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Freshfields Transactions

| 3 minutes read

Foreign investment review in times of COVID-19 – German regulation targets health sector

Today, a new regulation entered into force in Germany to increase foreign investment scrutiny in the health sector.

The new rules are based on the EU Commission’s 'call to arms' to member states, emphasising the importance of protecting critical assets and technology during the current crisis, in particular in the health sector (see our recent blog). The proposal follows similar changes in other European countries.

This latest update is an immediate response to the COVID-19 pandemic. Additional amendments to the regulation will be made later this year. These further changes will fully implement the EU screening regulation and, in particular, define the 'critical technology' that will be subject to increased scrutiny. 

They will also implement the recently proposed amendment to German foreign investment law, including a stricter standard of review, an extended stand-still obligation and severe sanctions for specific measures considered to be 'gun jumping' (see our recent blog).

This latest update of the regulation:

  • extends the scope of the mandatory regime, in particular in (but not limited to) the health sector;
  • clarifies the substantive criteria concerning the identity of foreign investors, which the authority may take into account when coming to a decision (ie relationships to governments etc.); and
  • clarifies the applicability of foreign direct investment rules in relation to asset deals, timing and whose responsibility it is to submit a notification.

The Ministry is likely to take the view that the new rules will also apply to transactions that have already been signed but not yet closed.

Extended scope of mandatory review

The new regulation significantly broadens the scope of the mandatory regime by extending it to activities that are regarded as crucial for maintaining a functioning health system in Germany, including companies that develop, manufacture or distribute 

  • personal protective equipment (eg protective masks, gloves or suits);
  • pharmaceuticals that are crucial to ensure the healthcare of the population;
  • medical products which serve to diagnose, prevent, monitor, predict or treat life-threatening and highly infectious diseases; or
  • in-vitro diagnostic medical devices that serve to deliver information on physiological or pathological processes or conditions, or to determine or monitor therapeutic measures concerning life-threatening and highly infectious diseases.

The amendments aim to shield companies that manufacture materials for which the COVID-19 pandemic has led to shortage of supply, such as personal protective equipment for doctors and nurses, ventilation equipment, tests to diagnose COVID-19 infections, disinfectants, etc. Unlike the draft update, the final text does not extend the scope of application to production facilities and input materials required for the above mentioned products.

In addition to the COVID-19 specific rules, the new regulation adds German companies that provide services to ensure the (undisturbed) functioning of governmental communication infrastructure operated by the Federal Agency for Public Safety Digital Radio to the mandatory regime.

The Ministry highlights that extending the scope of the mandatory review increases the effectiveness of foreign investment reviews in Germany, since the lower voting right threshold (10 per cent) will apply. In addition, following the implementation of the new draft foreign investment law (see our recent blog), a stand-still obligation will also apply to all mandatory filings (and corresponding rules on fines and imprisonment).

Substantive clarifications – standard of review

In addition to the extension of the mandatory regime the new regulation includes several clarifications in relation to the substantive review by the Ministry.

First, the new regulation explains that the Ministry may take into account the identity of the foreign investor, when determining whether a proposed acquisition of a German target company poses a threat to the public order or security. This includes whether or not

  • the acquirer is (directly or indirectly) controlled by the government (including public authorities or the armed forces) of a third country;
  • the acquirer has been engaged in activities that had a detrimental impact on public order or security in Germany or another EU member state; or
  • there is a significant risk that the acquirer has been involved in certain criminal activities under German law, including fraud, money laundering, corruption, or financing of terrorism. 

Second, it clarifies that asset deals fall within the scope of German foreign investment law, eg if a transaction concerns a separate operating unit, or all essential resources which are needed to operate the target company or parts thereof.

Third, it clarifies that a mandatory filing must be submitted immediately (ie without undue delay) after signing of the agreement underlying the acquisition. The submission of the notification is generally the responsibility of the direct acquirer (ie often a special purpose vehicle), but the submission may also be handled by the indirect investor.


europe, mergers and acquisitions, regulatory, foreign investment, life sciences