KLEO Connect – Takeaways from an unusual prohibition decision in the satellite industry
On 14 September 2023, the competent Federal Ministry for Economic Affairs and Climate Action (BMWK) prohibited the redemption of the shares of the German/Liechtenstein minority shareholders of the satellite communications start-up KLEO Connect by its Chinese counterparts Shanghai Spacecom Satellite Technology (SSST) and CED AG (CED). In doing so, the BMWK effectively prohibited SSST and CED, which had already been the majority shareholders of KLEO Connect, from acquiring sole ownership of a project intended to create a European low earth orbit (LEO) satellite fleet.
Background of the case
In 2017, minority shareholder eightyLEO and their Liechtenstein co-shareholder Celeste Holding sought an investor for a satellite-based communications system that would function similarly to SpaceX’s Starlink today. In this quest, eightyLEO and Celeste found partners in the Chinese state-controlled company SSST and CED, a Liechtenstein-based company owned by Chinese nationals. SST and CED AG are acting in concert and have acquired approximately 53% of the joint venture company KLEO Connect. The investment received FDI approval by the BMWK in 2018. Despite the Chinese majority ownership, the agreement between the investors granted eightyLEO significant minority rights, including managing the operational aspects of the venture.
Over time, however, significant disputes arose between the shareholders which eventually rendered shareholder meetings unable to make decisions. In this situation, SSST and CED declared the redemption of eightyLEO’s and Celeste's shares, essentially claiming 100 % of the voting rights for themselves.
The Application of FDI Screening to a redemption of shares
While the dispute about the redemption triggered significant litigation efforts, it also has a regulatory dimension pursuant to German Foreign Trade Law. There are essentially two legal bases for an action by the government in order to prevent a shareholder to increase its voting rights by way of a redemption. The first is an individual intervention under § 6 of the Foreign Trade and Payments Act (AWG), which was used for the first time last year regarding Gazprom Germania (now SEFE Securing Energy for Europe). The second option is a prohibition under the German FDI screening rules (§ 59 AWV). The procedure ultimately revolved around the latter option, raising the legal question of whether the collection was an acquisition as required by the German FDI screening rules, even though there was no agreement between a seller and an acquirer but only a unilateral act.
The BMWK concluded that the acquisition concept according to § 55 et seq. AWV is not directly applicable to a redemption, as this would require a bilateral agreement between two parties. However, the BMWK closed the unintended regulatory gap by way of an analogous application. FDI screening serves the purpose of safeguarding public order or security against changes in ownership within domestic companies by foreign investors. From a security policy perspective, it is irrelevant whether the acquisition concept is interpreted broadly or narrowly. The underlying interests remain comparable for similar reasons. As a result of a forced redemption, the remaining shareholders gain a proportionately higher voting interest in the target company and an increased influence on the target company. Therefore, if there was no acquisition as foreseen by the wording of the law, an analogous application was required to close the regulatory gap.
Influence of Current (Geo-)Political Events on FDI Screening
Eventually, the BMWK did not only assume jurisdiction but also prohibited that the Chinese shareholders took over 100 % of the shares in KLEO Connect for national security reasons. This is remarkable since it demonstrates a tectonic shift in the perception of Chinese investors by the BMWK since 2018, when the Ministry approved the initial acquisition by SSST and CED. It also serves as a reminder that even minority shares – as held by the German shareholders in this case – can play an important part in the assessment from an FDI screening perspective.
Although the purpose of FDI screening should be obvious, it cannot be emphasised enough: the outcome of an FDI screening procedure in Germany and abroad is heavily influenced by political considerations and, as such, is highly dependent on current (geo-)political events. The deployment of satellite constellation Starlink in Ukraine demonstrates the military capabilities that these systems can provide. In addition, the stance of Western governments towards Chinese investment has shifted fundamentally over the past five years. The KLEO Connect decision documents the expansion and ever increasing importance of FDI Screenings for a successful completion of M&A projects in sensitive industries.
The Evaluation Report and the Upcoming Investment Screening Act
Time to Evaluate
Mandated by law to further develop the German FDI Screening rules, the BMWK published in the end of September 2023 an evaluation report on the effectiveness of the recent changes to German FDI screening rules. Importantly, the report presents several interesting statistics and facts:
-
- The number of FDI Screenings increased from 189 in 2020 to 546 in 2021 and 570 in 2022.
- In both 2021 and 2022, there were 306 national FDI Screenings. The other procedures were EU notification procedures under the cooperation mechanism based on the EU Screening Regulation.
