives (eg, protection against the effects of competition or strengthening German companies) do not justify a restriction or prohibition of an acquisition.

Vulnerabilities and Threats

When reviewing security and public order issues, the MoE takes into account German vulnerabilities (eg, defence projects, critical infrastructure, security of supply, digital or technological sovereignty aspects, and protection of classified information) as well as foreign threats at issue. Such foreign threats include control of the acquirer by a foreign government (eg, due to state funding “beyond a marginal extent”), the “serious risk” of criminal or administrative offences by the acquirer, or known spy and data security issues.

Relevance of Control

In contrast to merger control procedures, the reviewability of FDI does not depend on a notion of control. Thus, non-controlling minority investments above the FDI screening threshold can be screened by the MoE. The MoE may consider control matters on a case-by-case basis when assessing whether the screened FDI likely affects security or public order.

The reviewability of FDI does not generally depend on the legal form or structure of the German target company. Thus, German companies structured as partnerships or joint ventures are generally in the scope of the German FDI screening. In an FDI screening, the MoE may, for instance, consider whether the involvement of a German company in a joint venture might mitigate security risks to some extent.

If the foreign investment at issue is likely to endanger security or public order, the MoE may request remedies and/or commitments to address these concerns. The MoE has broad discretion when requesting such measures in co-ordination with the other involved authorities. The MoE’s leeway regarding suitable remedies is not limited by a list of measures. The request is typically addressed to both the acquirer(s) and the German target, and in some cases, also to the sell-side.

The MoE typically tailors the request to the vulnerabilities and threats at issue. Typical requested remedies include:

• requirements on the protection of classified information and other sensitive data, including on security-cleared projects;
• commitments on the (non-)integration of the target’s critical IT systems into the acquirer’s IT systems;
• assurances to maintain German companies or sites, not to relocate certain production or R&D divisions out of Germany or the EU, to maintain a certain number of German directors, or to hold IP rights via German companies;
• termination of the target’s sensitive projects and customer relationships, or shutdown of certain business lines of the target; and/or
• certain veto rights in strategic decisions or even a (pre-emptive) purchase right for the German government.

If the MoE or any of the other involved ministries or authorities have security concerns, they tended to aim for the conclusion of a so-called mitigation agreement. In some cases, the MoE may also request unilateral commitments on the part of the buy-side and/or the target. More recently, the MoE rather implemented such remedies in an administrative order.

The initial draft of a mitigation agreement is normally provided by the MoE. In many cases, there is a certain room for negotiation on contractual commitments. The MoE typically insists that it may enforce key commitments against the involved parties and that non-compliance with these commitments will trigger contractual penalties. In case of an administrative order, the MoE typically provides an opportunity for comments based on a draft of the remedies.

The MoE has broad discretion when deciding on enforcement measures under the FDI screening regime and often requests security-related remedies under a mitigation agreement or an administrative order in the first step. As a last resort where there are security or public order concerns, the German government may fully or partially block FDI by way of a prohibition decision (see the paragraph below on the Government’s Decision Process), which may require unwinding an already closed transaction. So far, the German government has only prohibited a few transactions in its screening practice, but it has also discouraged some transactions prior to a decision. In 2023 and 2022, the application of the FDI screening rules by the German authorities tightened. For example, several Chinese investments in hi-tech, healthcare and infrastructure sectors failed due to security concerns in the FDI screening process.

Government Decision Process

In the sector-specific screening (defence and certain IT encryption companies), the MoE may issue a transaction ban or security-related orders in agreement with the Federal Foreign Office, the Federal Ministry of the Interior and the Federal Ministry of Defence. For all other sectors, the prohibition of a transaction requires the consent of the federal government (full cabinet including the chancellor and ministers), and security-related orders require the approval of the Federal Foreign Office, the Federal Ministry of the Interior and the Federal Ministry of Defence, and consultation with the Federal Ministry of Finance. 

