German foreign investment control tightened amidst Covid-19 pandemic

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Boris Dürr
Heuking Kühn Lüer Wojtek, Munich

Dr Bodo Dehne
Heuking Kühn Lüer Wojtek, Düsseldorf


On 3 June 2020, the German government amended the German Foreign Trade and Payments Regulation (Außenwirtschaftsverordnung or AWV), adding companies active in certain health sectors to a list of strategically important business sectors.

These include companies developing or manufacturing personal protective equipment (like FFP2 or FFP3 masks) or pharmaceutical products essential for ensuring the healthcare of the population (like vaccines). Also, companies developing or manufacturing medical products for the diagnosis, prevention, surveillance, prediction, treatment or relief of life-threatening or highly contagious infectious diseases (like respirators) or in-vitro diagnostics (like diagnostic tests for the detection of infectious diseases) are among the companies now considered strategically important.

The amendment comes after the publication of European Commission guidance on 25 March 2020 for the screening of foreign direct investments due to the Covid-19 related emergency. In its guidance, the Commission urged Member States to be particularly vigilant in order to avoid a sell-off of Europe’s business and industrial players, including small to medium-sized enterprises (SMEs), because of the current health crisis.

Reporting requirements for foreign investors

Foreign investors (directly or indirectly) acquiring at least ten per cent of the voting rights in German companies that are included in the list of strategically important companies are now obliged to report their investment to the German Ministry for Economic Affairs without undue delay after signing the relevant acquisition agreement.

Standstill obligation introduced

On 18 June 2020, the German Parliament passed further legislation to introduce a standstill obligation for all investments that have to be reported. Until the German government has decided whether to clear or restrict such investment, all legal transactions aimed at implementing the investment will be provisionally ineffective until the relevant foreign investment control proceedings are completed.

New disclosing restrictions for legal due diligences

To ensure that investments are not factually implemented, new restrictions were introduced that prohibit:

• allowing foreign investors to exercise voting rights;

• distributing profits to the investors; or

• disclosing sensitive company-related information that is of relevance for the foreign investment control proceedings.

The introduction of the new disclosing restrictions will especially affect future due diligence proceedings. Sellers will have to consider what information they may disclose to foreign investors. Violations of the new restrictions are punishable by law and can be punished with imprisonment for up to five years or monetary fines.

Further business sectors to be included

The standstill obligation and the new restrictions only apply to investments in companies that are considered strategically important. Apart from the health sector, German companies that operate critical infrastructures (in the areas of energy, water, food, IT, telecommunication, finance, insurance, transport and traffic), develop software for such companies, render cloud computing services or are active in the media industry are currently amongst those considered strategically important.

The German government intends to further expand the list this year. It is expected that companies active in business areas like artificial intelligence, robotics, semiconductors, biotechnology or quantum technology will also be included in the list of particularly security-relevant companies.

New legislation on review periods

The legislation passed by the German Parliament on 18 June 2020 also introduced new rules on the review periods for foreign investment control proceedings. The German government will be authorised to review foreign investments only if it initiates formal investment control proceedings within two months after obtaining knowledge of the investment. In practice, foreign investors usually file applications for foreign investment clearance if the investment concerns a strategically important company or if the transaction could be relevant for national security for other reasons.

The German government is authorised to also review investments in German companies that are not included in the list of strategically important companies if the investor (directly or indirectly) acquires at least 25 per cent of the voting rights. Therefore, most foreign investors notify the German government of the investment in order to trigger the two-month review period unless the transaction is totally unrelated to national security. These applications can also be done prior to signing the acquisition agreement.

If the German government initiates formal foreign investment control proceedings, the investor has to submit certain documents and information as requested by the Ministry for Economic Affairs. Once all documents and information are completely submitted, the government has four months to review the transaction. The four-month period is interrupted if the government requests further information or if the parties enter into negotiations on a potential mitigation agreement. In 2019, a total of 106 investments were reviewed by the German government. In most cases, any security-relevant risks identified by the government could be mitigated by contractual agreements.

Review periods may be extended

In future, if the foreign investment control proceedings prove to be particularly difficult for factual or legal reasons, the Ministry for Economic Affairs may extend the four-month review period by a further three months. A further extension by one month is possible if the German Ministry for Defence claims that the transaction particularly affects national defence interests. Due to the new legislation, review proceedings may take considerably longer. Foreign investors will have to take this into account when planning investments and structuring the transaction process.

Direct and indirect investments by non-EU investors

Unless the investment concerns the military sector, the German foreign direct investment regimes only applies to investments by non-European Union investors. This includes direct and indirect investments. For example, acquisitions of foreign companies that have German subsidiaries or participations of at least ten per cent of the voting rights fall within the scope of the German foreign investment control provisions. Investors from Iceland, Liechtenstein, Norway and Switzerland are not considered non-EU investors for purposes of the foreign direct investment control provisions. After Brexit, investors from the United Kingdom are considered non-EU investors unless a special exemption is negotiated. Currently, it is expected that investments from UK companies will also be subject to German foreign investment control.

Implications for M&A transactions

The new rules and regulations will have considerable impacts for the M&A industry. Foreign investment control will be a much more important factor. Non-EU investors will have to review at an early stage when planning an M&A transaction whether one of the target companies is included in the list of strategically important companies. If this is the case, they will have to observe reporting requirements, standstill obligations and further (eg, disclosure) restrictions. It is likely that only a limited number of selected advisers (so-called ‘clean teams’) may be allowed to review security-relevant information rather than the foreign investors themselves.

For non-EU buyers, investments in the relevant industries may become less attractive as, due to the pending invalidity, ownership may not be acquired until the completion of the review. Investors from EU Member States may have a competitive advantage in auction processes.