Effective since 18 July 2017, the German government strengthens control on attempts to take over German companies by investors from outside the EU or EFTA by a respective amendment of the Foreign Trade Ordinance (“Außenwirtschaftsverordnung”). The Middle Kingdom’s long-standing history of heavy foreign investments control (FDI control) all the while promoting outbound investments could explain Germany’s move.

The political background in Germany

Free trade is a huge topic these days, in particular since US President Donald Trump has declared to end what he identifies as unfair conditions in the exchange of goods and services between the US and other countries in the world. In this debate, the German government has clearly positioned itself as a promoter of free trade. On the other hand, the German federal government is under public and political pressure from within the country when it comes to takeovers of German companies by foreign investors. In particular, investments from China have been in the focus of the political debate since the Chinese company Midea took over the German robotics specialist KUKA at the beginning of 2017.

The traditional German approach

Traditionally, Germany has a very liberal approach to foreign investments. An intervention of the government is only possible if the public order or security of Germany is endangered by the (direct or indirect) acquisition of the assets or shares (minimum 25% of the voting rights) in a German company by a person not resident in the EU or an entity not based or headquartered in the EU. The German government may in such cases prohibit or restrict the investment. Until the recent changes, the Foreign Trade Ordinance provided for a notification obligation only with regard to investments in the defense and IT security sector (sector-specific control).

The new Foreign Trade Ordinance

With the amendment of the Foreign Trade Ordinance not only the sector-specific control was extended to certain additional military products, but the notification obligation now applies also to foreign investments in a large number of so-called critical (civil) infrastructure sectors. These include the sectors of energy, IT and telecommunications, transport, healthcare, water supply, nutrition, finance, and insurance, including companies developing operating software for such infrastructure. Furthermore, also investments in certain cloud computing service providers and companies active in the area of data processing in the public healthcare system as well as companies involved with telecommunication surveillance measures by the state are now subject to a prior notification to and control by the German government.

Together with the extension of foreign investment control to further sectors of industry, the timelines for such control by the government have been extended. Whereas previously the government could only conduct an investigation if this was notified to the acquirer within three months after signing of the respective acquisition agreement, this deadline now starts to run only when the government has gained actual knowledge of the signing of such an agreement with a final time limit of five years following signing. The time period for the examination procedure itself is extended from two months to four months following receipt by the government of the complete documentation on the acquisition. According to the German government, this is not only to take into account the increased complexity of transactions, but also to allow for consultation of the Ministry of Economy and Energy in charge of the investigation with the entire government in politically delicate cases.

Furthermore, the period for the government to issue, upon request by a foreign investor before entering into a definitive acquisition agreement, a certificate of non-objection (negative clearance) is now extended from one month to two months. Whereas foreign investment control in Germany is expanded to more sectors of industry by the amended Foreign Trade Ordinance and the longer timelines will allow the government to investigate the consequences of an acquisition more thoroughly, the assessment criteria themselves remain unchanged. Still, the government may only prohibit or restrict an investment if the same would endanger the public order or security of Germany. Nevertheless, non-EU investors planning the acquisition of German companies in industry sectors considered as “critical” under the new Foreign Trade Ordinance need to anticipate the new notification requirements. Further to the generally extended timeframes, a newly introduced option for the government to suspend the review period in order to negotiate certain aspects of the acquisition with the parties render the overall timeframe hard to predict. In all cases of doubt, investors should notify the German government of an acquisition to start the three months period for opening an investigation and should apply for negative clearance.

The new European paradigm

Germany’s new Foreign Trade Ordinance is connected with an initiative at the EU level jointly started by Germany, Italy, and France in February 2017. The governments of the three member states asked the EU Commission to review the possibility of EU member states being able to block a foreign investment or make it subject to conditions not only when public security and public order are at stake, but also based on economic criteria. The three governments inter alia suggested that the right of non-EU investors should be subject to reciprocity in cases where EU investors are granted only limited market access in non-EU countries, e.g. by being forced to set up local joint ventures or being barred entirely from certain sectors.

China in the crosshairs

While the initiative was not directly pointing the finger at a particular country, the reference made to foreign investors being forced by other nations to set up local joint ventures or being barred entirely from certain sectors sets a familiar tone. It forcibly reminiscent of the treatment foreign investors have been subjected to by the Middle Kingdom since its opening-up to other economies. With China’s access to the World Trade Organization (WTO) in 2001, experts and foreign pundits had predicted that China’s aversion towards ‘foreign influence’ and ‘western imperialism’ would diminish, not out of pragmatism but out of sheer necessity to comply with international trade rules. This compliance has, however, yet to fully occur. Indeed, the country is known for its reluctance to allow foreign capital to flow in certain industries in spite of numerous trade rules prohibiting such restrictions.

