Covid-19 coronavirus: Foreign Direct Investment Screening

Amendments to the German FDI screening rules have been under discussion since the beginning of this year. Covid-19 and the stock market developments introduced new dynamics to those discussions.

Recent developments

On 8 April 2020, the German federal government decided to launch the legislative process for the amendment of the German Foreign Trade and Payment Act. The government proposal includes the following amendments:

• The government's right to intervene and to open a review procedure shall no longer be dependent on an actual threat of the German public order or security; a probable impairment shall already be sufficient. The government is convinced that this will enable a more comprehensive and forward-looking foreign investment review. 
• The government shall be entitled to consider not only interests of the Federal Republic Germany but also interests of other EU Member States and the EU as such. This proposal will implement the new EU regime, allowing for an EU-wide coordination mechanism in accordance with the EU Screening Regulation 2019/452 that will come into effect on 11 October 2020.
• The suspensory effect with regard to transactions in the defence and encryption sector shall be extended to transactions in the field of critical infrastructure. This proposal shows that German FDI rules are getting stricter. A strategy of how to navigate FDI screening will therefore be more and more relevant when structuring transactions. It should be noted, however, that it is already market practice in Germany that FDI clearance is a closing condition; accordingly, the practical impact on M&A transactions will be limited.
• There shall be a ban on sharing information prior to the FDI (“gun jumping”). Breaches shall be a criminal offense (prison of up to five years). This means that purchasers and targets shall apply their utmost care when discussing post-merger integration before FDI clearance has been obtained.

Outlook

Most of the proposed amendments described above had already been under discussion since the beginning of the year. They are not primarily Covid-19 driven.

Moreover, the government announced that it envisages amending the German Foreign Trade and Payment Ordinance as well. It is expected that this amendment will be more Covid-19 focused, featuring an extended list of sectors falling under the mandatory filing and clearance regime.

In this context, it worth to note that as part of the German rescue package, Germany introduced stabilization measures by the new Economy Stabilisation Fund (Wirtschaftsstabilisierungsfonds; WSF). The WSF may acquire an equity stake in an enterprise only if this is in the material interest of the Federal Government and the intended purpose cannot be achieved better and more economically by any other measure. The important point is that sections 65 to 69 of the Federal Budget Code (Bundeshaushaltsordnung) are declared to be inapplicable. "In normal times" these provisions limit the Federal Government's ability to acquire equity stakes in enterprises, stipulating further requirements such as appropriate influence or control rights of the audit authorities. This can been seen as an indication of the direction the German government may take in further broadening the scope of the German FDI procedures.

It remains to be seen what impact such new legislation will have on (a) the timing and (b) the scope of review once the proposed new rules have taken effect. The government has not commented as to when it expects that the legislative process will be completed.

For foreign investors it is vital to note that, even after the implementation of the described legislation, Germany remains an investor friendly place; in particular, the proposed amendments are applicable to all non EU/EFTA purchasers and will not discriminate against any region in the world.