Germany to Tighten National Foreign Direct Investment Screening Regime in Light of COVID-19

A recent amendment to Germany’s foreign direct investment ordinance adds new businesses to the existing catalogue of critical infrastructures—in particular, in the health sector—that will be subject to foreign direct investment screening going forward.

Germany is taking several legislative measures to tighten its foreign direct investment (FDI) screening regime as a result of the coronavirus (COVID-19) pandemic. As a first step, the German government on May 20 adopted a COVID-19-related amendment to the government’s FDI ordinance.

Envisaged amendments to the Foreign Trade and Payments Act (Außenwirtschaftsgesetz (AWG)) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung (AWV)) aim at tightening the German FDI reviewing regime and align the national law with the EU FDI Screening Regulation that will fully apply as of October 11, 2020.

The 15th Amendment to the AWV (15th Amendment), adopted on May 20, is mainly a reaction to the COVID-19 pandemic. The 15th Amendment extends, among others, the catalogue of critical infrastructures that will be subject to foreign direct investment screening, in particular, in relation to the health sector. This amendment gives the German government the opportunity to review acquisitions by non-EEA investors of voting rights of 10% or more of German domestic businesses operating in the health sector, including the development and production of material medicinal products and medical devices.

The 15th Amendment will apply permanently and does not to expire when the COVID-19 pandemic ends. We expect the adoption of the updated AWG and a 16th AWV amendment over the next couple of months.

Specifics

The 15th Amendment in particular extends the catalogue of critical infrastructures subject to the so-called cross-sectoral FDI review, adding the following sectors:

• Businesses that provide services required to ensure the freedom from interference and functionality of state communications infrastructures of the authorities and organizations with security functions within the meaning of Section 2(1) sentences 1 and 2 of the Act on the Establishment of a Federal Authority for Digital Radio
• Businesses that develop or manufacture personal protective equipment within the meaning of Article 3(1) of EU Regulation 2016/425 of March 9, 2016 on personal protective equipment
• Businesses that develop, manufacture, or market material medicinal products within the meaning of Section 2(1) of the German Medicines Act (Arzneimittelgesetz) that are essential for ensuring the provision of healthcare for the population, including their raw materials and active substances, or are the holder of a corresponding marketing authorization under pharmaceutical law
• Businesses that develop or manufacture medical devices within the meaning of the law on medical devices that are intended for the diagnosis, prevention, monitoring, prediction, prognosis, treatment, or alleviation of life-threatening and highly contagious infectious diseases
• Businesses that develop or manufacture in vitro diagnostic medical devices within the meaning of the law on medical devices, which serve to provide information about physiological or pathological processes or for determining or monitoring therapeutic measures in connection with life-threatening and highly contagious infectious diseases

The 15th Amendment clarifies that the German FDI screening mechanism applies also to asset deals. The Federal Ministry for Economic Affairs and Energy (BMWi) had already interpreted the existing FDI regime to include asset deals, which the AWV now clarifies explicitly.

The 15th Amendment clarifies that the BMWi can consider as part of its review the following factors related to the acquirer (nonexhaustive list):

• Whether the acquirer is directly or indirectly controlled by a third country
• Whether the acquirer was already involved in activities that had detrimental effects on public order and security in the past
• Whether there is a considerable risk that the acquirer or persons acting or who acted on his behalf were involved in activities that fulfill a criminal or administrative offense (Ordnungswidrigkeit) in the areas of competition law, foreign trade law, or law on the control of weapons of war

What This Means for Foreign Investors

Non-EEA investors who intend to acquire at least 10% of the voting rights (directly or indirectly) in a German business to be considered as operating a critical infrastructure are subject to an FDI notification obligation. For the first time, this covers a wide range of businesses in the health industry.

The failure to notify bears civil law risks for the contract, including unwinding risks in case of a prohibition order. The consequences and sanctions for failure to notify may be further tightened by the upcoming changes to the AWG, in particular by possibly including a gun-jumping prohibition, which currently does not exist.

The 15th Amendment will enter into force after publication in the Federal Gazette. We will keep you abreast of the upcoming AWG update and 16th amendment of the AWV.

For additional information, please see our LawFlashes related to UK and France FDI screening regimes.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Frankfurt
Michael Masling

Brussels
Izzet Sinan
Christina Renner

London
Frances Murphy
Omar Shah

Washington, DC
Dr. Axel Spies

CFIUS Contacts

Washington, DC
Kenneth Nunnenkamp
Giovanna Cinelli
Ulises Pin

Boston
Carl Valenstein