In June 2020 the German government decided to tighten, both the German Foreign Trade and Payments Act (“AWG”) and the (“AWV”) significantly. The amendments’ consistent aim is to enable the relevant authorities to more effectively examine and prevent critical company acquisitions from third countries if those could endanger the public order or security of Germany (or the EU). The COVID-19 pandemic acted as a catalyst for accelerating the implementation of both laws and regulations.
On 3 June 2020, in direct response to the COVID-19 pandemic, a 15th amendment to the AWV, which provides for specific rules implementing the AWG, came into force in Germany. The 15th amendment (also referred to as the “Corona Amendment”) specifically focuses on the healthcare sector. Shortly afterwards, on 18 June 2020, the German Federal Parliament (“Bundestag”) passed an amendment to the AWG, which was considered particularly urgent due to the Corona pandemic. It is expected that the Chamber of the Federal Countries (“Bundesrat”) will approve the law on 3 July 2020 so that it will enter into force shortly afterwards. The law will be supplemented by another amendment of the AWV in autumn 2020, which would complete the implementation of the so-called EU-Screening-Regulation 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the EU.

AWV Amendment

The 15th amendment to the AWV extends the list of companies set out in Section 55 (1) sentence 2 AWV, the acquisition of which may pose a particular threat to the public order or security of Germany. This applies in particular to companies active in the health sector, which are essential for combating highly infectious pandemics. Therefore, planned critical acquisitions of at least 10 percent of the voting rights in German companies active in the listed sectors by investors from third countries, i.e. non-EU states (whereby acquirers from EFTA states are not considered non-EU states in this context), must be notified to the German Federal Ministry for Economic Affairs and Energy (“BMWi”) on a mandatory basis.

Specifically, the following sectors have now been added to the list in Section 55 (1) sentence 2 AWV:

• Companies that provide services necessary to ensure the continuity and functioning of certain public communications infrastructures of authorities and organizations with security functions as defined in the Act on the Establishment of a Federal Authority for Digital Radio;
• Companies that develop or manufacture personal protective equipment (PPE) as defined in EU Regulation 2016/425 (e.g. protective masks, protective gloves or protective suits);
• Companies that develop, manufacture or market medicinal products and vaccines which are relevant to public health, or that hold a pharmaceutical marketing authorization for such products;
• Companies that develop or manufacture certain medical devices within the meaning of the EU Regulation 2017/745 on medical devices for life-threatening and highly contagious infectious diseases;
• Companies that develop or manufacture certain in-vitro-diagnostic medical devices, which serve to obtain information on or treat life-threatening and highly contagious infectious diseases.

The other changes in the "mini-amendment" mainly have a clarifying function. For example, the new paragraphs in Sections 55 (1a) and 60 (1a) AWV are intended to clarify that so-called "asset deals" also fall within the definition of an “acquisition” – which was already common practice before. In addition, the new Sections 55 (1b) and 60 (1b) AWV explicitly list certain criteria which may be taken into account when assessing whether an investment poses a threat to the public order or security of Germany (such as the acquirer being – directly or indirectly – controlled or financed by government agencies or armed forces of a third country or whether the acquirer was already involved in activities having a detrimental effect on public order or security).

AWG Amendment

1. Implementation of EU-Screening-Regulation

The amendment to the AWG adopted on 18 June 2020 will have even more far-reaching consequences for potential investors. It mainly adapts the AWG to the requirements of the EU-Screening-Regulation (EU) 2019/452 of 19 March 2019, which will come into full effect on 11 October 2020. In particular, the standard to be applied when reviewing a foreign direct investment on the grounds of public order or security concerns is significantly lowered. In future, instead of requiring an “actual and sufficiently serious danger affecting a fundamental interest of society”, it will be sufficient that an investment is “likely to affect” security or public order. In addition to the effects of an acquisition in Germany, the focus will now also be on the effects on other EU Member States and on EU programs and projects.

In addition, the amendment establishes a German contact point at the BMWi for the mandatory European cooperation mechanism under the EU-Screening-Regulation. This contact point will be responsible for the coordinated cooperation with the other EU Member States and the European Commission, particularly in the area of information exchange on existing screening mechanisms, planned investments and ongoing investment review procedures.

