German government decides to further tighten the rules on foreign direct investments

Yesterday, the German government once again extended the rules on foreign investment in Germany. Only in mid-2017, the federal government had already significantly tightened up the rules (see our report).

This reform essentially has two effects:

1. The threshold for investments in certain types of critical infrastructure, defence companies and IT security companies is lowered from 25% to 10%. In other words: A foreign investor is now subject to the rules on investment control if it acquires shares of 10% or more in one of the companies operating in these areas.
    
2. With immediate effect, media companies are also deemed equivalent to critical infrastructure, so that (i) the threshold of 10% described above also applies, (ii) there is a reporting requirement for the acquisition of media companies, and (iii) there is an indication that it jeopardises public order or security. 

The reduction of the threshold has significant effects on M&A transactions in the acquisition of shareholdings of less than 25%. Also the acquisition of shares in listed companies is concerned inasmuch as the establishment of strategic positions, for example by activist shareholders, or shareholdings in preparation of a takeover can be subject to the rules. This is independent of whether shares are acquired via the stock exchange or in block trades and also applies to capital increases from authorised capital.
 
The reasons for the reduction in the threshold are the government’s experience in the 50 Hertz case: The Chinese state owned enterprise State Grid intended to take over only 20% of the shares in the grid operator. Since the then applicable threshold of 25% was not reached and allegedly also due to the lack of other competencies, the government solved this case with the help of a takeover of shares by the KfW banking group. But also the acquisition of just under 10% of Daimler by the Chinese entrepreneur Li Shufu, the owner of Geely, gained considerable attention in the media.
 
With this second tightening of rules within a short period the government is thus sending a dangerous signal of distrust to foreign investors.
 
Further changes are imminent: At EU level it is expected that the proposal for a framework regulation by the European Commission will be adopted in this legislative period, which may affect in particular the length of procedures (see our report). We will keep you posted.