Germany significantly lowers threshold to veto deals; FDI screening mechanism at the European level is coming soon
Legal developments and changes in Germany
On December 19, 2018, the German Goverment passed an amendment to its foreign direct investment regime that increases its powers to investigate and block foreign direct investments in the defense sector, in critical infrastructures, including the media industry, and in certain other civil technologies that are relevant to security, such as IT-security. The amendments will enter into force in January 2019.
This is the second significant reform of the German foreign direct investment rules within one and a half years. Germany already tightened restrictions on foreign direct investments in July 2017 by expanding the competences of the German Federal Ministry of Economic Affairs and Energy to review whether a foreign direct investment jeopardizes public order or security of the Federal Republic of Germany and by significantly extending the review periods. As expected, those reforms caused a significant increase in notifications of transactions to the Ministry and led to much more formal review procedures. In August 2018, the French company Manoir Industries, controlled by the Chinese Yantai Taihai Group, withdrew its bid for Leifeld Metal Spinning AG after the German government, was about to block the deal. Leifeld Metal Spinning AG is a German machine tool manufacturer specialized in high-strength materials for the aerospace, energy, automotive and potentially also for nuclear industries. It would have been the first implementation of Germany's foreign direct investment rules to veto an M&A transaction. Another remarkable case that became public shortly before the Leifeld case was a transaction concerning the German grid operator 50Hertz. The German government prevented the State Grid Corporation of China from buying a 20 percent stake in 50Hertz by directing the state development bank Kreditanstalt für Wiederaufbau (KfW) in Frankfurt to buy this stake and potentially resell it later.
The new amendments are in line with the stricter control of foreign direct investments in Germany. They considerably expand the competences of the Ministry to examine the acquisition of German companies by foreign investors through lowering the pick-up threshold for review from 25 percent stake in a German company to 10 percent for certain sensitive industries. This new threshold of 10 percent applies to