German FDI: Cabinet prohibits acquisition by a Chinese state-owned company

Germany has been tightening its foreign investment control rules significantly in the past. This stricter view was confirmed yesterday: According to reports in the German press the Federal Cabinet prohibited a transaction by a Chinese state-owned enterprise (SOE) because the acquisition would pose a threat to Germany’s public order and security.

This example shows that investments into Germany, especially by foreign SOEs, may face a thorough screening procedure that can result in a prohibition of the transaction. The decision does not mean, however, that all investments by (Chinese) SOEs will be prohibited.

Chinese SOE and German high technology – a potential threat to the public or-der and security

The Chinese investor in the case at hand was Addsino, a subsidiary of the Chinese state-owned defence group Casic. The target of the transaction was IMST, which has particular expertise in the field of satellite/radar communication and 5G millimetre-wave technology. IMST has developed a key component for the earth observation satellite TerraSAR-X. The Federal Ministry of Defence had purchased its data for calculating a 3D elevation model, which is used, for example, in reconnaissance, command and control, simulation and weapon systems for military purposes. Also, the 5G technology plays an important role and IMST’s mobile radio systems are used by police forces. The Cabinet was not willing to permit the outflow of this special know-how to a Chinese SOE and consequently prohibited it.

FDI screening procedure is more and more in the focus of M&A transactions

Germany’s tighter approach to FDI, especially with regard to Chinese SOEs, is in line with the policies of the European Commission in the EU-Screening Regulation 2019/452, where one of the key aspects of the screening procedure is the background of the investor. It follows that non-EU investors should be aware of the FDI rules and monitor closely whether a notification of the transaction is mandatory. In addition, a notification impacts the timing of a transaction. In complicated cases, the procedure can last several months.

17th amendment to Foreign Trade and Payments Regulation on its way

Currently, the Federal Ministry for Economic Affairs and Energy is drafting up the 17th amendment to the Foreign Trade and Payments Regulation, which will expand the content of the legal framework for FDI screening. The amendment will focus in particular on determining, on the basis of the requirements of the EU-Screening Regulation, those critical technologies which are of particular (security) relevance and which should therefore be notified in case of share acquisitions of 10 percent. The trade associations concerned will be given the opportunity to comment in detail on the amendment in the coming weeks. Feedback from the business community will be particularly important given the technical complexity of the aspects to be regulated.

BLOMSTEIN will monitor further developments. If you have any questions about the po-tential impact of these changes to foreign trade law on your company or your industry, Roland M. Stein and Leonard von Rummel will be happy to answer them.