Investor’s Appeal Against the MoE’s FDI Decisions

The foreign investor and other affected transaction parties may generally challenge any binding decision of the MoE in the FDI screening proceedings in court. An injunction proceeding aiming for timely FDI clearance in relation to a proposed Chinese semiconductor investment was unsuccessful in front of the Berlin courts in early 2022. Further FDI-related litigation is pending in court. A Chinese investor challenged an FDI blocking decision in court and obtained a favourable first instance judgment in November 2023 for his investment in Heyer Medical (not final). However, this judgment had a focus on procedural matters such as due process requirements rather than substantive security-related considerations. Moreover, another investor won a first instance court case based on the argument that the MoE is not free to terminate an FDI screening without a proper final decision (case regarding the German oil refinery PCK; not final).

Gun-Jumping Rules

Foreign investors may sign acquisition agreements for German target companies prior to obtaining FDI approval. However, acquisitions subject to the mandatory FDI filing requirement may not be completed prior to the MoE’s FDI clearance. As long as no FDI clearance has been obtained, it is prohibited to exercise voting rights or to disclose certain sensitive information about the target company to the acquirer. A breach of these requirements (so-called “gun-jumping”) may trigger criminal sanctions and administrative fines, including for the foreign investors and the investment entities involved.

The acquisition of companies active in certain industry sectors may be subject to an additional regulatory review or approval process. Specifically, the acquisition of a company in the financial industry is subject to a prudential assessment by the competent regulatory authority, which may object to the transaction within a certain period after the purchaser has filed a notification with the authorities.

Anyone who intends to acquire a qualifying holding in certain regulated entities has to notify such intention to the competent regulatory authority in Germany (shareholder control procedure). The types of entities that may trigger a shareholder control procedure include:

• regulated entities from the banking and financial services sector, such as credit institutions and investment firms;
• regulated entities from the insurance sector, such as insurance and reinsurance undertakings, pension funds, and insurance holding companies;
• UCITS management companies; and
• regulated entities providing payment services, such as licensed payment service providers and e-money institutions.

Similar provisions apply to entities operating a stock exchange, central counterparties (CCPs) and central securities depositories (CSDs).

This prudential assessment procedure may also be triggered by acquisitions of companies outside the financial sector that hold participations in regulated entities. These transactions may qualify as an indirect acquisition of a qualifying holding in such regulated entity. Many German corporate groups have in fact established licensed entities, such as captive insurers, pension funds or group internal leasing or factoring companies. It is part of the due diligence process to identify such regulated subsidiaries and participations of the target company in order to initiate the prudential review procedure in due time before closing.

Objective of the Prudential Assessment

The purpose of the notification requirement is to ensure that the competent authority has adequate information about changes in the direct and indirect shareholdings of entities that are subject to financial regulation. On the one hand, this prevents cash flow from illegal activities into the financial sector (prevention of money laundering and terrorist financing). On the other hand, this ensures the stability and soundness of financial institutions in order to protect the clients and creditors of such institutions (eg, depositors or policyholders), as well as the stability of the financial system as a whole.

The notification by the purchaser allows the competent authorities to assess the suitability and the financial soundness of the purchaser. If the competent authority concludes, for example, that the prospective shareholder does not comply with fit-and-proper requirements or is otherwise not capable of ensuring the sound and prudent management of the regulated entity, the competent authority may object to the acquisition. The same applies if, specifically in a third-country context, there is reason to believe that the transaction may result in a structure that makes it impossible to exercise effective supervision and to effectively exchange information between regulatory authorities.

Qualifying Holding

A qualifying holding is a direct or indirect holding in the regulated entity which represents 10% or more of the capital or of the voting rights, or which enables the holder to exercise significant influence over the management of the regulated entity. An indirect qualifying holding can result from the “control criterion” (holding the majority of the voting rights or otherwise controlling the holder of the qualifying holding) or the “multiplication criterion” (multiplied shareholding down the corporate chain of 10% or more). In a corporate group, all entities having direct or indirect control are subject to prudential assessment.

