In the wake of the Covid-19 pandemic: Germany considers prohibition to close transaction pursuant to foreign direct investment control regime

The German investment control regime is currently being restructured, both by means of scheduled as well as unscheduled measures: the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz, AWG) and German Foreign Trade and Payments Regulation (Außenwirtschaftsverordnung, AWV) are currently being adapted as scheduled to the requirements of the EU Screening Regulation adopted in 2019 and to be implemented by the Member States by October of this year, and are being tightened in connection with this adaptation. In this context, further amendments are also being introduced as a reaction to the Covid 19 pandemic. These include the first-time introduction of a punitive ban on transaction execution, which has been incorporated into the draft law passed by the German cabinet on 8 April 2020 (see below). The measures planned in Germany fit into the current picture of tighter investment controls worldwide: As already reported, the EU Commission has joined in urging the Member States to review their existing foreign direct investment regimes, to adapt them if necessary and to exhaust all available options in their implementation in order to closely examine the participation of foreign investors in European companies, especially in systemically relevant areas (see our detailed report).

As far as the legal changes in Germany are concerned, a draft bill of the Federal Ministry of Economics and Energy (Bundesministerium für Wirtschaft und Energy, BMWi) for a First Act to Amend the German Foreign Trade and Payments Act (Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes) has existed since January of this year. The main objective of the intended amendment is, on the one hand, to reduce the degree of risk required for investment restrictions. The draft bill provides that instead of the previously required actual threat to public safety or order in the Federal Republic of Germany, which must be sufficiently serious and affect a fundamental interest of society, a probable impairment will now suffice. On the other hand, the BMWi is aiming at a new interpretation of the concept of public order and security. In addition to the already known aspects of security, public supply and critical infrastructures, in future the focus will be on critical technologies such as artificial intelligence, robotics, semiconductors, cyber security, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies (see our detailed report).

On 2 April 2020, the Federal Government submitted a draft bill for the planned First Act to Amend the German Foreign Trade and Payments Act, which provides for a further tightening of controls on investments compared to the draft bill (available here in German). In order to speed up the legislative procedure, the draft bill was, with the same content, also put forward as a bill by members of the governing coalition in the Bundestag, on 21 April 2020 (available here in German). A first reading took place in the Bundestag on 23 April 2020. The Act is planned to be adopted in June or July this year.In particular, a comprehensive ban on the execution of transactions subject to notification requirements is now planned. This restriction on the execution of transactions is also to be subject to penalties. The envisaged penalties are severe: imprisonment for up to five years or a fine. In our view, it is questionable whether this threat of punishment is proportionate. We believe that violations of corresponding bans on executing transactions under antitrust law have been effectively prevented by the threat of administrative fines.

The federal government justifies the new regulation with the risk that, without a parallel ban on transactions being executed until the review procedure has been completed, the acquirer can already take and implement precisely those measures whose security-relevant effects are to be prevented by the notification obligation and, linked to this, a possible future prohibition or order. Access to security-relevant technologies is one stated example.

The amendments also provided for in the German Foreign Trade and Payments Regulation are to be published shortly, which will in particular include a further extension of the notification obligations in the healthcare sector due to Covid 19. Whether and which further temporary measures will follow with regard to the sell-off of European companies feared in view of the Covid-19 pandemic cannot be answered at present. The introduction of ‘golden shares’ in Germany is, however, considered impossible. We will keep you informed about further changes to the German investment control regime.