Germany: foreign trade law - Modifications and their effects and impacts on M&A transaction

By Dr. Kai Kerger, Dr. Ann-Kristin Asmuss, Johannes Wirtz


Foreign trade law includes the regulations that affect foreign commercial trade. The national foreign trade law in Germany is regulated by the Foreign Trade Act (AWG) and the Foreign Trade Ordinance (AWV). The Federal Ministry of Economics and Energy (BMWi) may assess whether the acquisition of a domestic company by a foreign buyer affects public policy or public security. The German legislator has initiated several amendments to German foreign trade law in connection with the implementation of European legal requirements and in the context of the COVID-19-pandemic. The changes, some of which have already come into force, have a considerable impact on the transaction practice, in particular longer duration of proceedings is to be expected.

1. Changes in German foreign trade law

By June 2020, the AWV had already been amended to ensure that a functioning healthcare system could be maintained in Germany in the long term before the Covid-19 pandemic. In July 2020, amendments to the AWV to implement Regulation (EU) 2019/452 (EU Screening Regulation) became effective. This will be followed by a further wide-ranging amendment to the AWV, which will adapt German investment auditing law to the requirements of European law and the amendments to the AWG.

a. Fifteenth Regulation amending the Foreign Trade Regulation (15th Amendment to the AWV)

The 15th Amendment to the AWV came into force on June 3, 2020. The AWV expands the range of catalogue transactions of cross-sectoral screening, introduces adaptations to the EU-screening regulation and names investor-related screening factors. It also codifies the administrative practice of the BMWi.

Expansion of the catalogue transactions

The changes are aimed at protecting critical infrastructures in the healthcare sector. In doing so, current developments against the background of the COVID-19 pandemic are to be considered and a lasting maintenance of a functioning health care system is to be ensured. The changes will expand the group of companies that are to be given special consideration in the assessment of investments (notifiable catalogue transactions). As particularly important groups, such acquisitions of companies are now also included,

  • which develop or manufacture personal protective equipment (e.g. FFP2 and FFP3 masks);

  • which develop, manufacture or place on the market medicinal products (including their starting materials and active substances) that are essential for ensuring the provision of health care to the population, or hold a corresponding marketing authorization;

  • which develop or manufacture medical devices for the diagnosis, prevention, monitoring, prediction, prognosis, treatment or alleviation of life-threatening and highly contagious infectious diseases; or

  • which develop or manufacture the in-vitro-diagnostic medical devices, used to provide information on physiological or pathological processes or conditions or to establish or monitor therapeutic measures in relation to life-threatening and highly contagious infectious diseases.

Adjustments due to the EU-screening Regulation

In addition, amendments to implement requirements from the EU-screening regulation were also introduced, which were originally only planned as part of the extensive amendment of the AWV.

Therefore, the list of catalogue transactions subject to reporting requirements has been expanded to include the acquisition of companies that provide services required to ensure the fault-free operation and functionality of state communication infrastructures.

Investor-related assessment factors

In addition, investor-related assessment factors have been included in the AWV. The BMWi can consider the following factors when assessing a threat to public policy or public security,

  • whether the acquirer is directly or indirectly controlled by the government (including other governmental agencies or armed forces) of a third country;

  • whether the acquirer has already been involved in activities which have had an adverse effect on the public policy or public security of another EU Member State; or

  • whether the acquirer was involved in criminal acts under Section 123 (1) of the Act against Restraints of Competition (GWB) or in violations of the AWG and the War Weapons Control Act.

Codification of administrative practice

Finally, the amendments also include clarifications and a codification of the administrative practice of the BMWi. In particular to the effect that

  • the obligation to report catalogue transactions is triggered with the signing of the acquisition transaction and generally concerns the direct purchaser; and

  • an asset deal is also to be classified as an acquisition under the AWV.


b. First Act amending the Foreign Trade Act and other laws (GWB-Amendment)

The GWB-Amendment came into force on July 17, 2020 and essentially serves to implement the requirements of the EU screening regulation. The European legal requirements are intended to create a framework for assessing direct investments from non-EU states that are likely to have a negative impact on public policy or public security. The decision as to whether a particular direct investment is reviewed remains with the member states. The EU screening regulation will become effective in the member states on October 11, 2020.

                Extending the audit standard for cross-sectoral examination

With the amendment to the AWG, the assessment standard was extended with regard to the measures restricting the purchase under the cross-sectoral examination. Whereas a real and serious threat to public security and public safety was previously required, now its foreseeable impact is decisive. With this reduced hazard standard, the prediction character of the regulation is stressed. In addition, the considered protection interests are also extended to the public policy or public security of other Member States and to projects or programmes of Union interest (e.g. Galileo, EGNOS, Copernicus). Finally, coordination with other Member States and the Commission is to be ensured trough a contact authority within the area of responsibility of the BMWi, details of which will be regulated in the AWV.

