German investment control overhaul started – First target: life science sector
With the EU Screening Regulation (EU) 2019/452 entering into force on 11 October 2020, many EU Member States are currently reviewing their foreign investment control regimes. Germany intends to not only implement those changes made necessary by the EU regulation, but will takes the opportunity to revise its regime quite fundamentally.
While the lion's share of the draft amendments is still being discussed at the legislative level, in response to the COVID-19 pandemic, Germany has now in a first step widened the scope of its investment control to include numerous life science companies. These amendments to the Foreign Trade and Payments Ordinance (AWV) entered into force on 3rd June 2020.
Non-EU-investors are now required to formally notify the German Federal Ministry of Economic Affairs and Energy (BMWi) if they want to acquire at least 10% of the voting rights in certain German vaccine and antibiotics manufacturers, manufacturers of medical protective equipment or manufacturers of medical goods for the treatment of highly infectious diseases. The BMWi may then open an investigation and can prohibit the acquisition or make a clearance decision subject to conditions.
In direct response to COVID-19, the BMWi took measures it considered necessary to maintain a functioning health care system during a pandemic or comparable crisis. The new rules accordingly affect companies which
- develop or manufacture personal medical protective equipment (such as masks);
- develop, manufacture, place on the market or hold a corresponding marketing authorisation for essential medicinal products or their raw materials and active ingredients;
- develop or manufacture medical devices intended for the diagnosis, prevention, monitoring, prediction, prognosis, treatment or alleviation of life-threatening and highly infectious contagious diseases;
- develop, manufacture or supply certain in vitro diagnostic medical devices relating to life-threatening and highly infectious contagious diseases.
The obligation to notify the BMWi of a transaction applies whenever a non-EU investor directly or indirectly acquires significant assets or at least 10% of the voting rights in a German company active int the targeted sectors.
It is important to note that in German investment control does not only cover foreign direct investments. German law cover also indirect investments and the notion of an "indirect acquisition" is extremely wide: In essence, an indirect acquisition exists whenever, somewhere in the shareholder structure of the acquirer, a non-EU shareholder – or, in some cases, a non-German shareholder – directly or indirectly holds at least 10% of the voting rights in the acquirer or in a company holding at least 10% of the voting rights in the acquirer. This includes, for example, the acquisition of a UK company by a US company, if the UK company holds at least 10% of the voting rights in a relevant German life science company. Even more surprising: the voting shares are not consolidated. The case described above would thus even be covered if the US company only wanted to acquire at least 10% of the voting shares in the UK company.
Regarding asset deals, the new ordinance clarifies that the acquisition of a separable part of a business or all essential operating resources of such part of a business is subject to investment control.
The latest amendments to the AWV are just a small step and were fast-tracked due to COVID-19. Much more important changes are still being discussed at the moment and will change German investment control more dramatically in the near future.
The most important changes to be expected are:
- There will be a new substantive assessment standard, as a result of which the BMWi can restrict foreign investments if there is a "potential impairment" of security interests – as of today the BMWi must demonstrate a "real and sufficiently serious threat";
- Further industry sectors will be added to the lists of sensitive activities and foreign investments in companies active in these sectors must be notified to the BMWi; the sectors likely to be added include German key industries such as robotics, but also artificial intelligence, semiconductors, nano- or biotechnology or quantum technology;
- There will be a stand-still obligation, which prohibits the implementation prior to clearance of any foreign investment which must be notified to the BMWi
Compared to many other investment control regimes, German investment control may have been somewhat toothless in the past. Once the new proposals are enacted, German investment control becomes a serious factor in almost all M&A transactions. Investors and companies looking for investors in Germany are well advised to pay the same importance to investment control as to merger control in the future.
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