Policies with historical roots

China’s glaring hostility towards ‘western imperialism’ – a pseudonym for capitalism, mostly stems back to Mao Zedong’s ‘Cultural Revolution’. This major social and political movement has carved the ideological bedrock of which much of the fear, compounded with abhorrence for western values come from. Upon Deng Xiaoping’s rise to power in the late 1970’s, the country adopted capitalism-inspired economic policies which at the time represented a systematic repudiation of everything the Cultural Revolution stood for. Albeit benefiting from unprecedented gains in economic growth upon opening up, China struggled to fully let go of Mao’s heritage, and the memory of its leader still influences greatly Chinese politics. A vestige and one of the most compelling examples of this reluctance to fully embrace the rules of international trade is the yearly issuance of the “Catalogue Guiding Foreign Investment in Industry” (‘CGFI’) by the Chinese Ministry of Commerce (‘MOFCOM’). This instrument has been used by Chinese policymakers to manage inbound foreign direct investment. It divides industries into three categories: encouraged, restricted and prohibited. Prohibited and restricted industries are either imposed stringent ownership restrictions (obligation to set up a local joint-venture) or a complete ban for foreign-invested enterprises.

The new Chinese paradigm

This attempt to keep foreign capital at bay, while being relatively effective for small and medium-size investors has never discouraged bigger players, which have long found a way to circumvent this seemingly insuperable Investment Great Wall. Indeed, many MNCs have resorted to setting up complex corporate structures such as the now infamous ‘Variable Interest Entities’ (VIE), allowing them to escape statutory restrictions on ownership. In an effort to address the critics of those policies and their two-tier enforcement (those happy few being merely frowned upon vs. the rest completely barred from investing in certain industries) but also and maybe more importantly in order to jolt its economy that has been slowing down, China has recently gone down on a road that has surprised many.

Ultimately, China seems to realize that foreign capital has been instrumental to its economic growth.

Over the course of the past 12 months, the country has drastically accelerated its opening up to other economies and has implemented numerous policies that many thought they would never see in their lifetime. In a little shy of a year, China has decreased from 93 to 63 the number of industries banned from foreign ownership and has also decided that the enforcement of this list would be executed to a national level. This cut included industries such as banking services, waterway transportation, education and aviation manufacturing. With respect to the aviation and ship manufacturing, we’ve seen the caps on join venture equity been entirely abolished for some products. Additionally, within the accounting and auditing service industries, the previous requirement for the chief partner of an accounting firm, which undertakes foreign investment to be a PRC national was too abolished. Despite prevailing regulations remaining within the accounting sector at this time, the systematic relaxation of regulation is a testament to China’s attitudes towards open market reform. Prior to the easing of the overarching list, foreign investors often faced local disparities in the application of this list where a business would be allowed to operate in Shanghai but not in Shandong or vice-versa. Further, any foreign investment that does not fall under the ‘restricted’ list of industries will be exempted of obtaining an approval from the Ministry of Commerce whereas in the past each and every investment had to be approved on a case by case basis. Finally, a law governing foreign investment promoting fair treatment for foreign companies is on the horizon. The government has announced that it was working on a set of policies that would have the effect to create equal treatment for foreign and domestic capital in M&A. It is expected that within the next five years there will be no more material differences in application procedures, processing timeframe, regulation method, industry policy and tax treatment.


During a speech on July 17, 2017, President Xi Jinping stressed that “China must push forward for faster market opening in areas that protect consumer rights, increase financial competition and fend off financial risks.” It is anticipated that the financial sector and consumer services are the next industries for “opening up” on the government’s agenda. Ultimately, China seems to realize that foreign capital has been instrumental to its economic growth. Beijing now fully understands that lifting up the remaining barriers would be one of the most powerful moves in reinvigorating an economy that has been gradually wearing off all the while allowing the country to posture as an advocate and promoter for free trade at a time where the United States and Europe seem to be implementing strategies to aggressively level the playing field. On the other hand, it would be out of place to overestimate the impact of the new German policy, because the basic requirement of a “threat to public security and public order” will be affirmed only in a very limited number of cases.

About the authors: this article is a joint-article co-written by Dr. Sven Ufe Tjarks of the German law firm Friedrich Graf von Westphalen and Teo Doremus of the Chinese law firm IPO Pang Xingpu.

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