Germany used to take a lenient approach towards foreign investment control. However, the first ever veto over an investment – announced under stricter rules introduced in 2017 – has been followed by proposals for even stricter controls.

“Any business proposing to buy a German company – even a minority stake in a German company – should expect its investment to come under intense scrutiny, if it is in a sector that is considered to have a bearing on public security”

Christian Ahlborn, Partner

Overview

Germany has taken the lead among European nations in beefing up its foreign investment control regime. This has all happened relatively quickly. Traditionally, the Federal Ministry of Economics and Energy (which is responsible for foreign investment control in Germany) took a rather lenient approach towards foreign investment control. However, in 2017, Germany strengthened existing rules and introduced notification obligations for acquisitions in specified industry sectors related to public security, such as IT, telecoms and critical infrastructure.

Then, this year, the German government was on the point of issuing its first veto, in relation to the proposed acquisition of Leifeld Metal Spinning, a German manufacturer of metal forming machines used in the automotive, aerospace and nuclear industries, by China’s Yantai Taihai Corporation, a privately-owned Chinese industry group, which provides metal processing, forging and smelting services to the civil nuclear industry. The veto was due to concerns around transfer of information to China and potential Chinese use of technology for nuclear military purposes. Ultimately, Yantai withdrew its bid hours before the decision was due to be announced (see here) on 1 August.

Shortly afterwards, the German government confirmed its intention to tighten the rules even further. This will likely involve lowering the threshold to review acquisitions by non-EU investors from 25 to 15 percent of voting rights.

What can potential investors expect even now, and more so if these stricter controls come into force?

  • Delays: The longer review deadlines as well as the introduction of a notification requirement for the acquisition of critical infrastructures are increasingly causing delays in relation to the closing of transactions.
  • More in-depth reviews: In the first 13 years of the existence of the German foreign investment regime only 36 out of 383 notified transactions were subject to an in-depth review. This number has been exceeded in the past year alone.
  • More commitments by foreign companies: In an increasing number of cases, the Ministry requires commitments from the acquirer to secure a non-objection certificate. Often these commitments are behavioural remedies such as supply obligations or requirements to license technology.
  • Uncertainty: There is increasing interference with transactions outside of the scope of German foreign investment rules. In July, it was announced that the German state-owned development bank KfW will acquire a 20% stake in the German transmission grid operator 50Hertz. The acquisition was made at the request of the Federal Government to prevent a Chinese buyer from acquiring that share.