German foreign investment control has taken centre stage in the last two weeks: After the German government just about (partially) approved a limited Chinese investment in the Hamburg port, this week it has set out to prohibit two Chinese acquisitions in the semiconductor space. Not only the number of difficult reviews in a very short timeframe is remarkable, but also how much information made it to the public. What once used to be rather secretive proceedings now seems to take place much more in the open. And in addition, it looks like the German foreign investment control regime will be tightened once again.
Within just two weeks leading up to yesterday, Germany has used foreign investment control to interfere in three transactions. We can expect that each of the deals was assessed individually on its own merits. All of them seem to have three things in common, though:
- The acquirers were ultimately Chinese
- The acquisitions were (partially) prohibited
- Quite a bit of information was leaked to the press
This becomes clear when looking at each case (even though each of them would warrant a separate post):
COSCO/HHLA Container Terminal – Partial prohibition, broad debate
Chinese state-owned COSCO meant to acquire a 35% stake in one of the container terminals in the Hamburg port. In what formally came down as a partial prohibition more than a year after signing, the German government ultimately only approved an acquisition of up to 24,9% (and set out a number of conditions to ensure that COSCO does not obtain effective control via different means).
A broad (!!!) public debate preceded the decision. It surfaced that most German ministries, including those led by members of Chancellor Scholz’ party, wanted to prohibit the deal as a whole. Apparently, even though the Ministry for Economic Affairs is officially responsible for foreign investment control reviews, the German chancellery pushed the deal through, with Chancellor Scholz having once been the mayor of Hamburg.
It was unseen before this case that disagreements of this scale would reach the public eye. Even the opinions of the German intelligence services made it to the press.
And the decision was not the end of the debate: The finance ministry wrote to the chancellery asking for
another a tightening of the German foreign investment control regime (needless to say, the letter made it to the press), and – following comments from the US – China’s foreign ministry complained publicly that the US should not interfere in the cooperation between Germany and China.
Silex/Elmos – An approval turning into a prohibition
Silex, a Swedish company ultimately owned by Chinese Sai MicroElectronics, meant to acquire a production facility of German semiconductor manufacturer Elmos. The deal was filed for foreign investment approval in January 2022 and was on its path to approval.
Reportedly, the Ministry for Economic Affairs had signalled to the parties that it was willing to clear the case subject to conditions and had sent them a draft of that approval. The target’s technology was perceived to be old and of no major relevance. But the tide turned: On short notice, the ministry informed the parties that it would prohibit the case within two days. As a publicly listed company, Elmos went public with this information and now seems to be mulling an appeal.
Also in this case, in line with the COCSO experience, it surfaced that German intelligence services opposed the deal, politicians of the governing parties voiced their opinions, and a letter from the Ministry of Education and Research to the Ministry for Economic Affairs demanding a prohibition leaked to the press.
On the overall timing, it is an interesting and maybe purely coincidental sidenote that the case had seemed to be on track for approval before and during the China visit of Chancellor Scholz this month, with the turn towards a prohibition coming shortly after the trip.
ERS – Acquirer unknown
German ERS, active in thermal management solutions and testing for the semiconductor industry, was meant to be acquired by a yet unknown Chinese company. The deal was not publicly announced, but about parallel with the Elmos prohibition it leaked (have I used this word before in this post?) to the press that the government would also prohibit the ERS deal.
That is the essence of what is known about the case at this stage, besides the fact that the decision to prohibit the transaction seems to have been taken unanimously.
Increased publicity – A gamechanger?
In previous prohibition cases, it has not been uncommon for (drafts of) decisions to leak to press and/or advisor circles. But the magnitude we have seen now had so far been unheard of.
More publicity can be good and bad: On the one hand, the public (including advisors) gets a better overview of how foreign investment control reviews are handled and where the government is headed. On the other hand, parties to an M&A transaction usually like to avoid public discussions on their case, with multiple stakeholders weighing in. While many criticize that the German Ministry for Economic Affairs does not even publish a list of ongoing reviews, the concerned parties often appreciate it not becoming public that their deal is undergoing a foreign investment control review.
At least to some extent, that certainty is in question. The majority of cases will of course not be as problematic as the three described above – still, in cases which might raise some concerns, acquirers should be cautious of the risk that more information than in the past could reach the public.
It remains to be seen whether that is just a sign of the times, a result of a changed policy of the Ministry for Economic Affairs, or a by-product of a three party-government whose members do not always seem to favour the same approach. It is, in any event, a somewhat new development that the Ministry for Economic Affairs issued press releases on both HHLA and Elmos; we have not seen similar releases in all of the prior prohibitions.
A tighter regime – Little chance for China?
In the immediate aftermath to the three deals, members of all governing parties have called for an amendment and further tightening of the German foreign investment control regime. As a gentle reminder, the legislator did not sit on its hands in recent years: The regime was amended several times in the last two years alone. And even though another update of the rules was expected, it now looks like that update could be rather significant.
This also means that Chinese investors cannot hope for easier times in the near future. Deals are likely still doable, but best outside any sector that could be regarded as somewhat strategic by the government. Together with the failure of GlobalWafer’s takeover of Siltronic (see here), this year the German government has stopped three acquisitions by Chinese and Taiwanese companies in the semiconductor industry. On the upside for Chinese acquirers, there are reportedly 17 ongoing foreign investment control reviews concerning China, and it is hard to imagine that all or even a majority of these will lead to prohibitions.
Photo by Mike Erskine on Unsplash