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Coronavirus - New hurdles for foreign investment - Germany

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German Federal Government has further tightened in-vestment control under the Foreign Trade Ordinance (Außenwirtschaftsverordnung, AWV)

Control of acquisitions of businesses or shareholdings extended to the health sector

German Federal Government has made acquisitions of businesses in the health sector by foreign purchasers subject to the same regime which applies to companies operating critical infrastructures . It has also clarified and tightened certain general aspects of that regime, irrespective of the sector concerned. This results in new hurdles for foreign purchasers against acquiring shareholdings in companies (not only) in the health sector.

1. Background

The BMWi is entitlfed to review whether it poses a threat to the public order or security of the Federal Republic of Germany if a foreign purchaser, which is resident neither in the European Union nor in the European Economic Area or in Switzerland, acquires a domestic company or a share of at least 25 % of the votes in such a company, and in the worst case, it may prohibit such an acquisition (§§ 55 ff. AWV).

Such threats are, according to the AWV, to be expected „in particular“ when such a foreign purchaser acquires companies active in specific sectors, namely operation of critical infrastructures. In view of such shareholdings, even an acquisition of 10 % of the voting rights will trigger a right for the BMWi to investigate and prohibit the transaction. It will also trigger an obligation to provide information about the transaction to the BMWi upon signing of the purchase agreement.

Federal Government has extended these special, stricter provisions to shareholdings in companies fin several fields of the health sector. The BMWi pursues its plans for an Act to Amend the Foreign Trade and Payments Act („Außenwirtschaftsgesetz“, AWG), which is to align German rules to the Regulation for the screening of foreign direct investments into the EU (2019/452) and to introduce an obligation not to complete transactions pending scrutiny of that transaction by the BMWi; non-compliance with that obligation will be a criminal offence.

2. Changes in the AWV

2.1. Control of acquisitions of shareholdings in companies in the health sector tightened

Production and development of the following products shall be treated like the operation of critical infrastructures for purposes of the review of acquisitions pursuant to §§ 55 sq. of the AWV:

  • personal protective equipment in the meaning of EU Reg. 2016/425
  • medicines which are essential for ensuring healthcare treatment of the general public
  • medical devices for diagnostics, treatment or relief of life-threatening and highly-infectious diseases
  • in-vitro diagnostics for use in the context of life-threatening and highly-infectious diseases

“Medicines” shall include basic materials and agents.

2.2. Tightened review of investments in view of further industriefs

In addition, the acquisition of shareholdings shall be subject to tightened scrutiny if the target companies provide services which are necessary for ensuring the functioning of digital radio of emergency services and government agencies (“Digitalfunk der Behörden und Organisationen mit Sicherheitsaufgaben”).

2.3. Provisions for clarification and modification applicable to all investigations pursuant the AWV

| The Amendment clarifies that (1) a part of the operations of a business which can be separated from the remainder of a domestic business or (2) the assets of a business which are essential for maintaining that business may also qualify as “target „company“, whose acquisition the BMWi may review.

| The BMWi, when scrutinizing whether a purchaser should be allowed to acquire a company or a shareholding, may take into account „in particular“ whether that purchaser (1) is controlled by the government or the armed forces of a third country, (2) has already been involved in activities which have been detrimental to the public order or security of Germany or another EU Member State, or (3) there is a „significant risk“ that the purchaser has been involved in criminal offences or misdemeanours relating to foreign trade or control of weapons of war, or in a criminal offence which would make it mandatory for public contractors in Germany to exclude the purchaser from public procurement procedures (§ 123 of the German Act against Restraints to Competition).

| Before the Amendment, the BMWi was allowed to exercise its right to investigate only if it had given notice to the purchaser that it had opened an investigation within three months after it had become aware that the purchase agreement for the acquisition of the target company had been signed.

Now, the BMWi „shall give notice that the investigation has been opened” within these three months.

3. Appraisal and practical issues

The scope of the right to control for the BMWi has been significantly expanded. Companies which have recently switched to manufacturing protective equipment during the Covid-19 pandemic may now be considered “manufacturers” of such equipment.

Former § 55 par. 3 of the AWV – „may exercise its right to investigate only“ – had to be read to exclude an investigation if the BMWi failed to take action three months after it had become aware of an acquisition. The new wording reads like a mere procedural obligation for the BMWi. Relevant provisions for administrative procedure foresee that an act of government issued in violation of such procedural obligations need not be reversed if “it is obvious that the violation has not had an impact on the outcome of the matter”, i.e. the BMWi, even having missed the three months deadline, may argue that this circumstance has not in any way affected its decision. This does not really enhance legal certainty for parties to transactions.

It is now even more advisable for companies and investors to review at an early stage of a transaction process hurdles or delays because of possible BMWi scrutiny, the case being ask for discussions with the BMWi, apply for a certificate of non-objection (“Unbedenklichkeitbescheinigung”) or also dare to argue with the BMWi.