Notification Requirements and Assessment Procedure

The following transactions relating to changes in the shareholder structure trigger the notification requirement:

• the acquisition of a qualifying holding;
• exceeding the thresholds of 20%, 30% or 50% of the capital or voting rights in the regulated entity; and
• disposing of the qualifying holding or falling below the thresholds of 20%, 30% or 50% of the capital or voting rights.

The notification requirement is triggered by the specific intention to conduct one of the three transactions listed directly above. In M&A transactions, it is common practice in Germany to file the notification within a few days of the corporate decision-making process being completed and of all board resolutions having been passed. If not yet available at that time, supporting documentation has to be filed as soon as possible at a later stage.

The documentation to be filed with the competent authorities varies depending on the target stake in the regulated entity. Specifically, in the case of an acquisition of a majority stake, but also in the other cases listed here, the documentation requirements are quite comprehensive. These include information on the purchaser, its management, the financing structure and the strategy followed by the acquisition. Certain exceptions and waivers may apply in specific circumstances.

The competent authority has 60 working days to review the notification. This 60-working-day period, which may be subject to an extension by the competent authority, starts as soon as the competent authority has received and confirmed the completed filing, including all supporting documentation. Due to additional information requests by the authority, the entire assessment period can take longer in practice (typically, between three and 12 months). On the other hand, the competent authority may issue a “non-objection letter” if and when it is satisfied that no objection should be raised.

Competent Regulatory Authority and Completion of Prudential Assessment

In most cases, the competent authority for the shareholder control procedure is the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin). For certain regulated entities, the notification must also be filed with the German Central Bank (Deutsche Bundesbank). Since the introduction of the Single Supervisory Mechanism, the European Central Bank (ECB) is the competent authority for credit institutions regulated under the EU Capital Requirements Regulation (Regulation (EU) 575/2013). While the notification must also be filed with BaFin in this case, the prudential assessment of the acquisition is completed by a formal decision of the ECB.

The purchaser may not close the transaction before the 60-working-day assessment period for the prudential assessment has lapsed or the competent authority has provided the purchaser with a non-objection letter (regulatory clearance). Therefore, regulatory clearance is a closing condition in the transaction documentation (sale and purchase agreement). That closing condition is typically supported by an undertaking by the purchaser to perform certain actions, or to make commitments to the competent regulatory authority to ensure that regulatory clearance will be granted.

German tax-resident corporations are subject to German taxation in terms of their worldwide income. Foreign tax-resident corporations are subject to German taxation if and to the extent income can be attributed to German permanent establishments/representatives or with other German-source income (subject to limitations by double-tax treaties).

German corporate income tax is levied at a rate of 15% (plus 5.5% solidarity surcharge) with a preferential regime for dividends/capital gains (95% tax exempt).

Corporations with German permanent establishments are also subject to trade tax. The basis is the net income plus/minus certain additions/deductions. The tax rate depends on the multiplier of the local municipalities at the place of business. Effective rates range from 7% to approximately 17%.

(Deemed) trading partnerships’ profits are subject to (corporate) income tax at the level of the partners. For partners subject to corporate income tax, see above. For individuals, the income tax rate is up to 47.475%, plus church tax, if any; there is a preferential regime for dividends/capital gains (26.375% flat rate or 40% tax exempt).

Profits of (deemed) trading partnerships are also subject to trade tax at the level of the partnership if and to the extent that business activities are performed in Germany. Trade tax can be credited against the income tax of individuals (but not corporations) up to a maximum trade tax rate of 14%.

Dividends

Dividends distributed (including hidden profit distribution) are subject to withholding tax at a rate of 26.375%.

