Germany extends FDI review mechanism to the healthcare sector

The changes to the Foreign Trade and Payments Regulation (AWV) of the German Federal Ministry of Economics and Energy (BMWi) entered with a slightly altered scope into force and is applicable as of 3 June 2020.

The regulation follows an earlier draft amendment to the Foreign Trade and Payments Act (AWG) which introduces amendments to reflect some changes brought about by the EU Regulation establishing a framework for the screening of foreign direct investments into the Union (Regulation (EU) 2019/452, EU FDI Screening Regulation).

This new amendment of the AWV focusses on the details of the German foreign directive investment (FDI) review mechanism and in particular broadens the scope of the mandatory review. It is a response to the developments triggered by the SARS-CoV-2 virus and focuses on the healthcare sector. The definition of companies in the health sector whose acquisition by a foreign (non-EU) investor may pose a threat to public order or public security is now extended.

Amended list of "Critical Companies"

The list of target companies that trigger a notification in case of an (indirect) acquisition reaching or exceeding 10% of the voting rights now includes:

• companies providing services which are necessary to ensure the freedom from interference and functionality of state communications infrastructures;

• companies designing or manufacturing personal protective equipment (within the meaning of Article 3 (1) of Regulation (EU) 2016/425);

• companies developing, manufacturing or distributing medicinal products which are essential for ensuring public health care, including their starting materials and active ingredients, or companies who are the holder of a corresponding marketing authorization under pharmaceutical law;

• companies developing, manufacturing or distributing medical devices which are intended for the diagnosis, prevention, monitoring, prediction, prognosis, treatment or alleviation of life-threatening and highly contagious infectious diseases;

• companies developing, manufacturing or distributing in vitro diagnostic medical devices which serve to provide information on physiological or pathological processes or conditions or to determine or monitor therapeutic measures in connection with life-threatening and highly contagious infectious diseases.

The original draft of the amendment sought to include further companies as "critical companies" but the scope was narrowed down during the proceeding. Originally, the draft considered to include as well:

• "companies extracting or processing raw materials or their ores as listed in Annex 1 to the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on the list of critical raw materials for the EU of 13 September 2017 (COM(2017) 490 final)" and

• companies "suppling preliminary products or components for the design or manufacture" of the above-mentioned companies.

Both provisions did not become law. Therefore, the revision of the original draft has considerably restricted the scope of application of the German FDI screening mechanism compared to the initial planning. In particular taking out companies "suppling preliminary products or components for the design or manufacture" prevents the scope for critical companies from getting out of hand and reaching too far into the supply chain. The legislator might have realised that FDI monitoring on the entire supply chain is practically hardly possible.

Next Steps

The BMWi already announced that further proposals for amending the foreign investment regime will follow shortly. In this regard a more detailed definition of "critical technology" is expected and companies engaged with such "critical technology" will become subject of the notification requirement under the 10% threshold. The fields of "critical technology" have been identified as artificial intelligence, robotics, semiconductors, biotechnologies and quantum and nuclear technologies, but the details remain unclear at the moment.

A comprehensive process of far-reaching adjustments to the AWG and AWV has begun and further amendments are imminent. Effects on the M&A business are to be expected, although the extent and scope of the changes in the law are not yet entirely clear. New considerations and careful planning of transactions will once again be necessary to avoid pitfalls under the new regime. An AWG/AWV review will be required for all transactions by foreign investors in order to identify reporting obligations and enforcement risks.