On 27 April 2022, the German government blocked the acquisition of German medical products manufacturer Heyer Medical AG by the Chinese Aeonmed Group.
Heyer Medical AG, founded more than one hundred years ago, is a manufacturer of ventilators for treatment of respiratory diseases and anaesthesia. Beijing based Aenomed Group produces similar anaesthesia and mechanical ventilation medical devices. According to press reports[1], Aenomed benefits from financial support provided by the Chinese government, that may allow it to price aggressively on the German market.
Aenomed completed its acquisition of Heyer Medical in March 2020 as part of Heyer Medical’s restructuring following financial difficulties that preceded the COVID-19 pandemic.
According to press reports[2], the German Federal Ministry of Economic Affairs and Climate Protection (Bundesministerium für Wirtschaft und Klimaschutz – “BMWK“), the agency in charge of foreign direct investment reviews in Germany, became aware of the acquisition after it had closed and Aenomed submitted a filing for clearance of the transaction by way of a non-objection certificate pursuant to Section 58 of the Foreign Trade Ordinance (Außenwirtschaftsverordnung – AWV). From the publicly available information, it is not clear if Aenomed attempted to negotiate potential commitments and remedies to induce the BMWK to clear the transaction. In any case, the review process took almost two years, which means that the review period must have been prolonged, since the standard statutory review period has a maximum of about six months. One explanation for the extended review could be that Aenomed and the BMWK were in negotiations over remedies, but that they were not ultimately able to come to terms acceptable to both sides.
According to the press reports, the BMWK’s 27 April 2022 decision found that the acquisition of Heyer Medical by Aenomed would impair Germany’s public order and security with regard to the supply of essential medical products for the healthcare sector. It also noted the BMWK’s concern over potential political influence of the Chinese government in the German economy by creating economic and technological dependencies in a key sector.[3]
In a foreign direct investment review the BMWK generally assesses whether the acquisition is likely to affect public order or security of Germany, of another EU Member State or with respect to projects of EU interest. In general, this includes an assessment of the impact of the transaction, e.g., whether the acquisition could adversely affect supply with fundamental goods or services, as well as an investor related assessment, i.e., if the background or the activities of the investor could affect public order or security. In this regard, a foreign governments’ influence over an investor, be it through ownership or by means of financial support, is a decisive aspect in the BMWK’s assessment and is explicitly stipulated as a criteria for review in the German foreign direct investment rules. This criteria takes into account that a foreign government could assert political influence over a German business and thereby implement its political agenda in the German economy.
The healthcare and pharma sector have been focal points of the tightening of the German foreign direct investment control regime in recent years. Initially, the German foreign direct investment control regime aimed at protecting critical infrastructure sectors, such as energy and water supply, financial services infrastructure, or telecommunications as well as the defense sector. As a reaction to the COVID-19 pandemic, since mid-2020 the German foreign direct investment control regime requires non-EU investors seeking to acquire 20% or more of voting rights in a German business that is active in the development or manufacture of medical devices, in-vitro diagnostic devices or pharmaceuticals, to mandatorily notify the acquisition to the BMWK. Failure to do so and consummating the acquisition without having received clearance leads to the legal invalidity of the consummation of the acquisition and can further result in sanctions, including administrative fines of up to EUR 500,000 and, in the event of a willful violation, in imprisonment of up to five years.
Based on what is known from the reports in the press, the Heyer Medical acquisition ticks several boxes for a transaction in which one can expect to receive in-depth foreign direct investment scrutiny and that may raise security concerns with the BMWK:
- The target company, Heyer Medical, is active in the healthcare sector, manufacturing medical devices that are highly relevant in times of the COVID-19 pandemic or in a similar crisis. Therefore, the transaction involves a business sector that is essential for the supply of fundamental goods.
- The investor, Aenomed, is a Chinese company. In line with EU-wide foreign direct investment policies and due to an increase of Chinese foreign direct investments in Germany in recent years, the BMWK has become more and more sensitive with regard to Chinese acquisitions of German businesses.
