Germany has recently boosted its control over undesired foreign investments by introducing an amendment to its Foreign Trade and Payments Ordinance, which complements the Foreign Trade and Payments Act. Under the new rules, the acquisition by foreign investors of significant shareholdings in German companies will be subject to an enhanced government control from a public policy and security viewpoint. The Ordinance increases the power of the German Ministry for Economic Affairs and Energy (BMWi) to review investments that result in the acquisition of a direct or indirect participation corresponding to 25 percent or more of the voting rights in a German company.

Under German law, two different procedures exist for investment review, depending on the industry at stake. On the one hand, special rules apply to the acquisition of companies operating in sensitive security areas. The Ordinance brings clarification in this regard and defines new categories of transactions that are subject to a reporting obligation. Such categories include acquisitions of German operators of critical IT infrastructure, developers of software for the operation of critical infrastructure in certain specific industry such as the energy and water, telecommunications and data storage, transport, health, food, as well as financial services. The new Ordinance also expands on the transactions in the defence industry and related industries that are subject to a reporting obligation.

On the other hand, outside the industry categories which are specifically mentioned in the revised Ordinance, no reporting obligation applies, although the BMWi may on its own motion initiate a review of a particular transaction where it feels that this is justified and where the acquirer is located outside the European Union or the European Free Trade Area (EFTA, i.e. Liechtenstein, Norway, Iceland, and Switzerland). After examination of the transaction, the BMWi may either issue a certificate of non-objection or it will prohibit or make the acquisition subject to restrictions. In order to ensure legal certainty at an early stage, investors may request a binding certificate of non-objection. Finally, the amendment clarifies the application of the Ordinance to indirect company takeovers, via an interposed entity, and circumventing transactions, and it furthermore extends the time limits within which the BMWi must carry out its review.

These legislative changes are evidence of an increased willingness of German government services to control foreign investments in industries deemed to be of strategic interest, particularly by investors from the People’s Republic of China (PRC). A recent survey by Ernst & Young concluded that Chinese investment in Germany had risen from approximately $530m in 2015 to $12.6bn in 2016. The country is now deemed the most favored European destination for Chinese investors, with 68 company takeovers in 2016. The perceived increased presence of foreign investors in industries of strategic interest has resulted in a certain backlash, as is illustrated by the example of the failed takeover attempt of the German manufacturer of high-tec coating applications Aixtron. In October 2016, the German government abruptly decided to withdraw its clearance of the proposed acquisition of Aixtron by the Chinese company Fujian Grand Chip Investment (FGC), and then reopened the review of the deal, after the US government had already blocked the acquisition of Aixtron’s US business. At the time, it was rumored that US intelligence services were concerned that Aixtron’s technology could be used in China’s nuclear program. FGC abandoned the project in December 2016.

Though this legislative amendment went largely unnoticed among the general public, it will have important consequences on foreign M&A investments. Not only will the number of deals affected increase tremendously, but the intensity of such control will also be more acute, meaning that more transactions could be blocked by the German government. The amendment will also extend the duration of the administrative procedure (giving the BMWi up to five years to initiate the review of some acquisitions) and will generally create an additional administrative burden for foreign companies, thus resulting in more legal uncertainty.

With the enhanced control over foreign investment, Germany is testing the limits of what is possible not only according to international investment protection rules, but also the law of the European Union. Being an EU Member State, Germany is bound by the rules set out in the European treaties guaranteeing free movement of capital and the freedom of establishment of all EU market operators within the European Economic Area (EEA).The new provisions must also be reconciled with the exclusive power of the European Commission to review mergers and other transactions between groups of companies that exceed the turnover thresholds foreseen in the EU Merger Control Regulation. Above these thresholds, the EU Member States only have a residual power to enforce certain measures that are objectively legitimate. According to the safeguard clause provided for in Article 21 of the Regulation EU Member States may take appropriate measures to protect legitimate interests such as public security, plurality of the media and prudential rules. Other public policy consideration can only justify an intervention by a national authority where the European Commission has granted a waiver, on a case-by-case basis, following a corresponding request. EU Member States are in principle free to legislate on the control of concentrations of smaller size, provided the EU fundamental freedoms with regard to the movement of capital and the establishment of EEA legal and natural persons are respected.

In a separate development, the German government has been advocating a joint EU initiative to seize control over foreign investments in strategic European industries, and in particular state subsidized foreign takeovers of European companies. In February 2017, the German Minister for the Economy and Energy Brigitte Zypries and her French and Italian counterparts Michel Sapin and Carlo Calenda wrote a joint letter to EU Trade Commissioner Cecilia Malmström to voice their concerns. In their letter, they recalled first the growing number of foreign investors taking over European companies active in security-relevant sectors. Second, they also addressed the lack of reciprocity experienced by European investors abroad. As German Chancellor Angela Merkel had already noted in 2016, German companies willing to invest in China are faced with a number of obstacles and are often required to form a joint venture with Chinese partners prior to any acquisition of domestic companies.

The joint initiative was met with a mixed response during the last European Council meeting held on 22 and 23 June 2017. French President Emmanuel Macron vigorously defended this project but other European Heads of State – especially from Nordic countries – cast doubts regarding the need for a stricter EU control over foreign investment. Furthermore, Southern European countries such as Greece, Portugal and Spain clearly rejected the idea, on the grounds that tougher EU control would deter foreign investment, which they desperately need in order to fuel their domestic growth.

In the meantime, the European Commission has expressed a renewed willingness to take action in order to coordinate the Member States’ policies regarding foreign investment. The Commission’s initiative could take the form of guidelines addressed to its Member States (‘soft law’) or a full legislative proposal to regulate foreign takeovers. European Commission President Jean-Claude Juncker is expected to present an outline of this policy initiative in his state of the European Union speech on 13 September 2017.