The Leifeld case
Leifeld Metal Spinning AG is a German mechanical engineering company with a turnover of about 40 million Euros and a technology leader with regard to supplies to the aircraft, aerospace and nuclear industry. Leifeld’s shareholders envisaged to sell all shares to Chinese investor Yantai Taihai.
Already in January 2018, after clearance by the German government, Yantai Taihai acquired the business of Duisburg Tubes Production AG, a company carrying out the business of development and production of precise tubes for the nuclear industry. In contrast thereto, the German government has been assessing the Leifeld case in-depth since May 2018 and it was in the press that the German government was considering a prohibition order for the first time ever.
The agenda of the German government’s meeting on 1st of August 2018 included the proposal to block the Leifeld transaction for concerns related to German public order and security. Just a few hours before the meeting Yantai Taihai abandoned the plan to acquire Leifeld. Nevertheless, the German government adopted a precautionary blocking decision to prevent completion of the transaction in any event.
Evolution of the German foreign direct investment control regime
In 2004, Germany enacted a regime empowering the German government to assess and prohibit the acquisition of German businesses active in the defence and encryption sector by Non-German investors. This regime, known as sector-specific review procedure, was broadened in 2009 to cover acquisitions of any German company irrespective of industry sector, provided that such acquisition may endanger German public order or security. This cross-sector review applies to Non-EU/Non-EFTA investors acquiring 25 % or more of the voting rights in a German company. The last step of the on-going evolution was the amendment of the regime in 2017 which established, in particular, specific regulations applicable to businesses active in industries that qualify as critical infrastructure.
Chinese investments as key drivers for the German approach towards foreign investments
A study published by the German think tank Bertelsmann Stiftung in May 2018 lists 140 Chinese investments in German companies between 2015 and 2017. The think tank Hans Böckler Stiftung, which is close to the German trade unions, concedes that such investments may have a highly positive impact on the German economy. In line with that the German government regularly emphasises that Germany is open for foreign investments.
Nevertheless, in practice, the German Ministry of Economic Affairs subjected transactions involving Chinese investors to a more and more restrictive review. This development is illustrated by the following headline cases.
Kuka – no intervention: The Augsburg based company is a technological leader in robotics and an important supplier to the German car industry. When Midea published its intention to acquire Kuka for about 4.5 billion Euros in 2016, the German government saw no legal grounds based on which it could open an in-depth examination; therefore it did not intervene. However, this deal was subject to an intense public debate because it was considered as an important case in which the German government did not sufficiently protect German key businesses.
Aixtron – revocation of a certificate of non-objection: The Aachen based company produces machineries for the semiconductor industry. Fujian Grand Chip Investment offered about 676 million Euros to the shareholders in 2016 and applied for a certificate of non-objection. This certificate was issued – and revoked shortly thereafter. The German government announced that new information had become available based on which it had to perform an in-depth examination. It never had to make a final decision because the transaction was prohibited under the US CFIUS regime.
Osram/Ledvance – entry into an in-depth examination: The Chinese investors MLS, IDG and Yiwu offered about 400 million Euros for the light bulbs business of the German company Osram which was formerly part of the Siemens group. Initially the German government refused to issue a certificate of non-objection. In 2017, however, the government gave its green light after an in-depth examination of about three months.
Cotesa – in-depth examination that took about seven months: The Saxony based aircraft and aerospace supplier Cotesa was acquired by Changzou QFA Composite Material in 2017/2018. The transaction reached completion only after a seven-month foreign direct investment screening.
Sepura – intervention post completion of the acquisition: Chinese company Hytera acquired British company Sepura, a German subsidiary of which supplies digital radios to German public authorities. After completion of that transaction, Germany entered into negotiations with Hytera, aiming at the execution of a contract covering security related aspects of Sepura’s German business as a condition to a clearance decision.
Daimler – discussions about acquisitions below the 25 % threshold: When the Chinese automotive conglomerate Geely acquired about 10 % of the shares in Daimler in 2018 a public debate started about how the government could have a say with regard to acquisitions of shareholdings below 25 % of the voting rights in German companies.
Transmission Grid Operator 50Hertz – political interaction and financial engagement in order to prevent a Chinese investment: In 2018, the Australian infrastructure fund IFM signed an agreement with State Grid Corporation of China (SGCC) based on which SGCC would acquire a 20 % stake in a Belgian company holding all shares in the German transmission grid operator 50Hertz. Like in Daimler/Geely, the 25 % threshold was not exceeded. But the Belgian co-shareholder exercised its pre-emption right and thus pre-empted GGCC’s investment in 50Hertz. In April 2018, the German government answered a parliamentary request, stating that 50Hertz is a highly regulated company and that the acquisition by SGCC would not cause any threat to the German public order and security.
Just a few weeks later, SGCC signed another agreement with IFM for the acquisition of another 20 % stake in 50Hertz. Given that, again, this acquisition would not have exceeded the 25 % threshold, the German government was not able to apply the German foreign investment regime. In the end, the Belgian co-shareholder exercised its pre-emption right again, passing on the 20% stake to German state owned bank KfW. Interestingly, the German government argued that the acquisition by KfW was driven by the need to protect the safety of critical energy infrastructure in Germany.
Leifeld – first (precautionary) blocking decision ever: The Leifeld case marks the culmination of the on-going political debate and the efforts of the German government to strengthen its control over foreign direct investments. There is no precedent case in which the German government actually issued a (precautionary) order that prohibits a specific acquisition due to alleged threats for the German public order or security.
Conclusions and outlook
Hot topic: Current developments underline that the German foreign direct investment screening is no longer a toothless tiger. The Leifeld case is just the culmination of the recent developments. The political environment apparently requires the German government to demonstrate strength, the strict application of existing rules and its ability to block foreign investors from acquiring German business considered to be of specific relevance from the perspective of the broad and vague concept of “national security”.
Transaction relevance: Foreign investors have to take into consideration that a clearance procedure becomes more intense and more complex. At the same time, the number of procedures increased from 42in 2016 to 66 in 2017. As a consequence, clearance procedures take much longer than in the past. Moreover, the outcome is less certain: Nowadays foreign investors must be prepared to negotiate contractual agreements with the government or to accept ancillary conditions to obtain clearance. And, since 1st of August 2018, they have to consider the increased risk that the transaction may fail altogether due to a veto from Berlin.
Thorough preparation required: Foreign investors will have to analyse even more thoroughly than before whether the respective target business presents any reason based on which the German government could intervene. Investors may also take into consideration how to profile themselves and their proposed acquisition with a view to public perception and tone from the top in the ministry. These preparations require ground work at an early stage and need to be driven forward together with a team of professional advisors. They cannot be taken seriously enough.
An even stricter and more complex regime to be expected: The coalition agreement that the governing parties CDU, CSU and SPD entered into in February 2018 provides for the intention of the parties to tighten the rules on foreign direct investment screening in order to protect “key enabling technologies” against their takeover by foreign investors. Currently, the German parliament is considering a bill introduced by the Federal State of Bavaria seeking to decrease from 25 % to 10 % the threshold triggering the German government’s right to initiate a clearance procedure. Whilst there is no official timeline with regard to the amendment of the German foreign investment regime the EU is discussing the introduction of an EU-wide scheme for the EU-wide coordination of foreign direct investment screening in the member states, taking effect as from late 2018 or early 2019. However, this scheme provides for obligation to coordinate clearance procedures with the Commission and/or other EU member states, i.e. the scheme may make clearance procedures even more complex.