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On April 28, 2020, the Federal Ministry of Economic Affairs and Energy (BMWi) published a draft for the 15th amendment to the Foreign Trade and Payments Ordinance (AWV). The changes are expected to be effective shortly after their required approval by the Federal government scheduled in mid-May for publication in the Federal Gazette. This AWV-amendment was triggered by the COVID-19 pandemic and mainly covers investments in the healthcare sector. It precedes the revision of the law amending the Foreign Trade and Payments Act (AWG), which is currently in the parliamentary legislative process and will further align the German FDI framework with the so-called European Screening Regulation. Another, more comprehensive amendment to the AWV adding “critical industries” in the technology sector is planned for later this year.
Germany is moving along with precautionary measures regarding foreign direct investments in light of the current COVID-19 pandemic and related overall economic vulnerability. With this AWV-amendment, the German government is implementing guidance from the European Commission (EU-Commission) to the EU Member States, published in the EU Official Journal on March 26, 2020. With this guidance, the EU-Commission wanted to make the Member States aware of risks regarding a potential increase of attempts by non-EU/EFTA investors to acquire healthcare or research capacities (e.g, for the production of medical or protective equipment).
The recent proposal for the 15th amendment to the AWV follows on the heels of these EU-wide calls to protect critical assets and technology by expanding the scope of national investment review especially in the healthcare sector. The BMWi also announced that a further AWV-amendment will follow shortly, which would be aimed at protecting other technologies, especially in the sector of Artificial Intelligence and High Tech, and at further following the EU Screening Regulation as well as align the AWV with the currently discussed AWG-amendment (see our Client Alert on the draft AWG-amendment from February).
Increased scrutiny in the healthcare sector and for national communication service providers
As general rule, an intervention by the BMWi in the cross-sectoral and in the sector-specific review process requires the investment to pose a threat to public order or security. With respect to the cross-sectoral review, the AWV provides a non-binding and non-exhaustive list of assets and technologies in respect of which public order and security is likely to be affected. This list is extended by the latest proposed AWV-amendments to companies providing infrastructures for governmental communication or critical resources (specific raw materials) and – due to COVID-19 – to companies in the healthcare sector. Every investment which reaches or exceeds 10% in a company covered by the list triggers the notification obligation, and will therefore be scrutinized by the BMWi.
The recent BMWi-draft adds six more examples of activities to the list that are essential to public security and order by default. Besides the suggestion to explicitly mention companies indispensable for the workings of the Federal Agency for Public Safety Digital Radio as well as listing the supply of critical resources, four of the proposed clauses aim at protecting the healthcare sector and list companies that either develop or produce, or are part of the supply chain for the following products:
- Personal protective equipment in accordance with Art. 3 No. 1 Regulation (EU) 2016/425
- Medicinal products in accordance with Sec. 2(1) German Medicinal Products Act
- Medical products specified for life-threatening and highly contagious infectious diseases
- In vitro diagnostics in connection with life-threatening and highly contagious infectious diseases
Manufacturing plants or technologies relevant to these products are captured as well.
The draft amendment therefore expands the notification obligation to these additional industries (while previously, transactions involving domestic targets active in these industries did not require a notification, but acquirers could opt to make a voluntary filing to obtain legal certainty more quickly).
Expansion of investor’s and investment’s scrutiny and procedural changes
Moreover, the draft stipulates that the review of an investment regarding its threat to public order or security will also take into account the shareholder structure and the origin of the investor. It should be taken into account, e.g., whether the investor is directly or indirectly controlled by a government or other institutions of a third state, whether the acquirer has been involved in activities which had posed a threat to public order or security (notably regarding not only German interests, but those of other EU Member States as well), or whether it was involved in any criminal act pursuant to public procurement or foreign trade laws.
Additionally, the draft amendment seeks to clarify that an investment review is also possible for asset (and not only share) deals, notably when separable parts of a company or essential assets of a German target in the industries identified is planned.
As soon as the currently discussed AWG-amendment will have come into force, all investments subject to a notification obligation under the AWV are provisionally void until clearance has been or is deemed to be granted. As a result, it will no longer be possible, even in the event of a cross-sectoral review process, to consummate any acquisition during an ongoing investment review process, if the company in question is particularly security-relevant within the meaning of the AWV. That way, the legislator intends to prevent the consummation of transactions whose security-relevant effects are to be avoided.
Timing of investment control revisions
The accelerated efforts of the BMWi to tighten investment control aim to fully comply with and partially go beyond the standard and scope of review of the EU Screening Regulation which will set up a cooperation mechanism between Member States effective by October this year. Once this AWV-amendment enters into force after governmental approval and publication in the Federal Gazette, it should not affect closed deals and arguably also not deals that have been explicitly cleared by the BMWi or are deemed to be cleared by expiry of the statutory deadlines to intervene, but for those deals signed that do not fall into either category, these may then face a notification obligation, which may adversely affect closing timing. The consequences of the imminent revisions of both the AWG and AWV should therefore be considered carefully for ongoing transactions, especially for those in the healthcare sector.
The BMWi already announced that in fall 2020, stricter reviews of acquisitions in other critical and strategic sectors such as Artificial Intelligence, robotics, semiconductors, biotechnology and quantum technology will be dealt with in a subsequent revision to the AWV.
Considering the general trend of tightening investment controls, it is likely that cases where State-owned enterprises come to rescue as a last resort to prevent foreign takeovers will become more frequent. The appearance of the Kreditanstalt für Wiederaufbau (KfW), a German State-owned bank, as the “white knight” acquiring a stake in domestic transmission system operator 50Hertz in July 2018, may serve as an example. Facing crisis-related economic vulnerability, the German government might step in more eagerly now (or try to motivate Germany-headquartered alternative acquirers to do so), especially when the transfer of sensitive or security-related technologies is at stake. German industry representatives voiced concerns regarding the increased restrictions on international trade and impending state influence. Nevertheless, the EU guidelines issued in the context of the COVID-19 pandemic also proposed the acquisition of golden shares if no other remedy is available to protect the national security interest.
Whilst openness towards foreign investors remains the fundamental principle, investors need to consider the German government’s increased scrutiny regarding foreign investment especially in the healthcare sector. It must be expected that investment reviews will now become the norm in this sector, will take longer and will become more detailed and burdensome under an adapted screening mechanism. Additionally, the express inclusion of investments in spin-offs or assets by such an AWV-amendment may further expand the scope of foreign direct investment control in Germany.
Mathilda Xu (White & Case, Associate, Berlin) contributed to the development of this publication.
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