GlobalWafers’ acquisition of Siltronic has failed because German foreign investment control approval could not be obtained in time. The case stands for a development in past years: Many countries have tightened their foreign investment regimes, some of them considerably. In this post, we undertake a brief review of the history of foreign investment control in Germany (without claiming to be complete).
This morning, GlobalWafers confirmed that it has failed to obtain the approval by the German Ministry of Economic Affairs within the 31 January deadline for its envisaged acquisition of Siltronic AG. We have already blogged about the case here, but take this brand-new development as an opportunity to summarise the history of foreign investment control in Germany, which goes back
a long some way. Let’s kick-off by returning to the starting point:
When it all began
The German legal framework for a general foreign investment control regime which is not limited to companies that produce war weapons, particular types of defence equipment or cryptosystems dates back to 2009. Back at the time, the governing parties of CDU and SPD (in the first electoral period in which Angela Merkel was Chancellor) introduced a significant amendment to the German rules (you can find more information here). The new law granted the Ministry a right of review for all acquisitions in which investors from outside the EU wanted to acquire 25% or more voting rights of a German company, regardless of the sector it operated in. However, an acquisition could only be restricted or prohibited if it threatened Germany’s public order or public security. This required a genuine and sufficiently serious threat affecting one of the fundamental interests of society. There was no filing obligation in the general regime, but the German Ministry of Economic Affairs could initiate a review of a foreign investments within three months of signing. However, investors already then could attain legal certainty earlier on by applying for a so-called “certificate of non-objection”.
And what happened then?
Nothing happened for a
really long time (for the sake of completeness: the laws containing, amongst other things, the German foreign investment control regime were newly promulgated in 2013, but the substance of the foreign investment control regime did not change). Then, in 2016 Midea, a Chinese electrical appliance manufacturer, made a public takeover bid to acquire KUKA, a German manufacturer of industrial robots and systems for factory automation (famous for their corporate colour “KUKA Orange”, in which most of their robots are painted). The outcry in Germany was significant at the time. There was talk of a sell-out of German industry. German politicians, namely then Minister of Economic Affairs Sigmar Gabriel (loyal readers already know him from this blog), reportedly even tried to win over a consortium of European companies for a counteroffer, but could not convince anyone. However, in the end the German Ministry of Economic Affairs did not initiate a formal review procedure and grudgingly stated that the preliminary review did not reveal any indication that the takeover would endanger the public order or security of Germany. That should not be all.
Now things really kicked off
Following the takeover of KUKA, some politicians even took the position that a similar transaction should never be allowed to happen again. Many say that played a role when, in 2017, the foreign investment control rules in Germany were significantly tightened. For example, the scope of the regime was specified and partly extended, a filing obligation was introduced with regard to a number of industries and the review deadlines were extended. The feedback from the public was mixed. While some praised the measures as increasing takeover defence for German companies, in particular business representatives criticised the regulation as unnecessary protectionism.
The first prohibition of a takeover of a German company by a Chinese investor followed in 2018. The German government stopped Chinese investors from acquiring Leifeld Metal Spinning, a manufacturer of high-strength materials used in the aerospace industry, which can also be used in the nuclear sector. It is noteworthy that the company had only about 200 employees at the time. Just a few days later, the German government resorted to an unusual measure to prevent a Chinese investor from acquiring a 20 percent share in electricity grid operator 50Hertz. The government brought in state-owned bank “Kreditanstalt für Wiederaufbau” to buy said 20 percent share, the reason being “security policy considerations”.
Geely’s acquisition of 9.7% of Daimler’s shares at the beginning of 2018 is also often mentioned in the context of foreign investment control. The deal received a lot of press coverage. In essence, however, the public noise was not about foreign investment control, but about whether the reporting requirements under the Securities Trading Act were complied with (they apparently were). Nevertheless, the case shows that such transactions were (and still are) closely observed by the public.
And it goes on
A few years later, in December 2020, the German government prevented yet another Chinese investment. German IMST was meant to be sold to China Aerospace Science and Industry Corporation (CASIC). The German government argued that the deal was to be prohibited inter alia because IMST had special expertise in satellite and radar technology, for example in 5G millimetre wave technology, and had received public funding.
On the legislative end, the foreign investment control regime was extended and tightened again, four times between July 2020 and May 2021 alone, and the last time just at the beginning of this year. Last year, the German Ministry of Economic Affairs (called the Ministry of Economic Affairs and Climate Action since the Green Party took over the ministry) reviewed approximately 450 transactions. Even though the number apparently includes transaction reviewed via the EU screening mechanism, it is still ten times higher than the number of cases reviewed in 2016 (when it all started with KUKA).
GlobalWafers/Siltronic now seems to be first transaction that failed due to German foreign investment control and that, at the same time, did not concern a (mainland) Chinese acquirer. It cannot be ruled out that the German Ministry of Economic Affairs would have approved the deal if it had had more time for the review (although the deal admittedly was announced more than a year ago, and was cleared by the German Bundeskartellamt in February last year). However, a statement by the Ministry is worth noting. A spokeswoman of the Ministry said that “it was not possible to finalize the foreign investment control review until the expiry of the deadline and this concerned in particular the examination of the merger approval by the Chinese authorities, which only took place last week.” One can therefore speculate whether the conditions imposed by the Chinese authority in the merger proceedings there have raised concerns at the ministry.
Where will this lead?
I always thought I liked history. Describing the past without having to think about the future. My (very good) history teacher at school once told me that the important thing about history is not only what happened in the past, but what it teaches us for the future.
So, here is my take: The changes to the law at ever shorter intervals, the increasing number of cases and also the discussions about cases in the recent past show that foreign investment control is constantly and rapidly changing. The global political trend is probably leading to a more critical view of investments from abroad in domestic companies, in all countries worldwide. Germany will not remain an exception – if you like it or not. Perceived key technology sectors like semiconductors will stay a particular focus, with a draft of the European Chips Act (which we have blogged about here) being scheduled to be presented on 8 February.