THE AMENDMENT(S) OF THE LAW AND THE ORDINANCE ON FOREIGN TRADE AND PAYMENTS
The legislator has substantially expanded and sharpened the scope of application of the review of foreign investments. Instead of an actual threat to the public safety or order, the likeliness to affect the public safety or order is now sufficient for a prohibition. In addition, an enforcement ban has now also been introduced for transactions regarding companies active in the critical technologies and branches listed in the catalogue of section 55 para. 1 sentence 2 German Foreign Trade and Payments Ordinance that has been further complemented by companies active in certain fields of the health sector.
I. Reason(s) for and purpose of the amendment(s)
The legal regime on review of foreign investments has been further tightened. Both, the Foreign Trade and Payments Act (AWG) and the Foreign Trade and Payments Ordinance (AWV), have been and will be further revised. The amendment of the Foreign Trade and Payments Act had been planned for some time due to the necessary adaptation to the EU screening regulation which came into force in 2019 and will apply as of 11 October 2020.
COVID-19 pandemic – 15th AWV amendment (already implemented) – health sector
In view of the COVID 19 pandemic, however, the German federal government saw a need for rapid action to prevent foreign takeovers in the health sector. One of the triggers was certainly the American interest in acquiring CureVac, a pioneer in the development of a vaccine against the SARS-CoV-2 virus, in which the Federal Republic of Germany now holds 23% of shares due to an investment of EUR 300m In a first step, the Federal Cabinet has therefore already adopted (unscheduled) the 15th Amendment Ordinance to the AWV, which came into force on 3 June 2020 and now extends the review of foreign investments to certain fields of the health sector.
Summer 2020 – 16th AWV amendment (pending) – Further extension to certain “high technology”
However, the German Federal Ministry of Economics and Energy (BMWi) has already announced a second (already longer planned) part of the AWV amendment (the 16th Amendment Ordinance) for summer 2020. It is to be expected that – as originally planned – the review of investments will be extended to the sectors of artificial intelligence, robotics, semiconductors, biotechnology and quantum technology.
AWG amendment 2020
The amendment of the AWG, by which also the deadline regime of the AWV has been remade, has already gone through the legislative procedure: the draft of the law of 21 April 2020 with the modifications proposed by the Advisory Committee of Economics and Energy was finally discussed and resolved upon in the Bundestag on 18 June 2020 in second and third reading and has now been submitted to the Bundesrat. The Bundesrat declared with a statement of 20 May 2020 regarding the first draft not to raise any objections.
II. Which acquisitions are affected by the amendments?
The amendments mainly affect the civil, so-called cross-sectoral, segment and will be explained with regard to this segment hereinafter:
Basic principle – 25 % threshold if company’s activities do not fall under catalogue of critical technologies or branches
In principle, investments by non-EU residents (and even EU-residents if deemed a non-EU resident under the applicable law and ordinance in order to prevent circumventions) into German companies may be reviewed in accordance with foreign trade law if at least directly or indirectly 25 % of the voting rights or assets (see below) are acquired and the acquisition is likely to affect the public order or security of the Federal Republic of Germany or another member state of the European Union (see below under III).
10 % threshold for certain case groups, reporting obligation
However, if a German company is active in critical technologies and branches listed in section 55 para. 1 sentence 2 AWV, already direct or indirect acquisitions of 10 % of the voting rights or assets (see below) are subject to the review of investements by the BMWi, also such acquisitions have to be notified to the BMWi pursuant to Section 55 para. 4 sentence 1.
New case group: health sector:
Beginning of June 2020 the catalogue of Section 55 para. 1 Sentence 2 AWV has also been extensively expanded by certain branches of the health sector so that acquisitions of directly or indirectly 10% of the voting rights (or assets – see below) of companies that develop or manufacture personal protective equipment, develop, manufacture or market essential medicines such as vaccines, including their starting and active ingredients, hold a relevant marketing authorization, or develop or manufacture medical devices such as surgical masks and respiratory equipment, or in vitro diagnostic medical devices such as diagnostic tests for the detection of an infectious agent in connection with life-threatening and highly contagious infectious diseases are also subject to investment control.
May also apply to start-ups
Start-ups and smaller businesses are not exempted from the scope of application of the investment control. The numerous German start-ups active in the critical technologies and branches listed in section 55 para. 1 sentence 2 AWV including certain branches of the health sector such as research and development(s) and/or production in connection with COVID-19, must therefore also keep foreign trade law in mind when looking for investors.
Clarification on asset deals – but uncertainties remain
The amendment now clarifies that asset deals can also be subject to investment control to the extent either (i) a separable part of a company or (ii) all essential operating resources of a company or of a separable part of a company (section 55 para. 1 and 1a AWV as amended) are acquired. The explanatory memorandum(s) do not comment on when a separable business unit within the meaning of the AWV exists and whether the assets acquired with the business unit must also exceed a certain threshold (e.g. 10 % or 25 % of the company’s assets) in order for investment control to be applicable.
III. Extension of the existing examination standard
Both for acquisitions of companies from the catalog of section 55 para. 1 AWV, to which the 10 % threshold applies, and for other companies to which the 25 % threshold applies, the examination standard has been revised.
In contrast to the previous legal situation, according to which an actual threat to the public order or security of the Federal Republic of Germany “only” was required, the amendment to the AWG stipulates that in future the likeliness to affect the public order or security of the Federal Republic of Germany or another EU-member state should suffice (section 5 para. 2 AWG as amended). This sharpening of the examination standard, which corresponds to article 4 para. 1 of the EU screening regulation, leads to a considerable expansion of the scope of investment control. In addition, henceforth, also effects of a transaction in Germany on the public order or security of other EU-member states have to be taken into account which increases the need for coordination and consultation in the framework of the review.
