Germany: Foreign Investments Under Increased Scrutiny

August 14, 2018

The German government opposes two high-profile acquisitions by foreign investors as it plans to tighten foreign investment control laws. 

Key Takeaways: 

  • In July and August 2018 the German government opposed two high-profile acquisitions of German companies by non-EU/EFTA investors due to national security concerns. 
  • The recent actions taken by the German government signal a stricter stance on the review of foreign investments into Germany, in particular by non-EU/EFTA investors that are state-owned or have strong government backing. 
  • Germany plans to tighten its foreign investment control laws, in particular by lowering the threshold for government scrutiny from 25% to 15% foreign ownership, thereby subjecting more transactions to national security reviews. 


The German government on 1 August 2018 prohibited the acquisition of a German company by a non-EU/EFTA investor on the basis of national security concerns for the first time since the laws on the prohibition of foreign investment laws were enacted in 2004. The Chinese company Yantai Taihai sought to acquire Leifeld Metal Spinning AG (Leifeld), a German machine tool manufacturer active in the defense sector and the nuclear industry. When it became clear that it would not receive approval from the Federal Ministry for Economic Affairs and Energy (BMWi), Yantai Taihai withdrew its application and abandoned the transaction before it was formally blocked. 

Yantai Taihai’s withdrawal came soon after the German government instructed the state-owned bank KfW (KfW) on 27 July to acquire a 20% stake in German power grid operator 50Hertz Transmission GmbH (50Hertz) to avoid an acquisition by the Chinese state-owned State Grid Corporation of China (SGCC). Because the government did not have the authority under the Foreign Trade and Payment Ordinance (AWV) to officially block the foreign investment in this case, it intervened through KfW to preemptively acquire the 20% stake, effectively blocking SGCC’s proposed investment. 

Both matters demonstrate the German government’s increasing enforcement of its foreign investment control laws to prevent acquisitions of German businesses where national security might be affected. Moreover, the 50Hertz case highlights the German government’s desire for broader powers to restrict foreign investment that may affect national security. In particular the government has proposed expanding its authority to review acquisitions that concern – directly or indirectly – less than 25% of the voting rights in a German business, and therefore to effectively lower the threshold from 25% to 15%. 


Yantai Taihai, a Chinese company active in nuclear casting and product forming, sought to acquire all shares in Leifeld, a manufacturer of machine tools for the defense sector as well as the aviation, aerospace and nuclear industries. Leifeld, with approximately 200 employees and €40 million in annual sales, is a technology leader in engineering machine tools that can process high-strength materials. After a detailed review of the proposed transaction, the BMWi concluded that the acquisition would jeopardize public order and security in Germany and should therefore be prohibited. On 1 August 2018, the German government approved the BMWi’s request to prohibit the acquisition. Before the BMWi could issue a formal prohibition order, Yantai Taihai withdrew its application for a clearance order and declared that it no longer intended to pursue the transaction. 

The AWV’s usual emphasis on critical infrastructure makes this case particularly noteworthy since Leifeld is not involved in critical infrastructure. Therefore, while an explanation for the prohibition was not made public pursuant to the German Foreign Trade Act (AWG) and Foreign Trade and Payment Ordinance (AWV), the decision to prohibit the acquisition likely was reached using the rather broad argument that it was a jeopardy to public order and security. Because critical infrastructure was not implicated by the transaction, it is likely that the use of machines, inter alia, for the defense sector ‒ and therefore for the German military ‒ led to the prohibition. 


50Hertz, one of four German power grid operators, is active predominantly in the eastern part of Germany and is likely to play an important future role in transporting power from the north into the south of Germany. Its business qualifies as critical infrastructure as defined in the AWV in connection with the German Act regarding the Federal Office for Information Security Technology (BSIG) and the Ordinance on the Determination of Critical Infrastructures (BSI-KritisV). Therefore, any acquisition of at least 25% of the shares in 50Hertz is presumed to be a jeopardy to German public order and safety, and any agreement regarding such an acquisition must be notified to the BMWi. 

