Germany to tighten Review of Foreign Investments again

The German Government announced plans to overhaul its rules on foreign investment and to lower the threshold for a review.

Last year, the Federal Government amended its existing rules for the review of foreign investments in German companies by investors from outside of the European Union. The Federal Minister of Economic Affairs announced plans to further tighten the rules.

Background of last years’ amendment has been the increased investment activity in Germany over the past couple of years, in particular by Chinese investors. In 2016, the German robotic company Kuka was taken over by Midea. This transaction received substantial interest, and this has been seen as a case where intervention should have been taken but the rules at that time did not allow for a review.

The current German rules provide, in general terms, that a review takes place if a stake of 25% or more in a German company is acquired by an investor located outside the European Union and the acquisition concerns public order or security interests of Germany. The existing rules set forth in which cases public order may be affected by an investment of a foreign investor. The review process focusses on companies which are active in the field of civil technology which can be security relevant such as critical infrastructure in the fields of information technology, telecommunication, cloud computing or industry-specific software for energy, water supply, transportation, health and financing activities. Besides the operation of the actual infrastructure the rules focus specifically on companies which provide particular software in such key sectors. Specific review rules apply in relation to companies active in the defence sector, encryption technology and certain satellite observation systems.

The press reported that the Federal Ministry for Economic Affairs reviewed a proposed acquisition of the German engineering company Leifeld Metal Spinning AG, which is active in the field of high-strength materials used in the aerospace and nuclear field, by French company Manoir Industries which is controlled by the Chinese company Yantai Taihai Group. It was reported that the Federal Ministry indicated to veto the transaction and thereafter the parties abandoned the transaction, so that no formal decision has been rendered.

In another case a 20% stake of the German energy grid operator 50Hertz was on the market and supposedly the stake should have been acquired by State Grid Corporation of China. The grid operator is qualified as a critical infrastructure. Even though the current rules do not allow for a review of a 20% stake, the acquisition was ultimately prevented through the use of a pre-emption of the Belgian Elia group which passed the 20% stake to the state-owned KfW bank which acted on instructions of the Federal government.

The last case highlights the limitations of the current systems and probably triggered the decision to overhaul the rules on foreign investment. No details of a new law have been published yet but from public sources it can be expected that the review threshold will be lowered to capture the acquisition of a 15% stake. Further it has been indicated that the rules will be amended to capture also subsequent transactions and acquisitions, ie if a shareholder holds a 15% stake and acquires another 15% stake in which case also the second acquisition can be reviewed and potentially vetoed.

The move of the German Government comes at a time when foreign investment is under scrutiny also on EU level and a proposed regulation of the EU Commission is currently in the legislative process.

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Germany tightens review of foreign investments

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