Outbound investments by Chinese firms are not only becoming harder due to the tougher curbs at home but also because of the tighter shackles abroad.
In the US, Chinese dealmakers are faced with a slowing approval process under the Donald Trump presidency. In Australia, the government last year blocked big infrastructure investments by Chinese state-owned enterprises while promising tougher scrutiny towards them in the future.
Now Germany, another top destination for Chinese buyers, has introduced a tougher regulatory regime for foreign investments.
On July 18, the new German Foreign Trade and Payments Ordinance (FTPO) entered into force, allowing the government to scrutinise more broadly both direct and indirect acquisitions by non-EU investors of companies active in “particular security-sensitive areas”.
Under the new rules, which apply to acquisitions for at least 25% of a German company’s voting rights, the industries that are now subject to greater government scrutiny explicitly include energy, water, nutrition, information technology, healthcare, financial services and insurance, transport and traffic, and all related software technologies – in short, the sectors Chinese investors have been pouring money into.
In addition, FTPO highlighted a number of “security-related technologies” that it would be interested in taking a closer look at (see picture below).
To be sure, the new regime does not explicitly target Chinese investors. Still, given the high degree to which Chinese companies have strode the globe hunting assets, not least in Germany, M&A lawyers expect Chinese transactions to face greater uncertainty and to take longer to close.
Chinese companies were the second-biggest buyer of German assets in the first half of 2017, not far behind US companies, Dealogic data shows. At 24 deals with a total value of $10.45 billion they are on track to beat last year’s record numbers by a big margin.
In contrast, only five German M&A deals targeting Chinese assets – worth $14.44 million in total – were announced over the same period.
Chinese acquisitions in Germany boomed last year, exceeding German corporate activity in China for the first time. Compared with the 32 transactions collectively worth $750.64 million that were announced in 2015, Chinese buyers last year bid a total of $11.544 billion for 57 German company assets, according to Dealogic.
“Sensitive” what?
“One of the biggest concerns raised by the new provisions is the broad definition of a ‘security-sensitive area’”, said Stephen Kitts, a managing partner at Eversheds Asia who specialises in cross-border M&A.
For him, this will likely lead to an increase in the number of cases seeking a so-called clearance certificate from the Bundesministrerium für Wirtschaft und Energie (Federal Ministry for Economic Affairs and Energy, BMWi).
The BMWi, which is the official agency that conducts regulatory reviews of acquisitions in Germany, would have previously taken up to three months for an ex officio review of a deal. Non-EU investors could also request a non-objection letter from the BMWi prior to closing to avoid any legal uncertainty.
Now, an acquirer of “sensitive” assets has an obligation to notify the BMWi of a proposed deal; and within three months of the notice of the signed transaction contract the agency can decide whether to initiate a formal review that is seen as tougher. Following investigations, which can last up to four months upon obtaining all the relevant documents, BMWi can then decide whether to block a takeover citing public security concerns, according to a July 19 note from law firm Latham & Watkins.
But just how much tougher the new government investigations will be is something even lawyers on the ground have limited clarity on.
“We do expect the German government to open more investigation procedures than before, particularly with the sensitive industries,” Jana Dammann de Chapto, a counsel in the Hamburg office of Latham & Watkins, said. She added that it would be interesting to observe the change in the coming months to see how it compares to the workings of the Committee on Foreign Investment in the United States (Cfius), which blocked a number of deals under former US President Barack Obama. There is concern that the Cfius is get more bogged down under Trump.
So far, Germany has not blocked any Chinese deals because of the new rules. “However, we are seeing the German government take stricter approaches and re-opening investigations that were already closed,” Dammann de Chapto said.
Both her and Kitts expect transactions to now be subject to lengthier investigations and longer review periods.
“Schlitzaugen” for Chinese deals
There is a widespread consensus among the German leadership that foreign deals have until now not been properly scrutinised. That was brought to public attention last year when Chinese appliance maker Midea acquired one of Germany’s biggest innovators, robotics firm Kuka.
Angst and criticism mounted once Midea revealed its interest in Kuka. The most publicised critique came from Germany’s top official at the European Commission and a close ally to Chancellor Angela Merkel, Günther Oettinger.
“Kuka is a successful company in a strategic sector that is of key importance for the digital future of European industry,” Oettinger told Frankfurter Allgemeine Zeitung, a local newspaper in May last year. “[Since] there was no call for help to China, it is reasonable to ask whether a European solution ― such as an offer from one of the other two major shareholders, or capital input from other European companies” could be the better solution. No one came forward though.
Oettinger also achieved some notoriety for a non-public speech in November when he used the racist term “Schlitzaugen” – German for “slitty-eyed” – to describe a group of high-ranking Chinese officials that had just visited Germany, creating a media storm.
That kind of political atmosphere does not bode well for future Chinese investments. Many Chinese companies have come to Europe in search of technological know-how to help upgrade the country’s industry and shift China up the production value chain, the Midea-Kuka case being a perfect example. Veteran Asian dealmaker Henry Cai even set up a dedicated $1 billion fund, Asia-Germany Industrial Promotion Capital (AGIC), to snap up tech assets in Germany.
But world governments including Germany’s are growing wary of that trend and beginning to intervene.
One of the most prominent German cases was the attempted acquisition of Germany’s Aixtron SE by China’s Fujian Grand Chip Investment Fund. BMWi last year withdrew its initial approval of the deal, which was also blocked by the Cfius. Since then, things have escalated with Germany, France and Italy signing a joint letter to the European Commission, which said Europe was losing its advantage in technological know-how and asked the Commission to give member states greater freedom to block foreign investments.
Among the four pending Chinese acquisitions of German assets announced so far this year, according to Dealogic, the biggest one is by a Chinese consortium – comprising listed Chinese manufacturer Zhengzhou Coal Mining Machinery Group and private equity China Renaissance Capital Investment. It offered $594 million to take over Robert Bosh Starter Motors Generators in May.
