Germany Moves to Protect Key Industries
In recent months, the German government has become increasingly anxious about the prospect of foreign state-owned investment funds or hedge funds -- which are popularly known as "locusts" in Germany -- snapping up strategic industries. Now Berlin has prepared measures to protect German firms from being bought by undesirable foreign investors.
The fact that no less than two working groups are dealing with the matter illustrates how dear the issue is to German Chancellor Angela Merkel. Merkel's Christian Democratic Union party has its own working group, led by Roland Koch, the governor of the German state of Hesse. In addition, a government working group comprising top officials from the Economic and Finance Ministries and the Chancellery is also dealing with the issue.
The two groups, which have collaborated closely, have drafted a set of proposals that Koch wants to present to the CDU leadership next week. The cabinet is to vote on the proposals before Christmas.
If the plan is implemented, the German government will have an instrument to use against unwelcome investors planning to purchase a German firm -- be it a Chinese state-owned investment fund, a French state-owned monopolist or an American hedge fund.
The experts from the Economics Ministry believe their proposal is merely a "minimally invasive intervention" into the rules currently in place. The relevant clauses of German foreign trade law -- which regulate the government's veto right in the arms sector -- are just being slightly extended, according to the ministry. Moreover, say sources in the ministry, the proposal is modest compared to the measures which were originally being considered.
In the future, foreign investors and German sellers will have the option of disclosing their plans to a state office. (In the far-reaching original draft, the parties would have been forced to disclose their intentions.) If the parties opt to disclose their plans, then the government will commit itself to making a decision on the transaction within a period of between eight and 12 weeks.
But if the foreign investor and the German firm do not voluntarily register their transaction, the federal government will have a veto right should it not approve of the business deal. Even three or four years after the deal is closed, the government would still be able to impose restrictions on the foreign investor's voting rights in order to limit its influence in the German company. "When in doubt, the federal government can also order the deal to be reversed," says Koch.
The government's power to intervene retrospectively is meant to motivate the parties involved to disclose their intentions at the outset. It also ensures the government will have a chance to exert its influence even in the case of takeovers that initially take place in secret.
The two work groups have chosen not to define which industries count as being "strategically important" and therefore come within the scope of the new regulations. Instead, the economics minister will decide on a case by case basis, guided by two criteria: The federal government can intervene if the firm is important for national security or if it is reponsible for strategically important infrastructure.
These vague parameters may give the government plenty of room to maneuver, but they also create problems. Government officials are faced with the tricky questions of which firms are important for security and what kind of infrastructure is strategically important.
Would the state have to intervene if foreigners wanted to purchase German telecommunications giant Deutsche Telekom? Probably. Siemens? Maybe. Deutsche Bank? Probably not.
"This is not a protectionist scheme with which we want to keep out foreign investors," says Koch. He explains that Germany is presently the only large country in the Western world that doesn't have any instruments to defend its industries against unwanted investors. "Germany should be on a par with other Western industrialized countries," he says.
Assistants to German Economics Minister Michael Glos are already warning against using the new instrument too often. Germany needs to continue presenting itself as an investment location that is open to the world, they say -- the country has to avoid creating the impression that it is sealing itself off. "The government's right to intervene should not be more than a stopgap measure for exceptional cases," sources within the Economics Ministry say.
"At the end of the day, the decision (when to intervene) will lie with the government," says Koch.