Source: US Global Legal Monitor
(Sept. 16, 2020) On July 17, 2020, an amendment to the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz, AWG) that lowers the standard for restricting foreign direct investment entered into force. The amendment requires that the investment be “likely to affect” public order or security rather than entail “actual and serious risk,” as the original act stated. The new amendment implements the requirements of the European Union (EU) Foreign Direct Investment Screening Regulation (FDI Screening Regulation) into German law.
Content of the Amendment
Tightened Standard for Restricting Investments
The amendment provides that foreign direct investments that are likely to affect public order or security in Germany or another EU member state, or relate to projects or programs of EU interest as set out in article 8 of the FDI Screening Regulation may be restricted, meaning the investment can be made subject to certain requirements or be prohibited. (AWG § 4, para. 1, nos. 4, 4a; § 4, para. 3.) The AWG formerly required an “actual and serious risk” to public order or security.
The amendment provides that restrictions may be authorized only when a screening order is issued by the Federal Ministry of Economic Affairs and Energy within two months after the legal transaction has been reported and the restriction is ordered within four months after all required documents have been received. The review period has been amended to apply irrespective of the sector concerned. (AWG § 14a, para. 1.) During the period that a foreign direct investment that is subject to notification is screened, the legal transaction is provisionally ineffective until approval is either granted or not granted within the prescribed time frame. (§ 15, para. 3; Civil Code § 184.) For the duration of the screening, the parties to the transaction are prohibited from allowing the purchaser to directly or indirectly exercise shareholder rights, granting profit participation rights, or granting access to sensitive company-related information that triggered the screening. (AWG § 15, para. 4.) Violations of the prohibition are subject to a custodial sentence of up to five years or a fine. (§ 18, para. 1b.)
EU FDI Screening Regulation
The EU FDI Screening Regulation does not harmonize national screening systems for foreign direct investments, nor does it prohibit or require member states to introduce one. (FDI Screening Regulation art. 3, para. 1.) However, member states that decide to set up a screening mechanism must establish a cooperation mechanism that allows other EU member states and the European Commission to be informed and submit comments and opinions. (Arts. 6–9.) In addition, a national contact point must be appointed. (Art. 11, para. 1.) The amendment designates the Federal Ministry of Economic Affairs and Energy as the German point of contact. (AWG § 13, para. 2, no. 2(e).)
Amendment to the German Foreign Trade and Payments Ordinance
The amendment of the Foreign Trade and Payments Act follows an earlier amendment of the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV) in June 2020 that added certain critical companies in the health care sector to the list of companies whose purchase must be reported to the German Federal Ministry of Economic Affairs and Energy and may be subject to screening. A purchase of a 10% stake in the company is sufficient to trigger the notification requirement. (AWV § 55, para. 1, sentence 2; § 55, para. 1a; § 56.) Such companies are, in particular, suppliers and producers of protective personal equipment, vaccines and antibiotics, medicinal products that are critical to ensure the health of the population, or in vitro diagnostics for therapeutic measures against deadly or highly infectious diseases. The amendment was adopted as a reaction to the COVID-19 pandemic.
The amendment adds additional reasons to restrict an acquisition—namely, the fact that a purchaser is directly or indirectly controlled by the government, government agency, or the military of a third country; that the purchaser participated in activities that have already negatively affected public order or security in Germany or another EU member state; or that there is a significant risk that the purchaser or persons acting on his or her behalf have committed acts that would be considered crimes according to section 123 of the Competition Act, the AWG, or the War Weapons Control Act.