I. Introduction to EU/German Foreign Direct Investment screening mechanisms in times of COVID-19
The European and German Foreign Direct Investment ("FDI") screening mechanisms have recently seen several legislative amendments which were followed by much more scrutiny by competent national administrations. Still, all EU Member States decide on their own whether they want to establish a proper system to screen FDI leading to a potential takeover of their national companies. To date, only 14 of 27 EU Member States have established FDI screening mechanisms which vary broadly in terms of procedures, review and tools for national governments to interfere with, mitigate or even block a takeover.
The current developments around COVID-19 have led to a Communication from the EU Commission regarding guidance to EU Member States concerning FDI ("Communication of the Commission")1 [VanderSchueren/Gereats] as well as a bill to amend the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz; AWG) ("German Bill")2. Both focus on two major issues around COVID-19: (i) a potential sell-out of key industries to fight the current crisis and (ii) a loss of all other critical assets and technology, in particular those that can potentially be acquired for a relatively low price because they are now struggling extraordinarily. To foster these aims the German governments also announced that it will make use of its "COVID-19-funds" to acquire certain stakes in German companies.
II. Further tightening Foreign Direct Investment screening mechanisms in light of COVID-19 by the EU and Germany
Still, there is neither a European nor a common national FDI screening procedure in place, however, the EU passed an FDI Screening Regulation3 [VanderSchueren/Gereats] to align national approaches and take the first step towards coordinated national screening systems. The EU Commission is entitled to comment on FDI though. In that regard, the Communication of the Commission can be regarded as "soft instructions" to the EU Member States to make use of their systems in accordance with the EU Commission's guidelines.
The Communication of the Commission provides such guidance in in light of COVID-19 highlighting that "today more than ever", the EU's openness to FDI needs to be balanced by appropriate screening tools to ensure that any such FDI does not have a harmful impact on the EU's capacity to cover the health needs of its citizen. The Communication of the Commission includes the following key aspects:
- The EU Commission emphasizes that it does not present a final list of industries that shall be given special protection but its non-comprehensive list comprises: healthcare capacities (for example for the productions of medical or protective equipment) or related industries such as research establishments (for instance developing vaccines).
- At present, the responsibility for screening FDI rests with the EU Member States. The EU rules, which were established through the FDI Screening Regulation, provide a framework to ensure the protection of legitimate public policy objectives if such objectives are threatened by foreign investments. FDI screening shall take into account the impact on the EU as a whole, in particular with a view to ensuring the continued critical capacity of the EU industry, going well beyond the healthcare sector. The EU Commission encourages the EU Member States to make full use of their FDI screening mechanisms.
Apart from COVID-19, the German government has already announced further plans to tighten its national FDI screening system which details have now been provided in the German Bill:
- The German Bill will implement the FDI Screening Regulation's requirements which mainly correlates around the establishment of a coordinated approach to review FDI between the EU Member States including some technical amendments.
- It lowers the level of risk which is required to interfere or block a deal. It shifts from an "actual threat" to an "expected threat" to the public order. This relates to the nature of the review process since it is an ex-ante screening which has no capabilities to look back. The German authorities will therefore be in a much more comfortable position to argue, if required, that a deal might interfere with Germany's public order and impose appropriate measures.
- It expands the prohibition to execute deals before clearance (Vollzugsverbot) to all transactions forming part of "critical infrastructure" being further defined in the AWG [Riehmer/Glasmacher]. This amendment was already obeyed in practice in many cases since no party wanted to take the risk that they had to withdraw from a closed deal in case it was prohibited.
- In a second step, the German Bill already anticipates that in the near future the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung; AWV) will be tightened as well which will include lowering the threshold to review deals (to 10% investments) and defining further critical infrastructures. In a statement issued on 8 April 2020, the German Federal Minister for Economic Affairs and Energy, Peter Altmaier, announced a prioritized procedure to pass such amendments.
III. Deal preparation and implications of responding to COVID-19 issues
It has become a crucial issue to deal with FDI regulations in the EU and in particular in Germany over the last years as is already the case with the US CFIUS system. This issue will draw even more attention in times of COVID-19 and must be analyzed in terms of the most recent legislative and administrative changes. It should be noted that Germany already has a robust FDI screening mechanism in place; however, as of yet no transaction in Germany has been formally blocked on such grounds, but such a blockage was seriously discussed in 2019 before a Chinese buyer withdrew its application for FDI clearance. Given the developments around COVID-19, this might change in particular for crucial companies in the healthcare sector fighting COVID-19. These questions lead to the following key considerations for M&A:
- Special consideration shall be given to FDI into the healthcare industry, namely productions for medical or protective equipment and related industries such as research establishments, namely for developing vaccines. Further special consideration shall be given to opportunities that seem only to be given (at a relatively low price) because the target is extraordinarily affected by the COVID-19 crisis. There is a high likelihood that national governments will use their tools to interfere with such deals. The German FDI regime already allows the German authorities broad discretion to do so. Even if acquisition processes have been kicked off before the current crisis arose, they might be re-considered by competent authorities. Part of a potential re-consideration could also be that the national administrations is reminded to take a European perspective in judging FDI in light of COVID-19.
- As seen in many cases and emphasized by the FDI Screening Regulation, cooperation between the authorities is increasing. It has become even more crucial in an international environment of aligning concerns in Western countries in connection with FDI to establish a "one voice"-policy towards national authorities. Therefore, a coordinated approach for (getting to) clearance is required.
- The timing for closing a deal must be reviewed. Even if the deal is not in the focus of today's FDI screening, but the FDI screening mechanism is generally applicable, careful diligence shall be given to the capacities of the competent national authorities. There might simply be a lack of capacity which could prolong the clearance procedure dramatically. An "informal" approach is often advisable to the authorities.
- National governments, including Germany, have established other mechanisms than FDI screening regimes which allow them to interfere with envisaged transactions, e.g. by investing in such companies through their respective "COVID-19-funds". In that regard, the German regulator is not bound to the legal criteria of the German Foreign Trade and Payments Act but may act entirely on its sole discretion as a "normal economic player". Some governments have already announced that they will be protecting their companies from hostile-takeovers. This creates even more possibilities for the national authorities to interfere with M&A which is confirmed by the Communication of the Commission.
- European Commission, Communication from the Commission, Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe's strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation), 25.3.2020, C(2020) 1981 final.
- Gesetzentwurf der Bundesregierung, Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes und anderer Gesetze, Bearbeitungsstand: 31 March 2020.
- Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments in the Union, 21.3.2019, L 79 I/1.