Foreign Investment Screening Reforms Enter Into Force in Germany

Amendments to AWG With Effect From July 17, 2020

The following key amendments to the AWG enter into force on July 17, 2020, and may also affect transactions that have been signed but not yet closed.

• New preclosing restrictions: Pending regulatory clearance of a transaction, the following actions are prohibited: (1) enabling the investor to exercise voting rights in the target, (2) granting the investor rights in the distribution of the target’s profits or economically equivalent transactions, and (3) sharing with, or disclosing, to the investor sensitive information relating to the target (except for commercial and company-related information typically shared during the pendency of transaction processes). Violations of these prohibitions are subject to fines and criminal penalties.
• Lower threshold for restricting investments: Investments may be blocked or subjected to conditions if they are likely to affect (1) public order or security of Germany, (2) public order or security of another EU Member State, or (3) Germany’s essential security interests for investments in the defense sector. Previously, German authorities could restrict only investments that actually affected public order or security of Germany (or Germany’s essential security interests for investments in the defense sector).
• Streamlining of the screening process: The timing for screening has been clarified and shortened. German authorities have two months to open a formal investigation after becoming aware of the contract providing for a qualifying investment, and four months to prohibit or impose conditions on the investment. If necessary, these timelines may be extended. It is explicitly provided that the streamlined screening process will apply to transactions of which German authorities become aware after July 17, 2020.
• EU coordinated screening mechanism: The German Federal Ministry for Economic Affairs and Energy (BMWi) is the appointed contact point for implementing the coordinated screening mechanism set out in the EU Investment Screening Regulation. Under the Regulation, the European Commission and other EU Member States can request information and submit comments/opinions on the screened investment.

Amendments to AWV With Effect From June 3, 2020

The amendments to the AWG come in the wake of the following key amendments to the AWV, which were fast-tracked due to the COVID-19 pandemic and entered into force on June 3, 2020.

• Expansion of transactions subject to screening: It has been clarified that not only share deals but also asset deals and acquisitions of business divisions or assets critical to the target’s business operations are subject to the investment screening regime.
• Additional sensitive businesses subject to mandatory notification: With a particular focus on healthcare, new businesses were qualified as sensitive. These especially include the manufacturing and marketing of personal protective equipment, pharmaceuticals essential to public healthcare, and medical devices for life-threatening and highly infectious diseases. Qualifying investments in such sensitive businesses are now subject to mandatory filing obligations.
• New criteria for screening: A non-exhaustive list of criteria for investment screening was adopted. The new criteria suggest that German authorities will more closely scrutinize the background of the investor taking into account, inter alia, whether the investor (1) is directly or indirectly controlled, including through financing, by a non-EU government, (2) has been previously involved in activities that have had an adverse effect on the public order or security of Germany or another EU Member State, or (3) appears to have been involved in certain illegal activities (including white-collar crimes).

Key Takeaways

As a result of these reforms, foreign investors should expect more transactions to undergo investment screening in Germany. Investors should be ready to assess investment risks relating to investment screening upfront and adopt risk mitigation strategies to address potential issues concerning the impact of the planned investment in both Germany and any other EU Member State. In particular, investors should

• take extra care when entering into negotiations and arrangements with potential German targets, especially as to information sharing in the context of due diligence processes
• consider the implications of investment screening on the transaction timeline; this is particularly important in view of multilevel (i.e., national and EU) notification obligations and review processes
• take into account investment screening in contractual language, including (1) a sign and close mechanism, (2) ensuring that all parties cooperate to ensure that regulatory approval is obtained, and (3) allocation of rights and obligations pending approval (and consider whether “hell or high water” provisions are appropriate)

In addition, investors should expect further amendments to be implemented in the near future. The German government has already announced the next review of the AWV, which is likely to subject investments in even more business areas (e.g., artificial intelligence and robotics) to mandatory filing obligations and closer scrutiny in Germany.