Update: Reform of the investment screening regime

In the course of the Corona crisis, the law to amend the Foreign Trade and Payments Act was introduced earlier than planned with a tightening of the investment screening audit standards and procedural rules [Link]. In addition, amendments were made to the German Foreign Trade Regulation (AWV). In particular, companies from the healthcare sector have been included in the list of particularly safety-relevant companies, such as manufacturers of vaccines and medical protective equipment.

The draft bill was passed by the Bundestag on 18 June 2020. The reformed AWG will come into force in the course of the summer. With the amendment of the AWG, the legislator is once again tightening the standard of screening. The draft law has met with massive criticism from the business community. For this reason, and in response to the sometimes lengthy procedures to date, the new Section 14a of the AWG, which was passed by the Bundestag, specifies the deadlines for the screening procedure.

The investment screening regime according to Sections 55 AWV et seq. serves to avoid fundamental security risks arising from foreign company takeovers. It can always be applied when foreigners acquire domestic companies or holdings in domestic companies. In this case, the scope of the company's activities and the percentage of the equity interest acquired are important. If so-called critical infrastructures are affected or in the case of target companies from defence or security-relevant sectors, there is an obligation to notify the German Federal Ministry of Economics (Bundeswirtschaftsministerium - BMWi). BMWi can prohibit transactions or approve them subject to conditions if there is a threat to public order or security (in the area of the so-called cross-sector review) or if essential security interests of Germany are endangered (in the area of the so-called sector-specific review).

Overview of the main changes:

• The following changes have been made in the reform of the Foreign Trade and Payments Act which has now come into force: In future, the subject of the audit will be "probable impairment" of public order or security, i.e. the scope for decision-making in the audit will be expanded (previously "actual threat").
• In future, the "public order or security of another member state" and the effects on "projects or programmes of Union interest" will also be the subject of the investment audit.
• The " blocking" of acquisition execution (= pending invalidity of the purchase agreement) will be extended to all acquisitions subject to reporting requirements (previously only in the particularly sensitive "sector-specific" regime).
• The "National Contact Point" for the new EU-wide cooperation mechanism will be located at the BMWi.
• Adjustment of the time-limits regime through the new Section 14a AWG: The previous time limit regulations for the screening of investments contained in various AWV provisions will be consolidated. This should enable at least simple screening procedures to be completed more quickly in future. The three-month preliminary screening period previously stipulated in Section 55 (3) and Section 61 AWV will be shortened to two months from the date of knowledge. The length of the main screening period will normally remain four months from the submission of all documents specified in the relevant general ruling and additionally requested by the BMWi on the occasion of the notification of the opening of the formal investigation procedure in the specific case. Thus the possibility of extending the deadline by requesting additional documents is no longer possible. In future, however, the deadline will be suspended if documents are subsequently requested in individual cases. In future, the BMWi will also be able to extend the main screening period once by up to three months if the individual case is a "particularly complex case" and by a further month if the defence interests of the Federal Republic of Germany are particularly affected.

In a second step, further amendments to the Foreign Trade and Payments Regulation will follow. These will focus in particular on further specifying the investment screening for so-called critical technologies (catalogue of critical technologies). In these cases, there is both a reporting obligation and a screening option from a threshold of 10% share acquisition. This catalogue should include the following critical technologies: Artificial Intelligence, robotics, semiconductors, biotechnology and quantum technology.

Consequences for transaction practice: 

In particular in the case of the sale of companies active in the field of critical technologies, careful and early preparation of the transaction, taking into account the new legal requirements, will be even more important than before. In future, these transactions can only be completed after approval by the BMWi [Link]. The changes with regard to the time limit regulations are to be welcomed in principle, as the long duration of the proceedings was a major point of criticism of the investment control. However, with the suspension regulation the Federal Government still has the possibility - albeit in a limited form - to delay the procedure by requesting additional documents. Proceedings are likely to continue to tend to be lengthy if a public law contract (suspension of time limits under Section 14a (6) no. 2 AWG) is negotiated.

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