Germany unveils law to block foreign takeovers

The law, aimed at protecting strategic domestic industries from unwanted foreign takeovers, was approved by the cabinet yesterday (20 August), despite insistence by German business associations that the move goes against EU rules on the free movement of capital.

The move is principally directed against state-controlled sovereign wealth funds originating in locations such as Abu Dhabi, Saudi Arabia, Russia and China, amid fears that they could be used to take over strategic German industries, such as in the energy, telecoms or banking sectors.

The law, which is yet to receive parliamentary backing, would give the German federal government the right to veto any non-EU or European Free Trade Association (i.e. Switzerland, Norway, Lichtenstein and Iceland) investment amounting to 25% or more of a company’s stakes if it deems that national security is at risk. 

Industry groups are concerned that the new bill will scare off investors, but Economy Minister Michael Glos yesterday insisted that the mechanism would be used only in “extremely rare” cases and that “the majority of foreign investments won’t be affected”. “Germany is and remains open to foreign investment,” he stressed. 

But Werner Schnappauf, who heads of the country’s largest industry group, the Bundesverband der Deutschen Industrie (BDI), insists the law sends “the wrong signal for Germany as a place to invest”. 

“As the world’s leading export nation and a key source of foreign investment, Germany is heavily dependent on open markets,” he stressed, underlining that foreign investment provides for roughly two million jobs in the country. 

The BDI further insists that the law would be in breach of EU legislation on the free movement of capital – which is meant to apply equally to EU and non-European investors. It further argues that its definition of national security is too broad. 

But the government says the law merely brings German law into line with existing legislation in France, the UK and the US. 

What’s more, the European Union is also getting worried about the risks posed by sovereign wealth funds, which are now worth around $2.5 trillion worldwide. Last February, the Commission put forward new proposals under which sovereign wealth funds would be asked to make public their investment objectives and relationship with government authorities, as well as the size and source of their assets, the currencies in which they are held and the rules under which they operate (EURACTIV 28/02/08). 

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