2. Invalidity of Acquisitions during Review Procedure

Furthermore, any acquisition subject to a notification requirement (even in the context of the so-called cross-sectoral examination within the meaning of Section 55 AWV) will now be "provisionally  invalid" for the duration of an ongoing examination procedure until it is cleared and must not be executed during this time frame. This (provisional) invalidity under civil law is accompanied by a list of newly introduced prohibitions that are intended to effectively reduce the risk of a de facto execution of the acquisition – for example in the form of an early outflow of sensitive technology or critical know-how during the review procedure. A violation of those prohibitions is punishable by law (the penalty is imprisonment of up to five years or a fine in case of willful behavior) or subject to administrative fines (in case of negligence). Especially the regulations prohibiting the provision of internal company information classified as critical to the acquirer will lead to considerable practical problems for the parties to an acquisition in the future already during the due diligence process.

3. Extension of the Scope of the Sector-Specific Examination

The amendment also slightly extends the scope of the sector-specific review procedure within the meaning of Section 60 AWV, with regard to the sectors of defence equipment and IT security functions. In future, this will no longer only affect those domestic companies that manufacture or develop such critical goods, but also companies that have actual control over these goods, as well as companies that have produced, developed, modified or had control over such goods in the past and still have knowledge of or access to the underlying technologies.

4. Consolidated Rules on Statutory Deadlines

On the basis of a short-term recommendation by the Committee for Economic and Energy of the German Bundestag, the AWG has also been supplemented by a new provision on timelines for investment review procedures (Section 14a AWG). This leads to a consolidation of the statutory deadlines applicable to all existing review procedures under the AWV and of the provisions relating to the documentation of the acquisition. The BMWi now always has to decide on the opening of a formal investigation procedure within two months of knowledge of the conclusion of the contract under the law of obligations (or after receipt of an application for a certificate of non-objection). Subsequently, the BMWi has another four months for the actual review. Ultimately, the amendment will only have an effect on the cross-sectoral review within the meaning of Section 55 AWV if no certificate of non-objection has been applied for (in which case the overall time frame for a review has been formally reduced by one month). Moreover, the new provision expressly grants the BMWi the possibility to extend the duration of the review procedure "in individual cases" by up to three months if the review procedure shows "particular difficulties of a factual or legal nature". Plus, if the defence interests of the Federal Republic of Germany are particularly affected, even an extension of up to four months may be considered. In addition, the BMWi has the possibility to extend the time frames with the consent of the parties to the acquisition, which de facto gives the BMWi a means of "exchanging" an extension of the time frame for an otherwise impending prohibition of the acquisition.

It is also noteworthy that the review period will not only be suspended only if the involved parties are negotiating a public law contract, but also if the BMWi requests further information or documents relating to the planned transaction. Admittedly, the new provision creates legal certainty with regard to the question as to when the documentation of the acquisition has been fully submitted and when the review period begins to run, which is to be welcomed in principle. However, the amendment is unlikely to lead to significant changes in the length of review procedures, as there is still a risk that the BWMi may extend the procedures at will by requesting the entities involved in the transaction to submit additional documents or information.

Finally, it is envisaged that the investigation period will start anew if, for example, a clearance decision (or a certificate of non-objection), a restriction order or a public law contract is revoked. Against this background, it remains to be seen whether the new rules on the timelines will actually create planning reliability for companies and make review procedures more transparent and faster. At least, for the vast majority of cross-sectoral investigations in which the acquirer applies for a certificate of non-objection, the amendment is unlikely to bring about any noticeable simplification.

Outlook

Further amendments to German foreign trade law by way of a 16th amendment to the AWV in order to adapt it to the above-mentioned changes in the AWG and to the EU-Screening-Regulation are expected in fall 2020 (i.e. before the EU-Screening-Regulation becomes fully applicable on 11 October 2020). The further amendment to the AWV will in particular also include a catalogue of critical technologies (e.g. in the areas of artificial intelligence, semiconductors, robotics and biotechnology), for which a notification obligation will apply from a threshold of 10% of the acquisition of voting rights in a German target company.

Marian Niestedt
Nina Kunigk
both Hamburg