Germany seeks to protect its companies against foreign government funds

Implications: More than USD 42 billion was invested by foreign government investors in Germany in 2007 and more than 2.2 million German employees work for companies owned by non-resident government and private funds. In regard to foreign investment funds, a German draft bill would allow the German government to prohibit the acquisition of a stake greater than 25% in a company located in Germany by a non-resident investor. Although the draft bill aims primarily at government-owned funds, the law would equally apply to any investor, whether privately or publicly owned, in order to allow blockage of controlling foreign interests in German companies. The President of the European Commission, Jose Manuel Barroso, has argued for a “European approach”, which need not automatically mean a European law, but which should avoid national solo attempts at restrictions.

Analysis: Germany seeks to protect its companies against foreign government funds  

More than USD 42 billion was invested by foreign government investors in Germany in 2007 – an increase of 20% over 2005 -- and more than 2.2 million German employees work for companies owned by non-resident government and private funds.   Government-owned funds of East Asia and the Gulf Region have invested USD 20.6 billion in foreign ventures since the beginning of this year, which represents one third of last year’s entire investment amount and government-owned funds own about USD two trillion worldwide. The idea behind such funds is not a new one – they have existed for decades and 41 countries have set up such funds. For example, the Kuwaiti government fund has been holding Daimler shares since 1969. However, the world has become increasingly concerned since Russia and China set up their own government funds although there has, to date, never been a case of trouble or political influence.   Impressed by these developments and the latest news in world financial markets, the German Federal Government has announced a draft bill which would protect German companies from takeovers by foreign funds whether privately owned or run by a foreign government.

Germany wants to remain an investor-friendly country

The German Secretary of Economics, Michael Glos, told the Financial Times Germany that while freedom of investment remains a strong guideline for the German government’s investment policy, particularly since foreign investors contribute considerably to the national GDP, the government must nevertheless address the concerns created by recent developments. “It cannot be ruled out that individual investors might also follow political interests, which might influence the public security of the state invested in”, Glos stated recently in Financial Times Germany.

The European influence on the bill

The President of the European Commission, Jose Manuel Barroso, has argued for a “European approach”, which need not automatically mean a European law, but which should avoid national solo attempts at restrictions. An initial draft of the German bill was already corrected to bring the German approach into line with European law by at least avoiding limitations on the fundamental freedom of the movement of capital within the EU. Furthermore, investors situated in the European Union or the EEA will be excluded from the law’s application. Since Germany grants US companies treatment equal to European companies in such matters on the basis of a bilateral agreement, this treatment will also apply to US investment funds.

The draft bill

In regard to foreign investment funds, the draft bill would allow the German government to prohibit the acquisition of a stake greater than 25% in a company located in Germany by a non-resident investor. Although the draft bill aims primarily at government-owned funds, the law would equally apply to any investor, whether privately or publicly owned, in order to allow blockage of controlling foreign interests in German companies.   The question as to whether an acquisition would be prohibited would be determined on the basis of the acquisition’s “danger to public security”, a vague and vast criteria which would leave a great deal of room for interpretation. In the case of a detected “danger to public security”, the draft bill grants the German Secretary of Economics the power to prohibit an acquisition or to make use of a veto right within three months following the announcement of such a transaction. This time limit is still in discussion, however, and the Christian Democrats (CDU), the main party in the governing grand coalition, have pleaded for a three-year veto period.   The bill also provides that potential funds will have the right to announce planned acquisitions in advance to the Ministry of Economics and to receive a decision on such transactions within one month of application. Furthermore, the draft bill would require foreign government funds to disclose their structures as well as their investment strategies.

Outlook

Currently, the draft provides for a complete investment prohibition only in regard to armaments companies. However, the German draft bill is still a light version of comparable bills existing, for example, in the United States, where the veto right is not limited to any specific time period.   Unavoidable loopholes in the draft bill and the upcoming law are already clear and arise from the fact that various investors, each holding less than the allowed 25% ownership level, could form an alliance or that an investor might use a European or US company as an investment vehicle to circumvent the law.   Critics already argue that the bill sets the wrong sign for investors who are both desired and needed in Germany. Despite the fact that practically all currently operating government funds are acting in a faultless manner, Germany intends to protect, in particular, its key industries from the two new players on the government fund field: Russia and China.