Extended screening procedures for foreign direct investments

The trend towards regulating foreign direct investments moves into the next round in 2018. After the German federal government increased the hurdles to M&A transactions involving non-EU investors in July 2017, the European Commission proposed a plan for an EU -wide framework of investment screening in the fall of 2017. Without explicitly mentioning it, both initiatives are aimed at the in-depth examination of Chinese investments.

For years, Chinese companies have been among the most active investors on the German and European markets. According to research of the German Economic Institute in Cologne (Institut der Deutschen Wirtschaft, IW), they invested more than ten billion euros and acquired 56 companies in 2016, setting a new record. As a reaction to Chinese investors’ immense “passion for shopping”, the German federal government already enacted stricter rules for foreign investment in July 2017. A proposal of the European Commission for coordinating the measures between the EU Member States followed in September 2017.

Among other things, the rules already implemented in Germany provide for acatalog of security-relevant economic sectors and key technologies – for example, telecommunications or energy, as well as reporting requirements for investments in these sectors. In the future, investors and sellers will be confronted with significantly higher efforts due to the new reporting duties. In addition, the duration of the screening procedure will be extended. In order to obtain transaction security as rapidly as possible, investors will have to apply for  a so-called non-objection certificate more frequently in the future. However, the period when such a certificate is deemed to have been issued was also extended from one month to two months. This means that investors and companies must be prepared for longer transaction processes.

The tightened investment control will lead to longer transaction processes and complicate the investment process as a whole. This may scare off certain investors.

And there is no end in sight. The European Union is currently working on further regulations for foreign investments. The draft, which was presented in September, provides the EU Member States with minimum requirements for the screening of foreign direct investments in the EU, a coordination mechanism between Member States, and a right of the Commission to make recommendations. Many of the screening criteria leave considerable room for interpretation, however. Alone the question as to whether an investor receives government support in order to assess whether its offer is made under market conditions may not be easy considering the close integration of Chinese companies with government agencies. European businesses in the relevant sectors may easily become pawns of foreign and economic policy interests in this respect. In a free market economy, it is difficult to convey that sellers cannot select the investors making the most attractive offer. It therefore remains to be seen what 2018 will actually bring for German companies and their foreign investors.

We combine our years of experience with Chinese investments in our China Desk. Our specialists work together with the experts of other Practice Groups, allowing us to provide our clients with comprehensive legal advice on international investment issues.

Your contacts are the experts of the China Desk. Dr. Kai Bandilla, Bodo Dehne, Michael Vetter, and Sen Gao regularly accompany investments by Chinese investors in Germany.