The German government is considering enacting stronger legislation against foreign investors that it deems a threat to public security or order. The proposed regulation may (either implicitly or explicitly) cover strategic infrastructure. A first draft for an amendment to the Foreign Trade Act and its implementing ordinance was circulated to the federal ministries for comments at the end of October.

The amendment would empower the Federal Ministry of Economics and Technology (the Ministry), in consultation with the Foreign Office, to examine whether the acquisition of a domestic company, or a stake in such company by a foreign investor, affects Germany’s public order or security. The Ministry may prohibit or otherwise restrict such acquisition as necessary to maintain public order or security.

Currently, transactions may be restricted only to guarantee Germany’s vital security interests or to prevent disturbance of peaceful international relationships. This includes restrictions of transactions that are related to the acquisition of resident companies producing weapons, ammunition or armaments material.

Funds, investors and lenders

The proposed legislation primarily aims to prevent indirect takeovers of German companies by foreign states. Since Chinese, Russian and Middle Eastern state-controlled funds are increasingly keen to invest in Germany, the German government is worried about a sell out of strategically important industries. The overall assets of such funds are estimated to be around $2.5tr.

However, the proposed amendment is not expressly limited to state-controlled foreign fund deals. According to its wording, which is very open, it would apply to deals meeting these three criteria: 

  • the acquisition of a domestic company or a direct or indirect stake in such company; 
  • the acquisition is by a non-resident or a resident company in which a non-resident holds at least 25 per cent of the voting rights; and 
  • after the transaction, the non-resident acquirer directly or indirectly holds at least 25 per cent of the voting rights in the company concerned.

Therefore, if these conditions are met the regulation could be applied not only to sovereign wealth funds but also to any foreign (EU or non-EU) financial or strategic infrastructure investor and to foreign lenders acquiring a direct or indirect stake (ie to take security).

Infrastructure branches affected

Protection is not confined to certain branches. While political discussions concentrate on the energy, banking and media sectors, other sectors may also fall under the amendment. Given the broadness of the concepts of public order and security (which stem from German police law), this may include virtually the whole infrastructure and transport sector, ie:

  •  aviation and airports; 
  • roads and railways; 
  • ports and shipping; 
  • post and logistics; 
  • water and waste; 
  • defence; and 
  • public health and social infrastructure.

It would be incumbent on the Ministry (and the judiciary) to further specify and restrict the terms ‘public order’, ‘public security’ and ‘strategic infrastructure’ for the purposes of the amendment.

Procedure for transactions

The Ministry may initiate ex officio investigations within three months of the date of publication of the takeover offer or signing of the purchase contract. There is no obligation on the part of the investor to notify the transaction. Yet, to gain legal certainty, the investor may apply for examination of the deal.

Within one month of receipt of the complete transaction documents, the Ministry may prohibit or otherwise restrict the acquisition. While this procedure is pending, the transaction is provisionally invalid.

The transaction becomes valid: 

  • three months after the date of publication of the takeover offer or signing of the purchase contract if the Ministry has not decided to exercise its right of control; or 
  • one month after receipt of the complete transaction documents if the Ministry has not prohibited or otherwise restricted the acquisition.

Compatibility with EU law

There are doubts over whether the proposed legislation is in line with EU law. In particular, the amendment could infringe the EC Treaty’s provisions on the free movement of capital within the EU. While it is true that these provisions are without prejudice to the member states’ right to take measures on the grounds of public policy and public security, the requirements of public policy and security, as derogations from the fundamental principle of free movement of capital, must be interpreted strictly. So, according to the jurisprudence of the European Court of Justice (ECJ), public security may be relied on ‘only if there is a genuine and sufficiently serious threat to a fundamental interest of society’. In addition, restrictions must meet the tests of legal certainty, foreseeability and proportionality.

Next steps

Following adoption of the proposed legislation by the German government (expected in January 2008), the amendment will have to pass the two chambers of the German parliament. Modifications are possible – particularly to the three-month time limit for examination of the transaction, which is under discussion within the German government. Additionally, the Christian Democratic Union, one of the Federal Government’s parties and party of chancellor Angela Merkel, recently presented its own ideas for the new legislation. These differ in three main ways from the government’s proposal. 

  • Restrictions would be allowed only to protect ‘public security’ or ‘strategic infrastructure’, the latter notion replacing the reference to ‘public policy’. This seems to be intended to narrow the scope of the regulation’s application. Yet from the investor’s point of view the explicit mention of the infrastructure sector might be counterproductive. 
  • Restrictions of transactions must be based on objective criteria and subject to judicial review. This requirement is obviously intended to comply with the ECJ’s jurisprudence. 
  • The Ministry may not only prohibit or otherwise restrict a transaction but also (positively) approve it. This is to ensure better legal certainty.

Besides, the Christian Democratic Union strives for a Europe-wide solution.