The COVID-19 pandemic has changed most governments' views on the strategic relevance of the domestic healthcare sectors across the globe. Although the European Commission, and also the German government, have re-emphasized the generally investment-friendly environment in the EU and Germany specifically, they and other governments are calling for more vigilance on foreign investments in key industries, and particularly foreign investors taking advantage of the pandemic and acquiring key healthcare assets. This alert explains what kind of healthcare transactions may be scrutinized by the German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie) under the currently applicable legal framework in Germany. In addition, it discusses the planned changes in the German legislative framework, which are aimed at further strengthening foreign direct investment (FDI) control mechanisms.

Current legal framework for German FDI reviews in the healthcare sector

As – due to the current pandemic - voices in the press demand that, for example, COVID-19 vaccines and testing capabilities must be treated as public good, it seems useful to recall which kind of healthcare sector investments the BMWi may scrutinize under to the current legal framework.

Pursuant to the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz; AWG) and the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung; AWV), the German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie; BMWi) is entitled to review any inbound transaction by foreign investors based outside the European Union (EU) or the European Free Trade Association (EFTA) under which they acquire, directly or indirectly, voting rights in a German entity, with a view to whether it poses a threat to the public order or security (öffentliche Ordnung oder Sicherheit) of the Federal Republic of Germany.

However, a filing is only required, and the BMWi may only review transactions, if post-transaction, the non-EU/EFTA acquirer, directly or indirectly, holds at least 10% of the voting rights in a domestic target operating a "critical infrastructure" (or otherwise active in one of the other "critical fields" identified in Section 55(1) AWV – hereafter collectively referred to as "critical infrastructure"). For domestic targets that do not qualify as critical infrastructure operators, the BMWi's intervention threshold is 25%, and a filing is only voluntary.

With respect to targets active in the healthcare sector specifically, a filing is therefore only mandatory if the target can be viewed as an operator of a critical infrastructure within the meaning of the Act on the Federal Office for Information Security (Gesetz über das Bundesamt für Sicherheit in der Informationstechnik), or if it develops or modifies software that is used for operating a critical healthcare infrastructure, i.e., software for operating hospital information systems, for operating facilities and systems used in the selling of prescription drugs, or for operating a laboratory information system.

The Federal Ordinance for the Determination of Critical Infrastructures (Verordnung zur Bestimmung Kritischer Infrastrukturen nach dem BSI-Gesetz (BSI-Kritisverordnung - BSI-KritisV)) further explains which kind of healthcare operations may be viewed as critical infrastructures. The list includes, e.g.:

• Hospitals handling 30,000 or more cases/year;
• Production facilities for directly life-saving medical products as of an annual turnover of € 90.68 million;
• Production facilities and warehouses for other pharmaceuticals as well as pharmacies as of 4.65 million packages put on the market per year; or
• Diagnostic and therapeutic laboratories as of 1.5 million orders/year.

Consequently, acquisitions pursuant to which the investor obtains at least 10% of the voting rights in a company active in these spaces must be notified to the BMWi. Additionally, the BMWi may conduct a review within three months from the time it became aware of the conclusion of the acquisition agreement in any healthcare transaction in which a non-EU/EFTA investor acquires, directly or indirectly, at least 25% of the voting rights in a German entity and the BMWi is concerned that the acquisition may pose a threat to public security or order. Given the COVID-19 pandemic, such investigations are today much more likely than they were a few months ago. Investors can abbreviate that timeline by voluntarily filing for a "non-objection certificate", in which case the BMWi has two months to decide whether to initiate an in-depth investigation.

To date, however, we are not aware of any transaction in the healthcare sector having been blocked, where the BMWi has indicated that it will block it, or where the German government has solicited a "white knight" acquisition, e.g., by German state-owned bank, to acquire the target in lieu of the foreign investor.

European Guidance on foreign direct investments and protection of Europe's healthcare capacities

On March 25, 2020, the European Commission (EU Commission) published in the EU Official Journal 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 entering into force of Regulation (EU) 2019/452 (FDI Screening Regulation which will come into force on 11 October 2020). The EU Commission emphasizes that the EU's openness to foreign investment needs to be balanced by appropriate screening tools. In the context of the COVID-19 emergency, the EU Commission expects an increased risk of attempts to acquire healthcare capacities (for example for the productions of medical or protective equipment) or related industries such as research establishments (for instance developing vaccines) via foreign direct investment. The EU Commission therefore requests the Member States to remain vigilant that any such FDI does not have a harmful impact on the EU's capacity to cover the health needs of its citizens.

Therefore, the EU Commission calls upon Member States to make full use its available FDI screening mechanisms in order to take fully into account the risks to critical health infrastructures. For further information please see our Client Alert of April 1, 2020.

Planned tightening of investment controls in the German healthcare sector

In light of the current COVID-19 pandemic and related overall economic vulnerability, on April 27, 2020 the German BMWi proposed further precautionary measures regarding foreign direct investments in the healthcare sector (for further information please see our Client Alert of May 4, 2020). With this AWV proposal, the German government is also implementing the above mentioned guidance from the EU Commission to the EU Member States.