- According to press reports[4], Aenomed seems to benefit from financial support by the Chinese government. In accordance with the criteria of the BMWK’s assessment described above, this will likely have been a decisive factor in the BMWK’s finding that the transaction adversely affects public order and security.
Against this background, while the acquisition concerns the healthcare and pharma space, the BMWK’s prohibition of Aenomed’s acquisition of Heyer Medical is in line with Germany’s foreign direct investment policy in recent years, including with prohibition decisions of the acquisition of German radar technology and communications specialist IMST GmbH by a subsidiary of the Chinese state owned defense group Casic in December 2020 and the acquisition of German wafers manufacturer Siltronic by Taiwanese GlobalWafers due to concerns of preferential supply of the Chinese market with much needed semi-conductor elements to the detriment of European customers.
This decision should be seen as a strong indication that the German government is able and willing to use the tools it has gained by the tightened German foreign direct investment rules. The BMWK does not shy away from taking severe measures to defend the German economy’s independence from undue foreign influence, even if this means that an apparently financially failing company, such as Heyer Medical, may eventually disappear from the market due to insolvency.
This does not mean that similar cases will always be prohibited in the future. The prohibition of a transaction has been and will remain the ultima ratio in the BMWK’s decision making. In general, in case the BMWK develops security concerns in relation to a transaction it will usually negotiate commitments and remedies with the investor, which are agreed in a security agreement between the investor and the German government. Such commitments and remedies can include obligations to continue the business of the target company in Germany, to continue supply obligations, to refrain from transferring intellectual property and know-how out of Germany or maintaining a certain number of German members on the management board. In more critical cases, the BMWK may even request the carve-out of certain parts of the German target business from the acquisition or a golden share combined with a veto right for certain business decisions or preemption rights with regard to the future transfer of shares.
As noted, given the length of the review process of Aenomed’s acquisition it is possible that commitments and remedies were discussed. If so, Aenomed was either not willing to eventually accept them or the BMWK came to the conclusion that even commitments and remedies could not effectively mitigate their security concerns. In any case, it will be interesting to see how the BMWK will deal with foreign direct investments from China in the healthcare and pharma sector in the future, but it should not be expected that scrutiny over such foreign direct investments will relax.
[1] https://www.focus.de/finanzen/boerse/schwerwiegende-gefahren-habeck-stoppt-uebernahme-von-deutscher-beatmungs-firma-durch-china_id_90693248.html (accessed on 9 May 2022); https://www.manager-magazin.de/politik/weltwirtschaft/china-thanks-but-no-thanks-a-5b019b4d-405a-4854-9b1b-bb0e2fbd0027 (accessed on 9 May 2022); https://www.faz.net/aktuell/wirtschaft/bund-stoppt-chinesische-uebernahme-von-beatmungsgeraete-hersteller-17989193.html (accessed 9 May 2022).
[2] https://www.manager-magazin.de/politik/weltwirtschaft/china-thanks-but-no-thanks-a-5b019b4d-405a-4854-9b1b-bb0e2fbd0027 (accessed on 9 May 2022).
[3] https://www.manager-magazin.de/politik/weltwirtschaft/china-thanks-but-no-thanks-a-5b019b4d-405a-4854-9b1b-bb0e2fbd0027 (accessed on 9 May 2022).
[4] https://www.focus.de/finanzen/boerse/schwerwiegende-gefahren-habeck-stoppt-uebernahme-von-deutscher-beatmungs-firma-durch-china_id_90693248.html (accessed on 9 May 2022); https://www.manager-magazin.de/politik/weltwirtschaft/china-thanks-but-no-thanks-a-5b019b4d-405a-4854-9b1b-bb0e2fbd0027 (accessed on 9 May 2022); https://www.faz.net/aktuell/wirtschaft/bund-stoppt-chinesische-uebernahme-von-beatmungsgeraete-hersteller-17989193.html (accessed 9 May 2022).