However, because the proposed SGCC transaction only involved the acquisition of 20% of the German target (below the legal threshold), the BMWi had no jurisdiction under the AWG to review it. Lacking regulatory authority to act, the German government approached 50Hertz’s majority shareholder Elia, which had a right of first refusal with respect to the 20% stake, persuading it to exercise the right and subsequently selling the stake to KfW. In a press release, the BMWi acknowledged that, due to national security concerns (i.e., the protection of critical infrastructure), the German government instructed KfW to purchase the 20% stake in 50Hertz for a certain period of time so that it can be sold to a suitable third party in the future. 

Both the Leifeld and 50Hertz cases represent a new approach to Germany’s national security reviews. While the legal standard for review has not changed since the amendments of the German foreign investment control laws in 2017, the government for the first time has made use of the AWV as well as other means to prevent foreign investment into German critical infrastructures. The BMWi has also expressed concern about approving investments from countries that do not themselves offer fair market conditions to German companies seeking to invest abroad. The German government’s recent actions make clear its increasing willingness to act in accordance with these statements. 

German plans for tightening foreign investment control 

Following the unique circumstances of the 50Hertz transaction, the German government is planning to amend the AWG and AWV. The core amendment will lower the ownership threshold at which foreign investment transactions can be scrutinized or prohibited by the government from 25% to 15%. Other amendments of the draft bill have not yet been made public. The BMWi has said that the draft bill is currently being discussed within the competent ministries and could still become effective as early as this year. This relatively short timeline is plausible given that support for tightening these laws is widespread among the governing political parties as well as initiatives from the Bundesrat, the council of the federal states in Germany. 

Germany is following a worldwide trend of governments seeking to reinforce their powers to scrutinize foreign investments, in particular into domestic critical infrastructure and critical technology, and to tighten the foreign investment control laws. As the U.S. finalizes its CFIUS reform and the UK strengthens its national security scrutiny, Germany is moving in a similar direction. German plans also coincide with the introduction of an EU-wide coordination of foreign investment screening in the EU member states, which is expected to be adopted early next year. 

What do investors need to know now? 

Investors contemplating direct investment into German industries that may pose national security concerns should carefully take into consideration the following: 

  • The German government is willing to intervene and ultimately prohibit transactions that it considers a threat to public order and security. To that end, the BMWi may initiate more detailed review proceedings of transactions. 
  • Non-critical investments are still being cleared within the regular two-month review period by BMWi. 
  • German foreign investment control laws will get stricter; in particular, the threshold for scrutinizing and prohibiting transactions might be lowered from 25% to 15%. It cannot be ruled out that future amendments to the existing regime may also impact review proceedings currently underway. 
  • The planning of M&A transactions must take stricter foreign investment control laws in various jurisdictions into account. Accordingly, early detailed planning and thorough due diligence of foreign investment control issues have become more important. Investors should consider how to reconcile foreign investment control laws in different jurisdictions, and how to deal with governments asking for concessions in order to clear the transaction. 

How can Dechert help? 

Dechert has a team ideally placed to help with foreign investment issues in connection with cross-border M&A transactions. With offices in Frankfurt, Munich, London, Brussels and Washington, D.C. (among many other locations) we can assist with planning a successful approach to multiple foreign investment review authorities. In particular, with respect to the implications of the developments in Germany and contemplated amendments of the AWG and AWV on M&A transactions, Dechert lawyers in Frankfurt and Munich are available to: 

  • Provide a detailed analysis, prior to commencing an acquisition process, of whether acquisition of a German target may impose a threat to public order or security, 
  • Assist in drafting acquisition agreements to increase the likelihood of regulatory approval and plan for the possibility of a blocked transaction, and 
  • Assist in drafting and submitting any required notification to the BMWi.

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