The recent BMWi-draft adds more examples of activities to the list of "critical activities" (i.e., which will trigger a filing requirement as of an acquisition of at least 10% of the voting rights by a non-EU/EFTA investor) that are essential to public security and order by default. Four of the proposed clauses aim at protecting the healthcare sector. The list includes:

• Companies which develop or produce personal protective equipment as defined in Article 3, number 1 of Regulation (EU) 2016/425 of the European Parliament and of the Council of 9 March 2016 on personal protective equipment or supply preliminary products or components for their development or manufacture such kind of products;
• Companies which develop, manufacture, provide to the market or hold a corresponding marketing authorization under pharmaceutical law for essential medicinal products as defined in Section 2 para. 1 of the German Medicinal Products Act (Arzneimittelgesetz), including their initial and active substances designed to ensure the provision of health care to the citizens;
• Companies which distribute or manufacture or distribute precursor/intermediate products or components for the development or manufacture medical devices within the meaning of the German Law on Medical Devices (Medizinprodukterecht) which are used for diagnosis, prevention, monitoring, prediction, prognosis and treatment or alleviation of life-threatening and highly contagious infectious diseases;
• Companies which develop, manufacture, supply or distribute precursor/intermediate products or components for their development or manufacture in vitro diagnostic medical products or devices within the meaning of the German Law on Medical Devices, which are intended to provide information on physiological or pathological processes or conditions or to establish or monitor therapeutic measures relating to life-threatening and highly contagious infectious diseases.

Interested parties were entitled to comment the draft AWV amendment until April 30, 2020; the expert opinons are available on the BMWi-Homepage. Generally, the draft AWV amendment has been criticized as too broad and essentially capturing any deals in the healthcare industry involving non-EU/EFTA acquirers. It will likely be narrowed down in terms of the products and companies covered in the healthcare industry, e.g., regarding those that merely distribute some of the products mentioned.

Nevertheless, the changes are expected to be effective shortly after their required approval by the Federal government and publication in the Federal Gazette, which may well happen within the next few weeks.

Further planned changes to German investment control procedures

Moreover, the AWV draft stipulates that the review of an investment regarding its threat to public order or security will also take into account the shareholder structure and the origin of the investor. It should be taken into account, e.g., whether the investor is directly or indirectly controlled by a government or other institutions of a third state, whether the acquirer has been involved in activities which had posed a threat to public order or security (notably regarding not only German interests, but those of other EU Member States as well), or whether it was involved in any criminal act pursuant to public procurement or foreign trade laws.

Additionally, the draft amendment seeks to clarify that an investment review is also possible for asset (and not only share) deals, notably when separable parts of a company or essential assets of a German target in the industries identified is planned.

Additionally, a further AWG amendment is currently in the German legislative process (see our Client Alert on the draft AWG-amendment from February). As soon as that AWG amendment will have come into force, all investments subject to a notification obligation under the AWV are provisionally void until clearance has been or is deemed to be granted. As a result, it will no longer be possible, even in the event of a cross-sectoral review process, to consummate any acquisition during an ongoing investment review process (albeit that most companies have elected not to do that previously either and typically waited for BMWi clearance, and in some cases even carved out Germany pending such clearance while closing globally otherwise), if the company in question is particularly security-relevant within the meaning of the AWV. That way, the legislator intends to prevent the consummation of transactions whose security-relevant effects are to be avoided.

Procedural implications for investments in the healthcare sector

Investments in any kind of healthcare related companies can fall into the scope of FDI procedures in Germany under the current legislative framework. Once the announced AWV-amendment will have entered into force after governmental approval and publication in the Federal Gazette, the new catalogue will define the extended scope of notification obligations for most transactions in the healthcare sector which aim at an acquisition of more than 10 percent of the voting rights.

The AWV amendment will probably not affect closed deals and arguably also not deals that have been explicitly cleared by the BMWi or are deemed to be cleared by expiry of the statutory deadlines to intervene. But deals already signed that did not yet fall into either category may – it is still being discussed within the government – then face a notification obligation, which may adversely affect closing timing. The – primarily procedural – consequences of the imminent revisions of both the AWG and AWV should therefore be considered carefully for ongoing transactions in the healthcare sector.

Outlook

When publishing the recent proposal for the AWV-amendment, Minister Altmaier was cited with "We need to know in good time about critical corporate acquisitions in the health care sector so that we can review them." Considering the general trend of tightening investment controls, it is likely that even under the current regime, healthcare deals involving non-EU/EFTA investors will face higher scrutiny, and we may actually see deals being blocked or cleared only subject to very stringent remedies that guarantee the security of supply for Germany. After all, it is difficult to imagine that the German government would simply "wave them through" in the current environment. Moreover, using German state-owned enterprises such as Kreditanstalt für Wiederaufbau (KfW) as "White Knights" to prevent foreign takeovers of healthcare assets will likely become more frequent. This would be backed by the EU guidelines issued in the context of COVID-19 pandemic, which also proposed the acquisition of golden shares if no other remedy is available to protect national security interest.

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