Export Control for Dual-Use Tech Part 2 ⛴️ 📦

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Jack Wang, David Rösch & Uwe Horstmann
November 23, 2023

Welcome 🇪🇺

Welcome to the 5th issue of the European Resilience Newsletter and thank you to those who already subscribed! Uwe and I (more about us at the end) started this newsletter to accelerate the building of the European DefenceTech ecosystem and fill a critical gap in European Resilience. We will keep the content bite-sized, frequent and free. We also openly invite guest content creators to contribute (see below for details on how to join). Our goal is to build an ecosystem of founders, operators, investors, and industry experts who are dedicated to enhancing European resilience through technology.

This issue we continue with our guest author David Rösch PhD, Associate from the leading European law firm Noerr to share some insights on the regulation around exporting dual-use technology across Europe.

Export Control for Dual-Use Tech - Part 2 ⛴️ 📦

This piece continues our look at investment and export controls for resilience tech from the previous issue, looking into implications of Germany’s foreign direct investment screening for companies and investors.

Investment Controls: Foreign Investors? That may be an issue

Finally have an investor lined up? Their investment in German companies may be subject to foreign direct investment (FDI) screening and, ultimately, restrictions if they directly or indirectly acquire 10 % or more of voting rights. These screenings aim to prevent foreign investments that would have an adverse effect on German public order and national security. FDI screenings have increased significantly in Germany over the past years.

The German FDI regime includes two distinct review mechanisms: cross-sectoral (A.) and sector-specific (B.) assessments. Which procedure applies depends on the target’s industry sector and the nationality of the investor. While the FDI screening based on a mandatory filing under either procedure is underway, transactions are generally subject to a standstill obligation and must not be closed. The authorities will approve the acquisition if there are no objections. Otherwise, they can prohibit the acquisition altogether or only approve it with conditions intended to mitigate potential adverse effects.

A. Cross-sectoral Assessment

Acquisitions by investors based outside the EU and the European Free Trade Association (EFTA) in German companies active in any of 27 critical industries require a filing with the German government if certain thresholds are reached.

These thresholds differ depending on the target’s industry. They are as low as 10 % of voting rights for seven particularly critical industries (e.g. critical infrastructure, certain cloud computing, media etc.). A 20 % threshold applies to 20 other industries including AI, robotics, autonomous vehicles and UAVs, semiconductors, and aerospace. Based on the mandatory filing, the German government may initiate a formal screening procedure, which can result in the prohibition of the transaction.

For acquisitions by non-EU/EFTA investors of German companies in any sector, the German government may initiate a cross-sector review if at least 25 % of voting rights are acquired directly or indirectly. Filing is voluntary in these cases.

Substantively, FDI screening seeks to establish whether the acquisition would likely affect public order or security of Germany or other EU members. Factors considered in making the assessment include e.g. government control over the investor and broader political considerations such as supply chain security.

B.         Sector-specific Assessment

Screening is particularly strict for investments in sensitive industries, including e.g. military equipment, defense tech and cryptography. In these industries, acquisitions of 10 % or more of voting rights by non-German investors are subject to a mandatory filing and review—regardless of whether the investor hails from the EU/EFTA or elsewhere.

To assess whether a target falls into these categories, there is, for example, the list of goods in Annex I Section A to the Foreign Trade and Payments Ordinance. If a company develops, manufactures, or disposes of such goods, the company acquisition is subject to sector-specific investment screening. Companies remain subject to screening as long as they have knowledge of or access to the relevant technology.

Substantively, the sector-specific assessment considers whether the acquisition is likely to impair Germany’s essential security interests. These include, in particular, its military security and security policy interests. In its examination, the Federal Ministry for Economic Affairs and Climate Action (BMWK) gauges whether any adverse effect on these interests is imminent and sufficiently serious. The German government may prohibit the transaction or approve it with conditions.

Lastly, BMWK can initiate an FDI screening even when there is no filing requirement per the above. BMWK can do so within five years of signing and retroactively undo or impose conditions on such transactions. Where filing is voluntary, investors may apply for a so-called certificate of non-objection. That way, investors can gain legal clarity, as it precludes the authorities from opening a review and potentially undoing the transaction later on.

In sum, investment and export controls are crucial for businesses and investors in the resilience space. The rules will affect you from day one, and ignoring their requirements is bound to cause problems down the road. Making sure you have a robust system in place to ensure you comply with the manifold requirements will only become more difficult the bigger your company is. It is something best tackled early on and not treated as an afterthought.

David is a Berlin-based lawyer with Noerr, where he advises international and German clients on all aspects of foreign trade law. His focus is on export controls, sanctions, and investment controls. He can be reached at [email protected] or via LinkedIn.

Noerr is one of the top European law firms with 500 professionals in Germany, Europe and the USA. We deliver real value to our clients by devising and handling the right solutions to complex and sophisticated legal matters. The Noerr difference is our unique combination of legal excellence, creative thinking, international experience and in-depth industry knowledge. Together with our tax advisors, auditors and management consultants, we also develop sustainable solutions for finance and management.

News That Caught Our Attention 👀

  • New York Times article on the war fought in the electromagnetic wave spectrum between Russia and Ukraine, featuring Quantum Systems - New York Times link.

    Source: NYT - Quantum Systems Vector

  • TechCrunch interviewed 5 US DefenceTech VCs to get their view on what is the latest trending DefenceTech - TechCrunch Link.

  • Diamond coated advanced radar systems - DefenceOne link. 

  • Ukraine’s struggle to get counter drone technology onto the field - DefenceOne link.

  • Some aspiring reading on US DoD AI and data strategy - DefenceOne link.

Featured Jobs 👷

Every week we feature a list interesting roles in European DefenceTech start-ups and scale-ups for readers seeking their next challenge in their careers.

If you are a founder and would like to promote your open roles, please get in touch with us!

Passionate and want to contribute? 👩🏻‍💻

The European Resilience Tech Newsletter is always looking for regular and guest authors, writers, reporters, content creators etc. If you like what you read, you are passionate about improving European resilience regardless of your background and want to contribute, just reach out to us!

European Resilience Tech Newsletter Team

Uwe Horstmann co-founded Project A Ventures in 2012 as General Partner and has built Project A to be a leading European early stage investor with over $1bn USD under management and having backed 100+ founders. In addition to Project A, Uwe serves as Reserve Officer in the German armed forces and advises the German Ministry of Defence in digital transformation issues.

Jack Wang is a software engineer turned product driven tech investor and joined Project A in 2021 to lead the firm’s deep tech investing, which have grown to include DefenceTech. Prior to joining Project A, Jack worked in a variety of organisations such as Amazon and Macquarie Group across Australia, US and UK / Europe. Jack holds a MBA from London Business School and Bachelors of Engineering (Bioinformatics, 1st) from UNSW, Australia.

Project A Ventures is one of the leading early-stage tech investors in Europe with offices in Berlin and London. In addition to 1 billion USD assets under management, Project A supports its 100+ portfolio companies with a platform team over 140 functional experts in key areas such as software and product development, business intelligence, brand, design, marketing, sales and recruiting. Project A have backed founders of Trade Republic, WorldRemit, Sennder, KRY, Spryker, Catawiki, Unmind and Voi as well as founders building in European Resilience: