Covid-19: stricter German investment control rules in the health sector

The changes to the German Foreign Trade and Payments Ordinance, which took effect recently, will add vaccine and antibiotics manufacturers, manufacturers of medical protective equipment and manufacturers of medical goods for the treatment of highly infectious diseases to the list of public security-relevant companies.

Acquisitions of shares from these companies by buyers outside the European Union (EU) and the European Free Trade Association (EFTA) need to be reported to the Federal Ministry of Economics if investors intend to purchase 10% or more of the shares of such a company. If businesses fail to comply with the notification duty, the Federal Ministry of Economics has the power to review such transactions up to five years after the conclusion of the purchase agreement and prohibit them retroactively.

"Foreign investors will have to consider this reporting obligation in the future," Dr. Sandra Schuh, M&A transaction expert at Pinsent Masons, the law firm behind Out-Law, said. "The new rules are also important for German sellers to avoid the risk of retroactive additional requirements or prohibition of the transaction by the government."

According to the Federal Ministry of Economics, the amendment is a response to the coronavirus pandemic and its consequences: "With the current amendment to the Foreign Trade and Payments Ordinance, we are ensuring that the federal government is informed of critical company acquisitions in the healthcare sector and is able to investigate them," explained federal economics minister Peter Altmaier (CDU). The explanatory memorandum to the law states that it is intended to "contribute to the long-term maintenance of a functioning health care system", also with regard to future health crises.

German investment control regulations distinguish between sector-specific and cross-sector screenings. In cross-sector screenings, which may be applied in all sectors with the exception of the defence industry, investments in companies can be examined and, if necessary, prohibited by the Federal Ministry of Economics. All acquisitions of 10% or more of the voting rights in a German company from a critical infrastructure by an investor outside the EU and EFTA are subject to reporting. This applies, for example, to companies in the energy, transport, finance, health, telecommunications, water and food supply and insurance sectors – and as a result of the latest amendment, now also to certain areas of the health sector.

The new provisions of the Foreign Trade and Payments Ordinance also provide for clearer criteria for assessing foreign investors. The aim is to review whether the acquirer is controlled by a government, including other government agencies or armed forces, and whether the acquirer has already been involved in activities that have had an adverse effect on public order or security in the Federal Republic of Germany or another EU member state. It should also be examined whether there is a significant risk that the acquirer may have been involved in certain economic crimes, violations of the Foreign Trade and Payments Act or the War Weapons Control Act.

The current amendments are only a first step towards more extensive reforms in foreign trade law. A more comprehensive amendment to the Foreign Trade and Payments Act is planned for later this year. The amendment implements the EU regulation establishing a framework for the screening of foreign direct investments into the EU. The member states have until 11 October 2020 to implement this regulation. For Germany, the provisions on cooperation and information among the member states are of particular interest in the regulation.

Dr. Sandra Schuh said: "The German government has made it clear with a legislative proposal already published on 30 January 2020 that the amendment will not only reflect the EU legislative recommendations – the amendment is also intended to further expand the screening competences of the Federal Ministry of Economics."

The amendment to the Foreign Trade and Payments Ordinance that has just entered into force and the forthcoming amendment to the Foreign Trade and Payments Act clearly signal that the federal government regards foreign investment control as an important instrument for the protection of German society, said Dr. Markus J. Friedl, an expert on international M&A transactions at Pinsent Masons. "Accordingly, the importance of foreign investment control for acquisitions of German companies and the number of screening procedures actually carried out will continue to increase," he said.

The number of screening procedures has already increased from 78 to 106 in the years 2018 to 2019, and German government itself is expecting an annual increase of 20 screening procedures in the coming years.

Dr. Markus J. Friedl said: "Sellers as well as purchasers are therefore well advised to consider the new regulations early on in their transaction and to take them into account appropriately, for example by including certain closing conditions in the purchase agreement. In addition, when assessing the foreign trade relevance of an investment in a German company, it is no longer sufficient to focus on the effects for Germany alone. From October 2020 the effects on other EU member states must be taken into account as well. Overall, the complexity of the subject will therefore increase significantly, which makes the planning and execution of transactions more difficult."