Coronavirus - No sale of German enterprises following the Corona crisis - foreign investment rules will be tightened - Germany

• Germany

• Other

15-04-2020

Expected financial difficulties of companies as a consequence of the Corona shutdown have given rise to the concern that foreign investors could acquire German enterprises in key technologies cheaply. The German government has now reacted.

Significantly more restrictive assessment of acquisitions by foreign investors

• no sale of German enterprises as a consequence of the Corona crisis
• scope of assessment broadened/criteria for prohibition tightened
• approval is mandatory pre-closing

Last week, the federal government approved significant amendments of the German rules on foreign investments. Partially, these legislative measures serve the purpose of bringing German law in line with EU rules but there are also further reaching aspects.

In a first step, amendments to the German Foreign Trade Act were approved. This led in particular to more restrictive assessment criteria. While up to now the prohibition of an acquisition of a German company by a non-EU resident could only be based on the finding of an “actual threat” to public security or order, it will now be enough to establish a “likely negative effect” on such public interests.

Simultaneously, the assessment process has been changed so that in all cases which are subject to compulsory notification (in particular energy and network industries) the transaction must not be completed prior to approval, similar to merger control processes.

In a second step, the Foreign Trade Ordinance will be amended and the term “critical infrastructure” (which defines the industries in which a notification of an acquisition is compulsory) will be extended to comprise enterprises in the areas of artificial intelligence, semiconductors, robotic, biotech, quantum technologies and possibly also pharmaceuticals and vaccines.

Background

The changes which face strong opposition of the industry, in particular machine tools businesses, are supposed to align German rules to EU law but also to prevent a sale of key technologies as a consequence of financial difficulties of companies in the aftermath of the Corona crisis. Cases such as the allegedly discussed sale of the vaccine producer Curevac, the grid operator 50Hertz and the robot manufacturer Kuka apparently rang the alarm bells in the Ministry of Economics. Interestingly, a few days ago France prohibited the sale of night vision and surveillance camera manufacturer Photonis to a US acquirer.

Consequences

The imminent changes can lead to significant uncertainties. The term “likely negative effect” is highly unprecise and open to interpretation. Past practice has also shown that the ministry which is in charge of the assessment has neither the personnel resources nor is it subject to strict legal time limits which would ensure a speedy process. Purchasers in the industries concerned will therefore have to factor in longer delays.

In view of these uncertainties, investors should start early on to examine whether they might face any concerns and which measures they could take to avoid a prohibition or a long review process.