When examining whether there is a likeliness to affect public order or security, investor-related factors have to be taken into account, in particular whether the acquirer is controlled or financed by the government or armed forces of a third country, whether the acquirer has already been involved in activities which have had an adverse effect on the public order or security of the Federal Republic of Germany or another EU member state, or whether there is a substantial risk that the acquirer may have rendered himself liable to prosecution under section 123 para. 1 Act against Restraints of Competition
(Competition Act – GWB), the AWG or the War Weapons Control Act (section 55 para. 1b AWV as amended).
IV. Introduction of an enforcement ban also for certain acquisitions in the cross-sectoral area
Ban on enforcement now also regarding the cross-sectoral area
Pursuant to the new section 15 para 3 AWG the legal validity of all transactions in order to achieve the closing of an acquisition (in the sense of the AWV) of (part of) a German company active in a field falling in the catalogue of Section 55 para. 1 sentence 2 AWV is deemed suspended until the termination of the investment control procedure. For the avoidance of doubt: this does not apply to the acquisitions (in the sense of the AWV) of (part of) the companies that do not fall into one of the case groups listed in sections 55 AWV and to which the 25% threshold applies in accordance with section 56 para. 1 no. 2 AWV.
Duration of the ban on enforcement
The duration depends on whether and when a review is ordered and an acquisition is approved or deemed approved. The new section 14 a AWG now contains for both the sector specific and the cross-sectoral areas the applicable deadline regime for the review process and replaces the deadlines so far provided for in sections 55 et seq. AWV which are amended, correspondingly. In any case, the BMWi must now indicate within a (shortened) initial review period of two (2) months from acquisition of knowledge of signing of a transaction whether it will carry out a review. A review henceforth has to be carried out in principle within four (4) months from receipt of the complete documentation required for the review.- The aforementioned review periods may be extended pursuant to section 14a AWG (as the case may be by unilateral action of the BMWi only or mutual consent by the parties concerned). A binding certificate of non-objection can still be applied for, but the procedure may not be accelerated by doing so due to the shortened initial review period (section 58 para. 2 AWV as amended, § 14a para. 1 No. 1, para. 3 AWG as amended).
Scope of the ban on enforcement
The ban on enforcement intends to prohibit the influence of an acquirer as well as the access of an acquirer to security-relevant technologies or security-relevant information or the outflow of such technologies or information to the acquirer, respectively, prior to clearance of the transaction. This includes all company-related information relating to divisions or objects of the company that are subject to the catalogue of section 55 para. 1 sentence 2 AWV and those the BMWi may designate during the review process. Pursuant to the explanatory memorandum(s) only such technologies and information may fall under the scope of the enforcement ban which are of particular relevance in view of a likely affection of the public security or order (i.e. are the reason why the review of the investment is carried out). This rather vague formulations already indicate that the relevant technology and/or information may only be determined on a case by case basis and that the differentiation from “uncritical” information may be difficult. The prohibition to provide access to critical technologies and information or to exercise any influence over the target is – in any case – to be observed already when preparing and conducting the due diligence as well as in the course of negotiations of the sale and purchase agreements (e.g. with respect to further disclosures or covenants).
Legal consequences of a violation of the prohibition of enforcement under criminal law
Pursuant to section 18 para. 1b AWG, as amended, a violation of obligations under the enforcement ban may now constitute a criminal offence also in the cross-sectoral area. A penalty may range from a fine to imprisonment for up to five years.
The new section 30 AWG explicitly provides for a legal transitional rule only with respect to the new deadline regime of section 14a AWG and for the corresponding amendments to the AWV which shall be applicable to all acquisitions of which the BMWi acquires knowledge after entry into force of these amendments. However, section 30 AWG remains silent on a transitional rule for the applicability of the enforcement ban and the suspension of the legal validity of transactions in order to achieve the closing of an acquisition subject ot the enforcement ban. This is amazing given that violations of the enforcement constitute criminal offences; yet, the prohibition of retroactive effect pursuant to article 103 para. 2 of the German Constitutional Law (Grundgesetz – GG) may have to be taken into account.
V. Consequences of Brexit for the scope of the law on foreign trade and payments – nothing new, but to be kept in mind
Negotiations with the UK on the legal relationship between the EU and the UK after the latter’s withdrawal from the EU should also be kept under close review with regard to cross-sectoral investment control. For if the UK is no longer a member of the EU, investment control would in principle be applicable. However, this is not an innovation by the AWV or AWG amendments.
VI. Conclusion and outlook
The sharpening and already implemented and still to be implemented extensions of the investment review (probably) also to companies active in the fields of artificial intelligence, robotics, semiconductors, biotechnology and quantum technology will render investments in Germany more bureaucratic and potentially more difficult.
The introduction of the ban on enforcement now also to the cross-sectoral review means that with respect to transactions regarding target companies falling under the catalogue of the section 55 para. 1 sentence 2 AWV attention has to be paid already in the course of preparing and conducting the due diligence and negotiations of the sale and purchase agreements what information may be shared and how and what covenants may be acceptable.
The extension of investment control must also be taken into account by start-ups and may be an obstacle to the (rapid) implementation of financing rounds with the participation of investors from third countries if investment control intervenes and a longer-lasting examination procedure is likely.
Moreover, it is already becoming apparent that the EU Commission could in future also use competition law instruments to prohibit takeovers by purchasers from third countries if they have received foreign state aid and (i) want to gain competitive advantages in the EU or (ii) acquire EU companies. The Directorate General for Competition under Margarethe Vestager has prepared a White Paper on this subject (“White Paper on levelling the playing field as regards foreign subsidies”), on the basis of which discussions with member states for a corresponding legislative project are to begin in 2022, if necessary.
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