Part I: #DefenseTech—Regulatory Requirements for Defense Start-ups (or "How to Stay Out of Jail") | Legal Ninja Snapshot

Defense technology companies in Germany operate in a highly regulated environment that requires careful navigation of various legal requirements. Key regulations include national or EU legislation on handling of defense-related goods and international treaties. The legal landscape is complex: Beyond defense-specific laws, start-ups must also comply with general public law requirements, including building permits and emission protection permits.

Besides regulatory requirements that need to be assessed on a case-by-case basis, defense start-ups should even at an early stage consider three areas: (i) foreign investment controls when it comes to investments by foreign investors; (ii) export control; and (iii) sanctions related questions.

In this three-part series, we'll examine each area in detail:

Part I: Navigating Investment Control Regulations for Defense Start-ups in Germany
Part II: Understanding Export Control Regulations for Defense Start-ups in Germany
Part III: Sanctions Compliance: A Guide for Defense Start-ups in Germany

Understanding and complying with these regulations is crucial to avoid severe penalties and ensure successful business operations.

Part I: Navigating Investment Control Regulations for Defense Start-ups in Germany

Germany's foreign direct investment ("FDI") control regime is a critical consideration for defense start-ups seeking to attract foreign investment. These regulations are designed to safeguard national security and public order, making it essential for companies in the defense sector to understand and comply with the legal requirements.

Legal Framework

The investment control regime in Germany is governed by the Foreign Trade and Payments Act (Außenwirtschaftsgesetz, "AWG") and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, "AWV"). These laws provide the basis for screening foreign investments either from a non-German or a non-EFTA investor, particularly in sectors deemed sensitive, such as defense technology.

Notification Obligations

Defense start-ups must be aware of the mandatory notification requirements under Sec. 60 AWV. Any non-German investor acquiring 10% or more of the voting rights in a defense-related company active in one of the defense-related sectors listed in Sec. 60 para. 1 AWV must notify the authorities. This applies to companies involved in the manufacturing or development of goods listed in the Export Control List, those with secret patents, and producers of IT security products for classified state material.

Critical Technologies and Infrastructure

The cross-sectoral review procedure according to Sec. 55a AWV extends notification requirements to investments inter alia in critical technologies and infrastructure. This includes sectors such as critical infrastructure, cloud computing, state communication services, advanced robotics, and IT security products as well as specific dual use goods. The thresholds for notification vary, with non-EFTA investors required to notify acquisitions of 10% or 20% of voting rights, depending on the sector.

Review Process and Implications on the Investment Process

The Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie, "BMWE") oversees the review process, which can as well be initiated ex officio if a non-EFTA investor acquires at least 25% of the shares. The statutory review period is two months but can be further extended in case of an in-depth proceeding. However, according to our experience the BMWE grants clearances well before the legal deadline expires for unproblematic cases. Nonetheless, it is crucial to have an eye on the timeline as early as possible in the process.

A failure to comply with these notification requirements renders the transaction void and may lead to criminal penalties.

Strategic Considerations for Defense Start-ups

Defense start-ups should integrate investment control compliance into their strategic planning. This includes early assessment of potential notification obligations, careful structuring of transactions to avoid legal pitfalls, and consideration of precautionary notifications or applications for certificates of non-objection. Establishing a robust compliance framework to monitor shareholding changes and ensure timely notifications is crucial.

Conclusion

Germany's investment control regulations are a vital component of the legal landscape for defense start-ups. By understanding and adhering to these requirements, companies can facilitate foreign investment while safeguarding national security interests. Professional legal advice is recommended to navigate the complexities of the FDI regime, regarding the advisability of a voluntary filing, and ensure compliance.