- Of the 306 national screenings in 2021, only 40 progressed to a Phase II in-depth screening, resulting in 14 restrictive measures or prohibitions. In 2022, there were 26 Phase II cases, 13 of which resulted in a restriction or prohibition. This shows that while a notification may be cumbersome, in the great majority of cases it does not result in restrictive measures.
- The average duration of FDI Screening procedures is relevant for transaction planning. In 2022, Phase I cases took an average of 38 days, while Phase II cases averaged 184 days. However, the latter figure is less meaningful due to the limited data and more variables.
Strengthening Economic Security – The Upcoming Investment Screening Act (ISA)
The core element of the evaluation of the current FDI screening rules will be the creation of a new, stand-alone FDI screening law – the Investment Screening Act (Investitionsprüfungsgesetz). A preliminary draft is expected to be published in the first quarter of 2024. At the moment, only internal BMWK documents are available. The new law is expected to separate the FDI screening rules from the general German Foreign Trade Laws contained in AWG and AWV, restructuring them into a separate law.
So, what are the key new features we will see in the upcoming ISA?
- Expanded Scope with respect to Intellectual Property, Research Cooperations and Greenfield Investments
The BMWK plans to include a provision for the screening of certain acquisitions of intellectual property rights, e.g. through licencing agreements.
In addition, in dialogue with science and research, the Ministry is considering closing possible security-critical regulatory gaps in connection with research cooperations. Up to now, these two cases have typically been monitored through the export control regime. However, for cooperations without a physical export of goods or technology, German export control rules only apply to know-how with specific military relevance.
The BMWK may also extend FDI screening to greenfield investments in some particularly sensitive areas (quantum technology, advanced semiconductors, artificial intelligence and critical infrastructure).
- Clarification of Atypical Acquisition of Control and Exemption of Intra-Group Restructurings
The BMWK considers clarifying the rules for transactions in which an investor acquires more influence in a target than indicated by actual voting rights obtained. Such influence may be conferred to an investor through other means of influence, such as through veto rights on important business decisions (atypical acquisition of control). The evaluation report shows that there is still uncertainty in practice as to which cases qualify as atypical acquisitions of control, and that the concept should be clarified in an administrative regulation supplementing and interpreting the ISA.
In addition, a new track for a preliminary assessment may be introduced, which would allow companies to address the question to the BMWK whether a proposed acquisition would constitute an atypical acquisition of control and whether the German target company belongs to one of the listed categories requiring a filing.
Concerns of the business community will likely be addressed by a broader exemption for intra-group restructurings that do not pose any security risks and thus do not fall within the scope of the FDI screening rules.
- Revision of Case Groups and Introduction of Presumptive Examples
Another focus is the revision of the case groups listed in §§ 55a(1) and 60(1) AWV. In order to achieve greater legal certainty, these categories are to be specified, refined or expanded. According to the BMWK, some case groups, such as artificial intelligence (AI) and smart-meter-gateways have not been used in any review yet, although that does not necessarily mean they will be removed. In order for the government to be able to make quick adjustments in times of crisis, as was the case during the COVID-19 pandemic, new case groups should be introduced by statutory order for a certain period of time, without having to amend the new ISA itself.
In order to protect particularly security-relevant sectors more effectively, the BMWK considers the use of presumptive examples in these sectors. The consequence would be a legal presumption that an investment in the mentioned sectors is security-relevant if the investor-related criteria are met. It would be up to the parties to rebut this presumption in the ongoing screening procedure to obtain clearance. However, it remains to be seen whether this will make a significant difference, given the already broad discretionary powers of the BMWK.
- Recalculation of FDI Screening Thresholds
The BMWK considers whether the thresholds for FDI screening should be recalculated, especially for listed companies. This is due to the fact that for some listed target companies in the past, the attendance rate at annual general meetings was very low, which meant that the effective voting share of the acquired share package was significantly higher than the nominal share.
- Procedural Changes
The length of the review periods will be reviewed. A potentially very welcome change for parties to transactions will be a reduction of the maximum duration of Phase I from 2 months to 45 calendar days which is under consideration. In cases of preliminary assessments, the review period would start only after the BMWK has announced its decision, thus providing the parties with legal certainty at an early stage.
Furthermore, the fragmentary provisions on form and notification in FDI screenings via administrative acts will be standardised and modernised.
Finally, a provision will be included to allow for interim measures to ensure the proper conduct of an ongoing FDI screening procedure.
- Enforcement
Today, infringements of the FDI screening rules constitute a criminal offence. The BMWK considers converting individual criminal offences into administrative offences. At the same time, it is examining the possibility of imposing fines in cases in which parties in the FDI screening procedure provide incorrect, incomplete, or misleading information.
