This article was updated on June 24, 2020.

1. Commission issues guidelines to protect critical European assets and technology in current public health crisis

On March 25, 2020, the European Commission issued guidance to Member States ahead of the application of the EU Foreign Direct Investment (FDI) Screening Regulation which is supposed to start on October 11, 2020 putting in place for the first time an EU-level mechanism to coordinate the screening of foreign investments likely to affect the security and public order of the Union and its Member States. The Guidelines of the European Commission encourages increased FDI controls for ‘strategic industries’, in particular but by no means limited to healthcare-related industries (available here). The Guidelines explicitly call on Member States to make full use of existing FDI review mechanisms in national law or to establish such review mechanisms if they do not already exist. They reflect the whole spectrum of possible measures as well as the respective European legal frameworks. The EC is also stressed, for example, that even investments in small start-up companies can be of strategic importance. It remains to be seen how this guidance will affect FDI regimes in Europe. In recent months, FDI regimes have been amended and tightened in several Member States, most recently in France, Spain and Poland. In Germany, the COVID-19 crisis has accelerated and modified the reform of the FDI rules, which was introduced at the beginning of this year.

2. Draft Act amending the Foreign Trade and Payments Act adopted by German parliament

On June, 18, 2020, the German parliament adopted the Draft Act to amend the Foreign Trade and Payments Act (Außenwirtschaftsgesetz – AWG) that was passed to parliament in April this year. The Act is expected to come into effect within the next weeks. It will introduce major changes to the German FDI rules, e.g. lowering of the level of threat to public policy or security and suspending any foreign investment subject to notification requirements for the duration of the review. We informed about these changes in our previous Client Alert on this topic on February 18, 2020 (available here). One additional major change to the AWG that was taken up right before passing the Draft Act to parliament is the threat of criminal penalties in case of violation of enforcement prohibitions for FDI transactions subject to notification requirements. The Draft Act provides for a prison sentence of up to five years or a fine. It is questionable whether criminal punishments are proportionate in this context. The good news for the business community is that the amended regulations try to set up clearer and more transparent review deadlines in order to provide more legal clarity for companies involved in foreign investment transactions.

3. Additional COVID-19 specific reforms

The COVID-19 crisis has also led to a change with regard to the envisaged second part of the reform of the German FDI rules. Instead of changing the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV) at one stroke, the German Government decided to go for a “mini-reform” of the AWV first, focused specifically on the health sector. The respective draft amending the AWV was published by the Federal Ministry of Economics and Energy on April 28, 2020, adopted by the German Government on May 20, 2020 and it came into force on June 3, 2020.It comprises the following key features:

Expansion of the catalogue of targets in the healthcare sector

Expansion of the catalogue of targets in the healthcare sector that belong to the critical infrastructure, which are subject to a notification requirement if non-EU investors hold 10 percent or more of the voting rights. Although the healthcare sector already belongs to the critical infrastructure, not all areas within the sector were covered by this catalogue. Companies engaged in the following activities are now added to the catalogue:

• Development or manufacture of personal protective equipment (e.g. FFP2 and FFP3 masks, protective gloves or protective suits),
• Development, manufacture, marketing or authorizing the marketing of essential medicines, including their input materials and active substances,
• Development or manufacture of medical devices intended for the diagnosis, prevention, monitoring, prediction, prognosis, treatment or alleviation of life-threatening and highly contagious infectious diseases,
• Development or manufacture of certain specified in vitro diagnostic medical devices related to life-threatening and highly contagious infectious diseases.

Expansion of the catalogue of targets in the field of state communications infrastructure

Apart from the above supplements with regard to the healthcare sector, one additional areas was added to the catalogue of targets subject to a notification requirement if non-EU investors hold 10 percent or more of the voting rights:

• Companies that provide services in the field of state communications infrastructure

These are companies that are indispensable for the interference-free operation of the digital radio systems operated by the Federal Agency for Public Safety Digital Radio (BDBOS).

For the companies concerned, the notification obligation will have a considerable impact on transaction security and timing in the future, as the proposed additional amendments of the FDI regulations provide for a ban on the execution of transactions subject to notification requirements and – as discussed above – for penalties in case of non-compliance.

4. Next steps / developments

After the COVID-19 related “mini-reform” of the AWV and the reform of the AWG, the next step will be the additional reform of the AWV, which will in particular include the implementation of a notification requirement for foreign investments of at least 10 percent voting rights in “critical technologies”. Critical technologies are already defined in the EU Investment Screening Regulation as – inter alia – artificial intelligence, robotics, semiconductors, biotechnology and quantum technology. It is very likely that the AWV will refer to this catalogue of critical technologies.

As already pointed out in our previous Client Alert on February 18, 2020, foreign investors must consider longer an increased administrative burden for acquisitions in sensitive sectors and technologies. The respective catalogue of targets subject to mandatory notification is getting longer and longer – not least due to the COVID-19 crisis. Suspension rules and penalties under criminal law will also have to be taken into account

We will continue to monitor the reform process of the German FDI rules and will keep you posted. If you have any questions regarding this alert or about regulatory matters in Germany, our Public and Regulatory Practice Group will be happy to assist you  ̶  please contact Dr Maria Brakalova (Berlin), Dr Julia Pfeil (Frankfurt) or Andreas Haak (Düsseldorf).