Because of Covid-19: German Government Accelerates Implementation of Tighter Foreign Investment Control in the Pharmaceutical and Med Tech Sectors

On April 27, 2020, the German Federal Ministry of Economics presented a draft for a further amendment to the Foreign Trade and Payments Regulation (AWV), which regulates, among other things, the control of foreign investments in Germany. The focus of this new amendment is the health sector. Investment control in Germany has already been tightened several times in recent years to prevent a drain of key technologies. This was done in particular after public criticism of the comparatively liberal German regulations arose in connection with the sale of the robot manufacturer KUKA to a Chinese investor.

As part of the so-called cross-sectoral investment control, the German Federal Government examines whether the acquisition of a domestic company by a purchaser from outside the EU jeopardizes public order or security. The Government may prohibit the sale or make it subject to conditions. In this context, the AWV explicitly lists certain critical sectors, e.g. energy or water supply. If the domestic company for sale is active in one of these areas, a threat is particularly obvious and stricter rules apply.

These critical sectors are expanded by the amendment now presented. In future, these will include in particular companies from the healthcare sector, which

• develop or manufacture personal protection equipment or supply preliminary products for it;
• develop, manufacture, place on the market or hold a marketing authorization for medicinal products, e.g. vaccines, which are essential for the supply of the population (including their source materials and active substances);
• develop, manufacture or distribute medical devices, including those for the diagnosis, prevention or treatment of life-threatening and highly contagious infectious diseases, or supply preliminary products for the same;
• supply, develop, manufacture or distribute in-vitro diagnostics for life-threatening and highly contagious infectious diseases or supply preliminary products for them; or
• develop, manufacture or distribute production facilities or technologies for the development or manufacture of the above-mentioned products or supply preliminary products for them.

If an acquirer from a non-EU state wishes to acquire a company from these sectors, the Federal Ministry of Economics must be notified in advance in future. If the planned acquisition by a non-EU buyer concerns at least 10% of the shares, the Ministry may then examine whether a prohibition or conditions should be imposed.

As hitherto, the Ministry must notify the acquirer in writing within three months of becoming aware of the conclusion of the acquisition agreement. In future, however, timely notification will no longer be a prerequisite for the cross-sectoral examination, i.e. the examination may also be conducted at a later date. After five years from the conclusion of the acquisition agreement, however, the opening of the examination procedure is excluded as before, irrespective of the Ministry's knowledge.

The content of the notification by the direct purchaser is regulated in more detail in the amended AWV. It is now explicitly required that the business areas of the acquirer and of the domestic company to be acquired are to be described in the basic outlines. The amendment also clarifies that an asset deal, e.g. the acquisition of a business unit, essential production facilities or know-how, is also subject to foreign investment control. Furthermore, it is now expressly stipulated that the examination shall take into account, for example, whether the acquirer is directly or indirectly controlled by a foreign state.

The amendment of the AWV is intended to flank the amendments to the Foreign Trade and Payments Act, which were already adopted by the Government on April 8, 2020 and are intended to implement the EU-wide regulations on investment control adopted in 2019 by means of Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union. With its focus on the health sector, the German Federal Government follows a corresponding recommendation of the EU Commission in its guidelines published on March 20, 2020 in the run-up to the applicability of the aforementioned regulation (from October 11, 2020). In addition to companies from the health sector, the AWV amendment also includes as further critical sectors service providers in the field of government communications, such as digital police radio, and companies that extract or process certain critical raw materials. In addition, the German Federal Government is currently planning further changes, but the tightening of the regulations affecting the healthcare sector is now to be given priority due to the current situation in connection with the Covid-19 pandemic.

As a result of the amendment, transactions in the healthcare sector in Germany in which the acquirers have a connection to third countries outside the EU will in future be very largely subject to investment control by the German Federal Government and thus to a corresponding obligation to notify. In such cases, it is recommended to apply for a clearance certificate in accordance with section 58 AWV directly with the notification. This certificate is deemed to have been issued after two months if the Ministry does not open an examination procedure. Without such an application and despite immediate notification, there is a threat of a prohibition still after up to five years after the conclusion of the deal, because the preclusive period for the examination of three months from the Ministry's knowledge of the conclusion of the contract will no longer apply in future.