Risks for closed M&A deals and unpredictable timeframes – Navigating German FDI control

Introduction

In the European Union (EU), 18 Member States currently have screening mechanisms to review transactions involving foreign direct investments compared to only 11 in 2019, reflecting the increased focus on transactions that raise national security and other public interest concerns¹. Even jurisdictions with established regimes are strengthening their rules, including Germany where foreign investments from outside the EU are facing greater scrutiny, increasing the burden of regulatory reviews and uncertainty for investors. 

Germany’s Federal Ministry for Economic Affairs and Climate Protection (Bundesministerium für Wirtschaft und Klimaschutz - BMWK), which enforces Germany’s FDI regime, is reviewing more transactions each year due to several legislative amendments that have reduced the thresholds for notification and increased the sectors subject to mandatory notification. A key driver behind these reforms is the impact of the COVID-19 pandemic on Germany’s national healthcare and medical equipment industry, and particularly notable is a recent decision to prohibit the acquisition of a medical equipment manufacturer on national security grounds despite that transaction having completed more than two years earlier in March 2020².

FDI control as a means to protect the healthcare sector

The COVID-19 pandemic has led to heightened awareness of the crucial importance of the medical industry in Germany, reflected in recent legislative reforms and case developments. 

Recent amendments to Germany’s FDI regime

The 15th revision of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung - AWV) came into force in June 2020. This extended Germany’s mandatory notification regime to cover, in particular, important products or activities in the healthcare sector. As a result, activities in relation to the following products are now caught:

• Personal protective equipment;
• Essential medicines;
• Medicinal products in relation to life-threatening and highly infectious diseases; and
• In-vitro diagnostics in relation to life-threatening and highly infectious diseases.

In these sectors, the acquisition of a domestic company may be deemed to constitute a threat to public order or security, and therefore requires mandatory notification and approval before the transaction can be implemented. 

Also in 2020, the 1st revision of the Foreign Trade and Payments Act (Aussenwirtschaftsgesetz – AWG) together with the 16th revision of the AWV introduced a new lower standard of review,  the new standard being whether an impairment to public order or security is likely (whereas the previous standard was whether there is an actual danger to public order or security). 
The 17th revision of the AWV came into force on 1 May 2021 and further expanded the list of critical sectors to 27 in total. Acquisitions in the healthcare sector are also now subject to review if the acquisition concerns 20 per cent or more of the voting rights of a relevant entity. 

Retrospective prohibition of acquisition in the medical devices sector

Before the above legislative changes, in March 2020, a leading Chinese manufacturer of anesthesia and respiration equipment completed the acquisition of a German medical device manufacturer, primarily active in the manufacture of anesthesia machines and medical ventilators. The legislative amendments implemented later in 2020 and 2021 became decisive over two years later when, on 27 April 2022, the German government decided to prohibit this acquisition retrospectively (applying those legislative changes) because of national security concerns.

The prohibition of an already implemented transaction due to national security concerns is, to our knowledge, unprecedented in Germany.  However, indications of stricter FDI enforcement were already evident from an earlier case in the semiconductor sector in 2021.

Failed takeover in the semiconductor chips industry

Prior to the recent retrospective prohibition in the above medical equipment case, the most eye-catching FDI case in Germany concerned the proposed acquisition by a Taiwanese undertaking of the majority of shares and control in a Munich-based manufacturer of silicon wafers, an essential component for the production of microchips. This case illustrates the difficulties in predicting the timeline of German FDI reviews.

Diverging results of parallel FDI scrutiny and merger control procedure 

The Federal Cartel Office (FCO) cleared the transaction under Germany’s merger control rules in February 2021 after a straightforward one-month Phase 1 review that did not identify competition concerns. The FCO defined a global geographic market, while not reaching a definitive position on possible segmentation of the product market for silicon wafers. However, as the FCO did not have any concerns regarding possible non-coordinated effects of the merger or the creation or strengthening of a possibly collective dominant position held by the remaining leading suppliers, it had no reason to review this transaction further.

The parallel FDI screening procedure proved to be more complicated. In December 2020, the Taiwanese undertaking voluntarily applied for a certificate of no-objection (Unbedenklichkeitsbescheinigung) under Section 58 of the AWV to obtain legal certainty. A notification was not mandatory because, at the time, semiconductors were not included in the list of critical technologies likely to affect public order or security. However, the transaction collapsed because the BMWK did not decide on the certificate of no-objection before 31 January 2022 – the deadline set by the acquirer to obtain all regulatory approvals. The BMWK sought to justify the delay in its approval on the basis of the Chinese antitrust authority approving the transaction only in the week prior to the deadline.

Courts deny application for deemed clearance

Shortly after the transaction collapsed, the acquirer requested a court ruling in summary proceedings that the certificate of no-objection was deemed to have been issued because the deadline for the BMWK’s decision had expired. However, the Administrative Court of Berlin and – on appeal – the Higher Administrative Court of Berlin both denied the application, ruling in favour of the BMWK,  which argued that the deadline for its decision had been suspended. As a result, although the BMWK did not prohibit the transaction under Germany’s FDI screening procedure, the effect was the same. The Taiwanese undertaking announced afterwards that it would refrain from making another public bid to acquire the German company.

Key takeaways for M&A investors

There are a number of key takeaways from the above developments. One takeaway from the cases is that a careful assessment is required as to whether it is advisable to apply for a certificate of no-objection in order to achieve legal certainty under Germany’s FDI control regime. When the parties implemented the transaction regarding the German medical device manufacturer the healthcare sector was not categorised as critical infrastructure and a notification to the BMWK was therefore not mandatory. However, it is important to keep in mind that, according to Section 14a (3) of the AWG, the BMWK has up to five years after the date of the contract giving effect to the acquisition in which it can intervene. 

Another key point is that parties should include appropriate contractual protections in their deal documents to avoid unexpected surprises, in particular the transaction being prohibited after it has closed. This should include making relevant regulatory clearances a condition to closing and possibly arranging for a right to terminate the deal if regulatory reviews proceed to protracted second phase/in-depth reviews or including provisions for the distribution of costs should the parties not obtain all required clearances. 

Moreover, it is crucial to take into account that the timeframe for an FDI screening procedure can be considerably longer and more unpredictable than for other regulatory procedures, as illustrated by the semiconductors case. That case shows that the assessment of a transaction under merger control and FDI control may differ significantly due to the different legal tests applied. Early and proactive coordination of the various notification procedures is therefore increasingly important, especially since there is a high hurdle for a successful legal challenge by way of interim proceedings before Germany’s administrative courts.

The recent developments in Germany also show the increasing politicisation of transactions that involve critical infrastructure and products. The current political landscape – including the ongoing COVID-19 pandemic and Russian war against Ukraine – has prompted political decision-makers to conclude that a more protectionist policy is required in certain areas of the economy. This is also visible at the EU level where legislators are discussing a number of initiatives, such as the European Chips Act³, to make the EU economy more resilient regarding critical infrastructure and products.