                Extension of the scope of sector-specific examination

In the area of sector-specific examination, the scope of application has been extended. Regarding acquisitions of companies in the defence industry, previously only the production and development of military equipment had been covered. Now it is also possible to impose restrictions or obligations to take action if these companies modify such goods or have actual control over them. If a company has been active in the defence sector in the past, restrictions or duties to take action can be justified if knowledge or other access to the technology is available.

                Unified deadline regulation

With the amendment to the AWG, the deadlines have been unified; deadline regulations of the AWV now refer to the AWG. The BMWi must decide within two months after knowledge of the signing of the acquisition agreement (SPA) on the commencement of an investigative procedure and must decide within four months of the complete receipt of the required documents on the imposition of restrictions or duties to act. An extension of the deadline by the BMWi is possible if the investigation procedure involves significant difficulties or with the consent of the parties involved.

                Enforcement bans and punishable bans of action

Finally, the amendment to the AWG extends the enforcement prohibitions during the assessment of investments to cross-sectoral control in order to prevent de facto enforcement measures (also called "gun jumping" in competition law). From now on, all notifiable acquisitions are pending ineffective until the BMWi gives its approval. In addition, concrete prohibitions of action during the review phase have been established. Thus, it is forbidden for the seller towards the acquirer

  • to enable the exercise of voting rights;

  • to grant, in connection with the acquisition, subscription of profit distribution claims, or an economic equivalent;

  • to provide or otherwise disclose security-related, company-related information to the extent that such information triggers an investment review or requires special consideration; or

  • to provide or otherwise disclose any company-related information that is designated as significant in a regulation.

A violation of the listed prohibitions of action is punishable by penalty and fine. An intentional violation can be punished with a prison sentence of up to five years or with a fine. A negligent violation is punishable with a fine of up to 500,000 Euros. These regulations are intended to close a gap between regulation and prosecution, because under the old regulation there was no way to prevent the (legal or factual) execution of an acquisition during the investigation period. In order to prevent the interference with public policy or public security in any case, the legislator believes that it is important that a possible interference by the prohibited act exists at the time of the act.

c. Sixteenth Regulation amending the Foreign Trade and Payments Regulation (16th Amendment to the AWV)

As a consequence of the amendment to the AWG, the 16th Amendment Regulation to the AWV is intended to make further adjustments to the AWV in line with European law. It is expected that the scope of application will be extended, in particular by including the categories of goods and technologies worthy of protection covered by the EU Screening Regulation.

2. Effects on the transaction practice

Extended processing length

The amendments to the AWG and the AWV have increased the requirements for controlling investments and have led to more complex investigation procedures. As a result of this, and also due to the involvement of the Commission and the other member states, the individual duration of the inspection procedure will be extended. An intensive examination of notification requirements or the application for a clearance certificate by the BMWi will play a major role in ensuring a successful transaction.

Exchange of information within the scope of due diligence

The new rules also apply to the disclosure of security-relevant information before the BMWi gives its approval. This is intended to prevent the leakage of information or technology during an acquisition review. However, the legislator does not include the exchange of information within the scope of due diligence. The prohibition does not apply to purely commercial or other company-related information that are required for a reliable assessment of the economic opportunities and risks associated with the acquisition. In practice, the information in question should only be exchanged after closing. However, the practical implications should not be underestimated. The individual information disclosed as part of the due diligence process must, in case of doubt, be individually assessed by the target and the seller as to whether the information is of particular relevance with regard to a possible violation of public security or public policy. This assessment will often be difficult. However, disclosure in violation of the prohibition constitutes a criminal offence and should therefore receive sufficient attention. After acquisition, the target may also be subject to a fine if the prohibition of action is violated, since it has at least contributed to the disclosure of the information.

Threat of punishment or fine

The threat of punishment or fines with regard to the prohibitions to act presents a challenge, especially with regard to the disclosure of information in the course of due diligence. Here, further specification of security-relevant information is required in the AWV in order to provide clarity to the parties involved in the acquisition about the permissibility of the exchange of information. Purchasers should consider whether they should demand an indemnity clause for such fines in the SPA.

3. Conclusion

The amendments to the AWG and the AWV do not make it any easier for foreign buyers. It requires greater inspection effort, longer closing periods and thus increases the amount of advice required. The individual potential obstacles of the investment control procedure should be avoided by adequate advice.

With the assistance of Jonathan Stoldt (research assistant)