In an unprecedented double-strike, the German government recently blocked two transactions pertaining to Chinese investments in German semiconductor facilities. Just two weeks before, the cabinet had already intervened regarding Chinese COSCO Shipping Ports Limited’s (“CSPL”) planned acquisition of a 35% stake in a container terminal in the port of Hamburg by allowing only 24.9%, which was referred to as a partial prohibition.

These recent developments follow a number of revisions and expansions of the German foreign direct investment (FDI) rules since 2020 (including aligning the scope of review more closely with the EU Screening Regulation which resulted in an unprecedented increase of transactions subject to German FDI screening). This is in line with the international trend of a more prudential approach to inbound and even outbound foreign direct investments in Europe including the UK and in the US.

Increased scrutiny by the German Federal Ministry for Economic Affairs and Climate Action (“BMWK”) in 2022

Following a number of revisions of the German foreign direct investment rules (c.f. our Client Alerts here and here), the German government recently prohibited the sale of two companies active in the semiconductor industry to Chinese investors.

The first case concerned Elmos Semiconductor SE (“Elmos”), based in Dortmund, which develops, produces and markets semiconductors mainly for use in the automotive industry. The BMWK stated that the planned investment by Swedish Silex Microsystems, a subsidiary of Chinese Sai Microelectronics, in Elmos would endanger Germany’s public order and security. The BMWK argued that any mitigation measures, such as an approval of the acquisition with conditions, were not suitable to remedy these concerns.

The second recent case was handled strictly confidentially by the BMWK; according to press information, it concerned a Chinese acquisition of the semiconductor company ERS Electronic GmbH in Bavaria, which pioneered the thermal wafer testing and invented a technology for cooling without liquid.

These transactions are only the last two interventions in a series of similar cases in 2022:

  • In October, the German government approved the investment by the Chinese company CSPL in HHLA Container Terminal Tollerort GmbH (“CTT”) only to a significantly lower degree than planned by the parties. CTT operates a container terminal in the port of Hamburg, Germany’s largest port. According to press statements, the Federal Chancellery and several ministries initially had different views on the proposed acquisition. At the end and shortly before Chancellor Scholz’s first visit as Chancellor to China, the German government cleared the transaction. However, it only allowed CSPL to acquire a shareholding of 24.9 % instead of the originally proposed 35 %. In addition, the BMWK prohibited CSPL to acquire atypical means of further influence on CTT that would go beyond the typical influence of a 24.9 % shareholder to ensure that CSPL will not have influence on any strategic issues.
  • In May, BMWK prohibited the acquisition of Heyer, a producer of respirator products, by the Chinese investor Aeonmed, a step which was taken, according to BMWK, in view of the COVID19-pandemic to protect the availability of critical healthcare products and know-how.
  • In January, the BMWK failed to clear the public takeover of Munich-based wafer manufacturer Siltronic AG by the Taiwanese competitor GlobalWafers within 13 months after filing, and thereby before the “long stop date” of the public takeover offer. As a consequence, the acquisition failed. The BMWK’s failure to clear the transaction within such a long time period was largely construed as an alternative way to block the acquisition.

The above series of interventions shows that Germany is exercising more intense scrutiny on foreign investments in sensitive industries and these investments are getting increasingly politicized, including quite obvious disagreements between different branches of the German government that have led to U-turns during the proceedings, moving from an envisaged clearance subject to mitigation measures to effective prohibitions. This particularly applies to Chinese investors but also impacts investors from other regions. At the same time, we are not experiencing the same scrutiny on transactions in industries which are not or less sensitive even if proposed by Chinese investors.

General trend in Europe, the US and Canada

The developments in Germany are in line with a general European and global trend to exercise deeper scrutiny on inbound investments. In the UK, this November the government ordered the divestment of 86% of Nexperia’s shareholding in the semiconductor factory Newport Wafer FAB (NWF) in Wales based on national security grounds although – according to Nexperia – the acquisition had been “cleared by two previous security reviews”. Nexperia is headquartered in the Netherlands and owned by the Chinese group Wingtech Technology. Nexperia acquired NWF in 2021 before the UK’s National Security and Investment Act entered into force. Nexperia announced that it will appeal the UK government’s decision. In the first eleven months of operation of the National Security and Investment Act, Authorities in the UK have also issued two prohibitions against Chinese (Beijing Infinite Technology / University of Manchester) and Hong Kong-based (Super Orange HK Holding / Pulsic Limited) investors, as well as six conditional decisions. These prohibitions related to prospective investments in military and dual use goods, although conditional decisions have been issued in a broader range of sectors including energy, quantum technology, satellite and space technology, and suppliers to the emergency services. Again, Chinese investors feature prominently in those decisions imposing conditions on acquisitions.

Likewise in Canada the trend towards an increased scrutiny of foreign investment in areas of geo-political sensitivity has become obvious this November: In the first case, the Canadian government announced a new policy applying stricter scrutiny to investments in the critical minerals sector. In the second case only some days later, they announced that they ordered the divestiture of investments by three Chinese firms in Canadian-headquartered companies that have actual or potential operations in lithium and, in some cases, other critical minerals. These steps are the latest in a series of measures the Canadian government has taken to strengthen Canada’s national security regime, in particular with respect to investments by SOEs or private companies with ties to nations of higher sensitivity such as Russia or China.

In September 2022, President Biden signed an Executive Order identifying national security risks that the Committee on Foreign Investment in the United States ("CFIUS") must consider when reviewing covered transactions. For the first time in CFIUS's nearly 50-year history, the President has expressly directed CFIUS to consider certain specific sets of factors in its review of national-security risks arising from covered transactions, underscoring the Biden Administration's view of their importance to the national security of the United States.

Also in September 2022, the European Commission (“EC”) released its second Annual FDI report showing increased momentum in FDI regulation and screening in the EU (please see our Client Alert). The EC stated that the FDI regulation has worked quickly and efficiently, preventing investments posing security risks while not restricting the flow of foreign investment.

Despite these perceived initial successes, the EC announced in its work program 2023 that it is prepared to revise the EU’s FDI screening regulation in order to strengthen its functioning and effectiveness in light of two years’ experience. Moreover the EC announced that it will examine whether additional tools are necessary in respect of outbound strategic investment controls.

In the same vein, the US proposal for a National Critical Capability Defense Act (NCCDA) dating back to December 2021, which provides for an administrative procedure for certain outbound activities of US or third country companies with substantial US business (think US subsidiaries of non-US companies) must be on the radar of global investors – primarily with respect to China-related transactions.

Impact for foreign investors

The US, Europe and more specifically Germany remain open for foreign investors. To quote Minister Habeck, “Germany naturally is and will continue to be an open destination for investment”. However, investors should also note the second part of the quote, stating that “we aren’t naive.” Investors should therefore carefully consider potential FDI restrictions at an early stage of the transaction when pursuing investment opportunities in Germany and elsewhere in the ever-growing number of countries implementing FDI screening procedures. It is crucial to get clarity on all of the target's activities early in the process and factor in sufficient time and resources for FDI review in the transaction timetable.