Interest Payments

Interest payments are generally not subject to withholding tax except for interest paid by banks/financial institutions and on certain instruments such as convertibles or profit participation rights and in crowd-lending situations. If interest payments lead to the limited tax liability of foreign investors in Germany (eg, if capital assets are secured by domestic real estate), tax offices can additionally order a withholding.

Relief

German tax-resident investors can credit withholding tax against their final tax liability within their tax assessment. Foreign tax-resident corporations can request a refund of two fifths of the taxes withheld at the Federal Central Tax Office (Bundeszentralamt für Steuern). Furthermore, foreign tax residents may be entitled to a full or partial refund under an applicable double-taxation treaty or the EU Parent-Subsidiary Directive. All refunds are, however, subject to strict German anti-treaty/directive-shopping limitations, and relief will only be possible to the extent that one of the following conditions is met:

• the shareholders of the entity claiming the refund would have been entitled to the same relief had they received the payment directly;
• the source of the income has a significant connection to a genuine economic activity carried on by the foreign recipient;
• obtaining a tax advantage is not the main purpose of interposing the foreign recipient; or
• the foreign recipient is a publicly traded company listed on a recognised stock exchange.

Usual tax-planning strategies for high-tax jurisdictions such as Germany, eg, utilising tax deductions for interest and/or royalty payments or loss-carryforwards, are subject to various limitations, in particular:

• the interest-ceiling (Zinsschranke) limits the deductibility of interest to 30% of the borrower’s tax-adjusted EBITDA with a de minimis of EUR3 million net interest expense, a standalone exception and a debt/equity ratio test;
• the royalty-ceiling (Lizenzschranke) limits the tax deductibility of licence or royalty payments to foreign related parties that benefit from preferential regimes with a tax rate of less than 25% (for licence or royalty payments incurred after 31 December 2023: less than 15%) (“Patent Box”);
• any payment to a shareholder or related person is subject to an arm’s length test and might be treated as a hidden profit distribution; and
• in case of a change of ownership (more than 50% to one acquirer), the loss trafficking rules may result in the forfeiture of loss-carryforwards.

German tax-resident parents and subsidiaries can consolidate their profits and losses for corporate income and trade tax purposes by forming a tax group (Organschaft). The controlled subsidiary must enter into a profit-and-loss transfer agreement (PLTA) with a controlling parent. Such PLTA must be entered into for a minimum duration of five years and must actually be performed (profits transferred to and losses compensated by the controlling parent) throughout this period.

Since 2022, Germany allows certain partnerships to be treated “as” a corporation for corporate income tax purposes based on a “check the box” system.

Capital gains received by foreign corporations from:

• the disposal of shares in German corporations (participation of 1% or more within the last five years) are 95% exempt from corporate income and trade tax (100% tax exemption if the shareholder does not have a German permanent establishment/representative);
• interest in a German tax-resident (deemed) trading partnership are subject to corporate income tax (15.825%, including solidarity tax), unless such partnership has no permanent establishment/representative in Germany; the profits are also taxed at the partnership itself for trade tax purposes (7% to approximately 17%); and
• the disposal of assets with a German nexus are subject to corporate income and trade tax if the applicable double-taxation treaty (DTT) assigns the right to tax to Germany (eg, for German situs real estate).

Capital gains received by foreign individuals from:

• the disposal of shares in German corporations (1% or more within the last five years or shares held as business assets) are subject to taxation at 26.375% flat rate or at regular rates with 40% of the gains exempt, leading to a maximum tax rate of 28.5% plus church tax, if any; under an applicable DTT, such gains are usually tax exempt. Provided that 50% of the corporation’s assets consist of real estate, Germany imposes taxes irrespective of any participation threshold and is usually not prevented from doing so under a DTT; and
• interest in a German tax-resident (deemed) trading partnership and assets with a German nexus are subject to income tax (maximum 47.475% plus church tax, if any) if an applicable DTT assigns the right to tax to Germany (eg, in the case of a German permanent establishment/representative or real estate). The profits are also subject to trade tax, with a credit at the level of the individual partner.

