Ever since the US President’s controversial proposal to gain exclusive access to the promising vaccine that is being manufactured by CureVac, or to acquire the entire company, public debate has shifted without fanfare to the German Foreign Trade and Payments Act in response to the clear demands for a means of putting a stop to Donald Trump’s advances.
The German government’s only option to deal with this issue is within the framework of the Foreign Trade and Payments Act reform, which was already on the agenda. The EU Screening Regulation entered into force in April 2019. It envisages EU-wide collaboration and minimum standards for investment screening and has to be translated into national law by October 2020.
In the cabinet meeting of 8 April the German government approved a draft amendment to the German Foreign Trade and Payments Act. The parliamentary process is expected to conclude swiftly and without much debate so that the amendments can enter into force in the very near future.
The amended Foreign Trade and Payments Act will be associated with some fundamental changes in addition to the introduction of the new EU-wide foreign investment screening cooperation mechanism.
- The screening mechanism in the Member States will be extended to ensure that in addition to being vetoed on the grounds that they pose a “tangible threat” to security and public order, foreign investments can also be vetoed at a much earlier stage in the process if they are deemed “likely to affect security or public order”.
- Corporate acquisitions (10% threshold) will be prevented from completion and even the transaction imposing an obligation under the law of obligations will be declared invalid ex lege. Measures to ensure the economic influence of the acquirer in the pending phase are explicitly prohibited.
- It will also be prohibited to share significant information which is deemed to be confidential by the German Foreign Trade and Payments Act with the potential purchaser before the transaction is approved.
- The subsequent amendment of the German Foreign Trade and Payments Ordinance will significantly extend the catalogue of acquisitions subject to reporting and screening requirements.
The previous catalogue primarily included critical infrastructure acquisitions in the telecommunications and energy sectors, for example. The extended catalogue of acquisitions subject to reporting requirements was to have additionally included artificial intelligence, robotics, semiconductors, biotechnology and quantum technology. However, in light of COVID-19 it is now expected to explicitly list vaccines and medical products in order to establish clear guidance on sectors with strategic significance for the pandemic.
Although unambiguity is desirable, particularly with regard to the extended catalogue of strategically significant sectors of industry, and despite the importance of EU-wide collaboration in the prohibition of acquisitions by non-EU investors, the amendments to the German Foreign Trade and Payments Act also introduce a number of stumbling blocks in M&A processes.
It is naturally to be hoped that a promising candidate for the COVID-19 vaccine we so urgently need will not be lost to the United States. On the other hand it is important to remember that the majority of venture capital investments – and vaccine development is dependent on the availability of significant amounts of venture capital, either on the company’s own balance sheet or in the form of investments from financially powerful external investors – still come to Europe from other countries, especially the USA. The extension of the Foreign Trade and Payments Act’s scope of application, together with a new lower intervention threshold, should not have the effect of impeding these investments until such a time when Europe’s venture capital sector is up to strength. As a footnote, Brexit could mean that investments from the UK are viewed as “non-EU”, which would result in similar obstacles.
The elimination of regulatory loopholes that render non-approved legal transactions subject to the law of obligations void, supported by flanking prohibitions preventing pre-transaction influence on the target enterprise, are necessary so that the law has the necessary ‘clout’. However, the prohibition of disclosing significant information to the potential purchaser before the transaction is approved could turn out to be an obstacle. It is hard to imagine PE transactions in the aforementioned sectors – e.g. transactions involving vaccine manufacturing companies – in which the non-EU purchaser invests in the company’s equity without having received any significant information about the strategically important asset, the vaccine. The purchase price, an essentialia negotii, can hardly be established if the purchaser is denied information about the vaccine’s action and standard of protection. The outcome of a due diligence process will also have to be anticipated and possibly even repeated after the approval of the transaction in accordance with the Foreign Trade and Payments Act. It remains to be seen whether the market is this flexible. All the uncertainty could also make European targets less attractive to foreign investors.
The reforms that have been set in motion will extend the scope of the Foreign Trade and Payments Act. As a result, the approval requirement will be a consideration in a substantially higher number of investment scenarios and the M&A processes will have to be structured differently to ensure successful transaction outcomes. The timely involvement of foreign trade experts in the process is advisable. At the moment, however, we can safely say that Donald Trump’s attempts to take over CureVac will be thwarted not only by the company’s shareholders, but also by a sharp legislative sword.