Germany blocks the full acquisition of an already majority-owned company

News broke yesterday that the German government prohibited the acquisition of 45% of the shares in a German satellite company by a Chinese acquirer. The notable twist: The acquirer already held 53% of the shares in the target.

Kleo Connect is a German start-up that wants to provide global satellite data communications. 53% of its shares are ultimately held by Chinese SSST (Shanghai Spacecom Satellite Technology), which apparently became a shareholder in the company in 2018. Judging by a court decision from October last year, Kleo, SSST and Kleo’s main minority shareholder recently found themselves in a dispute related to radio frequencies essential for Kleo’s business. SSST now wanted to acquire an additional 45% and thus nearly all of the shares in Kleo Connect.

German government prohibiting the deal

The German government stepped in to prohibit the deal. This was made possible by a peculiarity in Germany’s foreign investment control regime: Even an existing foreign shareholder has to notify acquisitions of additional shares when certain overall shareholding thresholds are reached. The exact thresholds depend on the activities of the target, but in all cases, reaching a shareholding of 40%, 50% and 75% each requires a new filing. Even where the target’s activities are generally not covered by the German regime, reaching each of these thresholds allows the German government to investigate pro-actively.

The political environment

This seems to be the first publicly known case in which the government prohibited a deal in which the target was already majority-owned by the acquirer. Two political developments have to be kept in mind in this regard:

• Satellite communications apparently play a major role in Ukraine’s defence against Russia’s invasion. In that regard, Ukraine seems to be reliant on the US-(Elon Musk-)owned Starlink network. This has put additional political and public focus on the sector.
  
• The German government decided on a new China strategy about two months ago, signalling a tougher stance towards China. The prohibition of the Kleo-deal is the first one following that China strategy.

Outlook

So far, all publicly known prohibitions under the German foreign investment control regime concerned Chinese acquirers, plus one with an acquirer from Taiwan (also see our post here). To that extent, the new prohibition is in line with precedents. But blocking an acquisition of a company that is already majority-owned by the investor takes this to a somewhat new level.

Germany continues to take a tough stance on Chinese investments into sectors considered to be of critical nature. That message is loud and clear, and it was delivered on the same day the European Commission announced an investigation into subsidies for electric vehicles from China. It also has to be kept in mind that the German government is working on an overhaul of the German foreign investment control regime that will likely broaden the regime’s overall reach.

Photo by NASA on Unsplash