Transactions in which real estate is transferred are subject to real estate transfer tax (RETT). RETT also applies if 90% or more in a corporation or a partnership with German real estate are directly or indirectly transferred to/unified in the hand of one acquirer. Real estate of partnerships or corporations can also become subject to RETT if 90% or more of the interest in such partnership or the shares in such corporation are transferred within ten years to new partners/shareholders (turnover provision), whereby the turnover provision for corporations provides for an exemption for stock exchange transactions in shares of listed companies within the EU/EEA. RETT rates range from 3.5% to 6.5% (depending on the state in which the real estate is located).

Share deals are in general exempt from VAT, but the seller has the right to opt for VAT. Asset deals are generally subject to VAT unless they qualify as a transfer of a going concern (Geschäftsveräußerung im Ganzen), in which case, the transfer is not subject to VAT at all. There are no stamp taxes in Germany.

German tax law includes various anti-avoidance rules, in particular:

• the general anti-avoidance rule – tax laws cannot be circumvented by abusive arrangements; abusive arrangements are understood as arrangements with no sound economic reason, which do not serve any economic purpose, are intended to reduce taxes and which cannot be justified by significant non-tax reasons;
• the CFC Rules – certain low-taxed passive income of German-controlled foreign corporations is subject to a pick-up and taxation with (corporate) income and trade tax at the level of the German shareholder;
• cross-border business relationships between related parties not at arm’s length will be taxed under arm’s length conditions, ie, deduction of unjustifiably high payments is disallowed and treated as a hidden dividend distribution;
• the 95% tax exemption for dividends received is only granted if the distributing entity has not deducted the dividend for tax purposes and if the receiving shareholder holds more than 10% in the distributing entity;
• a hybrid mismatch provision pursuant to which payments on hybrid instruments are not tax deductible at the level of the payer in the case of mismatches, such as non-inclusion of the interest income at the level of the recipient; and
• a defence mechanism to make it more difficult for individuals and companies to avoid paying taxes in Germany through business relations with countries and territories that are on the EU list of non-co-operative tax jurisdictions.

German employment law is strongly regulated and based on a variety of sources, including statutory law as well as collective bargaining agreements and agreements with works councils.

Statutory law is highly dynamic and under constant revision by jurisdiction and legislation. It generally provides for strong protection of employees (eg, termination protection, protection during maternity and parental leave, continued compensation in case of an illness, minimum vacation, minimum compensation) and has a tendency to be interpreted in an employee-friendly manner.

The trade unions and works councils exert a strong influence through collective bargaining and works council agreements. Consequently, the relationship with the unions and/or works councils can be crucial for business.

Principally, employing someone is simple; termination of employment is rather more difficult. Each employee has an employment contract, ie, employment at will does not exist in Germany. There is a distinction between employees and freelancers, however – the latter are not subject to employee protection laws and enjoy less legal protection.

Compensation for employees in Germany commonly consists of several elements, ie, fixed salary, variable compensation and additional compensation elements. Additional compensation components such as Christmas or vacation bonuses, non-cash compensation (eg, company car), capital-forming payments or other benefits, like a company pension scheme, are in principle discretionary.

The compensation received by employees must fulfil the prerequisites of the German Minimum Wage Act, whereby the minimum wage currently amounts to EUR12.41 per hour as from 1 January 2024.

As a general rule, the compensation of employees should not be affected by an M&A transaction. An acquirer would, however, typically consider whether existing compensation plans should be amended as part of the integration process, what the legal requirements for such amendments are and, furthermore, whether there are any employment-related liabilities pertaining to the period prior to acquisition (eg, accrued pension and similar liabilities), which would reduce the purchase price.

The legal consequences of an M&A transaction for employees depend, inter alia, on the type of transaction (ie, in particular, whether it is a share or asset deal).

