Post by Sapphire Capital on Aug 22, 2008 8:09:45 GMT 4
Germany must use protectionism sparingly
Source:Nicholas Pettifer
IFLR
Foreign investors should not fear Germany's new legislation to monitor foreign investment, but the federal government has a responsibility to apply its new powers conservatively.
Yesterday, the German cabinet approved a bill that gives the state power to scrutinise acquisitions of more than a 25% stake by entities based outside of the EU or EEA. The Ministry of Economics and Technology (BMWI) will be able to prohibit direct or indirect acquisitions that it considers a risk to the public order or security of Germany.
"It's nothing completely absurd, but it depends on how it is handled. The concept of a national interest is the key issue," said a German corporate partner. "If it is applied too frequently, then I would oppose it. I personally prefer a more liberal system, but I can see why we may need something for more extreme cases."
The danger is that the BWMI could use the new powers to meddle in a large number of transactions, slowing the investment process for foreign companies. This protectionism may discourage investment and damage the German economy.
But Johannes Perlitt, partner at Clifford Chance, is confident this will not be the case:
"If we'd had the law for the past 50 years, it would only have been used once or twice and no one would question it. It is just reassuring to have something in place, to have weapons in case they are needed. It may send a signal that some investment funds are not welcome in Germany, but I don't think that is the case."
Indeed, the legislation is not unique to Germany; many other countries have similar systems in place. Most prominent is the US Cfius process, which is triggered at much lower thresholds. So Germany can argue that it is merely bringing itself into line with peers.
The timing of the legislation may create problems, though. It seems to have been created in response to the furore over sovereign wealth funds (SWFs) at the start of the year. Many SWFs have been working hard to be more transparent and may resent Germany's action.
But Perlitt is sure that investors will not be put off, comparing any political reaction to SWFs to Germany's vocal response to private equity:
"There was lots of coverage on German opinions on private equity last year. But if you are on the autobahn and stop in a restaurant, it is now owned by private equity and no one cares. Politically it is sometimes useful to take a strong line, but I don't think this new law will change foreign investment much."
It will be a while before the concept of national interest is defined, but in the meantime investors in particularly sensitive sectors should talk to the BMWI before finalising deals.
In ongoing multi-jurisdictional transactions, it may also be sensible to carve-out German subsidiaries to avoid delays. Restrictions and prohibitions can then be dealt with in separate transactions at a later date.
Source:Nicholas Pettifer
IFLR
Foreign investors should not fear Germany's new legislation to monitor foreign investment, but the federal government has a responsibility to apply its new powers conservatively.
Yesterday, the German cabinet approved a bill that gives the state power to scrutinise acquisitions of more than a 25% stake by entities based outside of the EU or EEA. The Ministry of Economics and Technology (BMWI) will be able to prohibit direct or indirect acquisitions that it considers a risk to the public order or security of Germany.
"It's nothing completely absurd, but it depends on how it is handled. The concept of a national interest is the key issue," said a German corporate partner. "If it is applied too frequently, then I would oppose it. I personally prefer a more liberal system, but I can see why we may need something for more extreme cases."
The danger is that the BWMI could use the new powers to meddle in a large number of transactions, slowing the investment process for foreign companies. This protectionism may discourage investment and damage the German economy.
But Johannes Perlitt, partner at Clifford Chance, is confident this will not be the case:
"If we'd had the law for the past 50 years, it would only have been used once or twice and no one would question it. It is just reassuring to have something in place, to have weapons in case they are needed. It may send a signal that some investment funds are not welcome in Germany, but I don't think that is the case."
Indeed, the legislation is not unique to Germany; many other countries have similar systems in place. Most prominent is the US Cfius process, which is triggered at much lower thresholds. So Germany can argue that it is merely bringing itself into line with peers.
The timing of the legislation may create problems, though. It seems to have been created in response to the furore over sovereign wealth funds (SWFs) at the start of the year. Many SWFs have been working hard to be more transparent and may resent Germany's action.
But Perlitt is sure that investors will not be put off, comparing any political reaction to SWFs to Germany's vocal response to private equity:
"There was lots of coverage on German opinions on private equity last year. But if you are on the autobahn and stop in a restaurant, it is now owned by private equity and no one cares. Politically it is sometimes useful to take a strong line, but I don't think this new law will change foreign investment much."
It will be a while before the concept of national interest is defined, but in the meantime investors in particularly sensitive sectors should talk to the BMWI before finalising deals.
In ongoing multi-jurisdictional transactions, it may also be sensible to carve-out German subsidiaries to avoid delays. Restrictions and prohibitions can then be dealt with in separate transactions at a later date.