Cosco case shows: foreign direct investments are under increased scrutiny in Germany

The planned entry of the Chinese state-owned company Cosco Shipping into the Tollerort terminal at the Port of Hamburg has led to a major public debate in Germany, with many people claiming that it is still too easy for foreign investors under state control to buy into security-relevant businesses in Germany.

Cosco intended to take over 35% of the port terminal operator. However, the transaction became the subject of a foreign direct investment screening (FDI screening) initiated by the German Ministry of Economics on the basis of the Foreign Trade and Payments Ordinance. The German government yesterday issued a partial prohibition for the acquisition, thus concluding the FDI screening. Instead of the planned 35%, Cosco is now only allowed to acquire a company share of less than 25 %. The Federal Ministry of Economics justified the step by saying that the takeover would otherwise pose a "threat to public order and security".

The decision also prevents Cosco from acquiring atypical control through special rights. Among other things, the Chinese group is prohibited from "contractually granting itself veto rights over strategic business or personnel decisions". Cosco is also not allowed to appoint members of the management or persons in operative management positions who make decisions independently.

Cosco Shipping is not the only business from a third country that wants to invest in Germany's critical infrastructure or other security-relevant areas and is therefore currently under scrutiny. According to media reports, the planned takeover of VMware, a cloud computing business, by the US semiconductor company Broadcom is also being examined by the Federal Ministry of Economics.

"Foreign investors who intend to invest in companies in security-relevant industries should keep the German investment control in mind and provide for sufficient time in the transaction," Dr Sandra Schuh said, an expert in M&A transactions at Pinsent Masons. "In particular, they should check whether the planned transaction needs to be reported to the Federal Ministry of Economics. In addition, they should adhere to the prohibition of execution during the review."

Statistics from the Federal Ministry of Economics show that the number of FDI screening procedures initiated in Germany almost doubled from 2020 to 2021: there were a total of 306 national review procedures in 2021, compared to 160 in 2020 and only 66 in 2017. In addition, a full 240 EU notifications were received by the Federal Ministry of Economics in 2021 under the European cooperation mechanism. In such cases, an EU member state notifies the other EU member states that it has initiated a review procedure for a transaction, thus giving them the opportunity to comment on it.

According to experts, the increase in FDI screening procedures is caused by changes in German and European foreign trade law in recent years. Since then, it has become much more difficult for investors outside the European Free Trade Association (EFTA) to buy into German businesses from the 27 security-relevant sectors defined in the Foreign Trade and Payments Ordinance.

If investors from countries outside the EFTA want to invest in German businesses from these security-relevant sectors, the transaction must be cleared by the Federal Ministry of Economics whenever certain thresholds are reached in terms of voting rights or control rights. The list of security-relevant sectors no longer only includes the military and critical infrastructure, but also key technologies. The focus of the investment control review is the question of whether the takeover could harm Germany's or the EU's security interests. Crucial here is also the question of who the buyer is or who is behind it. Experts observe that especially investors from China are under increased scrutiny.