Share Transaction

In a share transaction, the identity of the employer remains unchanged. A share deal will neither affect existing employment relationships nor any of the rights and duties under existing labour contracts. No specific employees’ or employee representatives’ co-determination rights (beyond information rights) exist. This generally also applies to other types of investment transactions.

Asset Deal

By contrast, an asset deal will often trigger a so-called transfer of undertakings. As a consequence, all employment contracts allocated to the transferring (part of a) business would transfer automatically to the acquiring entity by operation of law, together with all the rights and obligations under existing individual employment, collective bargaining and works council agreements. Each employee may object to the transfer of employment within one month upon receipt of a letter describing in detail the transaction and its consequences for the employees. In this event, the contract of employment remains with the seller, but may in principle be terminated.

Transfer of Undertakings

While a transfer of undertakings as such is not subject to any co-determination rights of the works council (beyond information obligations), any operational change associated with the transfer of undertakings (eg, split of a business or other significant reorganisation) results in the right of the seller’s works council to negotiate a compromise of interests and social plan, which may impact the timing and costs associated with the implementation of the operational change and, thus, the transaction.

Intellectual property (IP) held by the German target company is a relevant aspect in the FDI screening process – see 1.2 Regulatory Framework for FDI. Recent amendments have added mandatory FDI filing and clearance requirements for hi-tech areas, including semiconductors, robotics, artificial intelligence, and quantum technologies (see 7.1 Applicable Regulator and Process Overview). The German government has also been increasingly applying Germany’s and Europe’s digital and technological sovereignty as substantive screening consideration. A broadening of the FDI regime for IP licensing deals is under discussion.

The protection of innovation and creative works has a strong tradition in Germany. German law covers all major internationally recognised types of intellectual property rights, in particular, patents, utility models, design rights, trade marks, copyrights, database rights, as well as rights in trade secrets and know-how. Germany’s judiciary is known for its efficiency in deciding IP disputes, with a number of courts having built up specific subject-matter expertise (eg, the courts in Düsseldorf, Mannheim and Munich for patent infringement actions).

Unitary Patent System

Germany takes part in the new European unitary patent system. The system permits the newly established Unitary Patent Court to grant injunctive relief from European Patents and to nullify such patents with effect for up to 17 European countries (including Germany, France, Italy and the Netherlands), depending on the circumstances. The new system presents patent owners and potential infringers with certain options and strategic choices. Enterprises for which patent portfolios play a crucial role should assess their options to avoid unwanted consequences and costs.

Stronger Trade Secret Protection With New Requirements

Based on a unifying EU directive, Germany’s protection of trade secrets has been strengthened through a dedicated law. Trade secret protection and trade secret licensing have increasingly become a focal point of legal reviews in the context of investments. While the new law provides for additional legal protection, the identification of relevant trade secrets remains a crucial practical precondition for effective trade secret protection and for an appropriate assessment of trade-secret-related risks in M&A transactions.

Participation of Inventors, Content Creators and Software Developers

With respect to inventors, content creators (such as journalists, designers or videographers) and software developers, German law provides differentiated rules.

• While a contractual assignment or licence is required to obtain the rights to an invention made by a contractor, transfers of inventions made by employees in the course of their employment are governed by statutory law. The German Law on Employee Inventions (ArbnErfG) requires that employee inventors notify their inventions to their employer. The employer may then claim the invention for itself in exchange for a reasonable remuneration in addition to the inventor-employee’s regular salary.
• A contractual assignment or licence is also needed to obtain rights from an external software developer or content creator. The compensation for work products of employed software developers or content creators is typically covered by their salary unless it turns out to be materially below a reasonable amount.

The EU General Data Protection Regulation (GDPR) came into effect on 25 May 2018 and regulates data processing in Germany and other EU member states. Depending on the circumstances of the data processing, the GDPR can extend to data processing by foreign investors. Furthermore, there are various other German data protection laws, including sector-specific rules (eg, healthcare sector).

The German data protection authorities can issue substantial fines for data breaches.