Germany decides on foreign investment

Investors from outside Europe, including private equity firms, could be affected by an amendment to Germany’s Foreign Trade Act approved today.

Germany’s Federal Cabinet Government today approved a ruling which will allow the German government to veto any investment of more than 25 percent in certain types of company from non-European investors.

The rule has been formulated to prevent sovereign wealth funds, in particular those from China, Russia and the Gulf States, buying strategically important German assets relating to defence.

The update to Germany’s Außenwirtschaftsgesetz, or Foreign Trade Act, specifies that the Government can limit or totally block investment in assets if the “strategic infrastructure” or public security is put in jeopardy.

Martin Schulte

The law applies to investors from outside of European Economic Area seeking a 25 percent stake or more. The government veto can be enacted at any point up to three months after the deal is announced.

“It may not make or break any particular deals, but US private equity investors will see a potential extra complication imposed on them, making the German market appear to be no longer a level playing field,” Martin Schulte, a partner in law firm DLA Piper’s Cologne office, told PEO.

AmCham Germany, an organisation dedicated to promoting German-American business relations said in a statement, “Planning reliability and legal certainty are essential conditions for investment. Decisions either for or against approval should be made after a brief processing period of no more than four weeks.”

“The private equity industry is innovative; it will circumvent any technical regulatory obstacles that arise. The real issue is that investors will start to see the German regulatory environment as unpredictable and increasingly expensive to operate in,” said Peter Laib, managing director at Zurich-based fund of funds manager Adveq.

Foreign private equity firms with funds domiciled within Europe and denominated in Euros, such as KKR’s Europe III, should not be affected by the ruling.

Sovereign wealth funds, state-owned pools of capital that have amassed huge sums in the Gulf States and Asia in particular, were praised by Stephen Schwarzman, chairman and chief executive of The Blackstone Group, earlier this year as being “smart, long-term, and highly professional”.

Last year China’s Government Investment Corporation bought a 9.9 percent stake in Blackstone for $3 billion (€2 billion).

In the US, the President has been able to prohibit foreign direct investment if it is seen as a threat to national security since 1988. An additional control was introduced last year, meannig all direct investments in which a foreign government is involved are scrutinised by the Committee on Foreign Direct Investment.