- No Outbound Investment Screening on the Horizon
While in the wake of recently introduced US rules there is an intensified public debate about outbound investment screenings, the BWMK so far has not published any plans to introduce a comparable screening of German investments abroad. This is being considered in a separate process within the framework of the EU’s economic security strategy, which has just begun and whose results are still to be seen.
20th Amendment to the AWV – “Reform Light“
Finally, ahead of the aforementioned upcoming major reform of the German FDI screening rules by the ISA, some smaller amendments have already entered into force on 5 October 2023. This “reform light” includes the following technical changes regarding form, timing and eligibility:
Form
FDI screening procedures are set to be digitised as part of an initiative to improve online access to government services in Germany.
While it has already been possible for the BMWK to issue decisions and for foreign investors to submit notifications and applications for a certificate of non-objection electronically (e.g. via email), the new § 3(3) AWV allows for full online communication regarding all documents that will be exchanged during the FDI screening procedure. In the near future, an online portal (the so-called Bundesportal) has to be used for all communication in connection with FDI screening procedures. Intelligent click paths, predefined answer options and explanations in the new online form are intended to avoid errors and follow-up questions.
No date has yet been set for when communication via the online portal will be possible. The BMWK will announce the go-live date by updating its general administrative act in relation to FDI screenings.
Timing
In view of the expected launch of the online portal, the triggering event for the review period has also been changed.
Previously, the current 2 month review period in Phase I was triggered by the BMWK’s receipt of a notification or an application for a certificate of non-objection.
The new § 3(4) AWV now provides that in the case of submission via the online portal, the review period does not begin with the successful transmission to said online portal, but only when the BMWK has downloaded the documents from the online portal into its own IT system in complete and undamaged form. The reason for this is that the online portal is operated by an external third party provider and the BMWK cannot directly access or process the documents in the online portal. The BMWK wants to avoid that in case of a technical malfunction the review period starts unnoticed and a deemed clearance is granted after the expiration of the 2 month review period in Phase I, even though the investment in a German company by a foreign investor might give rise to national security concerns. The BMWK will confirm receipt of the submitted documents to the foreign investor and, to the extent possible, inform them of any incomplete or missing documents.
The same triggering event applies to the submission of additional documents via the online portal, e.g. if an in-depth review (Phase II) is initiated or if supplemental information is subsequently requested.
The introduction of the online portal for communication with the BMWK is very similar to the situation in the UK, which likewise relies on an online portal and where the review period does not start until the Investment Security Unit (ISU) has accepted the notification as complete. This typically takes a few days, but in some cases can take up to a few weeks. For all the benefits that the envisaged digitisation will bring, the changes could therefore lead to uncertainty about timing for deadlines and delays for transaction planning.
Notifying Party for a Certificate of Non-Objection
Pursuant to the revised § 58(1) AWV, only the direct acquirer of a German company and no indirect acquirer further up in the ownership chain is eligible to apply for a certificate of non-objection. This results in a well-received harmonisation with the mandatory sector-specific and cross-sectoral procedures, according to which only the direct acquirer may submit a notification.
Outlook – FDI Screening Not Free of Charge Starting in 2024
For the first time since the introduction of FDI screening rules in 2004, the BMWK will start to charge filing fees as of 1 January 2024, as it is already standard practice in merger control proceedings before the Federal Cartel Office (Bundeskartellamt – BKartA). The new fees are based on a fee regulation, which entered into force on 16 September 2023 (Besondere Gebührenverordnung BMWK und BAFA für Kriegswaffenkontrolle, Ausfuhrkontrolle und Investitionsprüfung).
The filing fee in Phase I is 800 Euro. Fees in Phase II range from 2,500 to 6,000 Euro. The latter may be increased by 10,000 to 30,000 Euro, depending on the complexity of the case, if the BMWK imposes special protective measures in the course of the screening procedure or in its final decision. Informal guidance from the BMWK remains free of charge.
The filing fees applicable from 2024 are relatively modest compared to merger control proceedings. It should be noted, however, that there are no clear criteria for what constitutes “simple”, “complex” or “high” complexity cases as referred to in the fee regulation. In this respect, the BMWK has some discretion in deciding the amount of fees it charges.
Caroline Jesche, a trainee in our Brussels office, and Felix Pachmann, a trainee in our Dusseldorf office, contributed to this article.
Authored by Stefan Kirwitzke, Philipp Reckers, and Julius Gertz.
