GERMANY?S DRAFT INVESTMENT SECURITY LAW

UNCLAS SECTION 01 OF 03 BERLIN 002064 SIPDIS SIPDIS PLEASE PASS TO TIM HAUSER AT EEB/IFD/OIA; LKOHLER AT US TREASURY; JKALLMER AT USTR E.O. 12356: N/A TAGS: EFIN PREL PGOV GM SUBJECT: GERMANY?S DRAFT INVESTMENT SECURITY LAW STRIKES BALANCE BETWEEN NATIONAL SECURITY AND OPEN INVESTMENT REF: BERLIN 01958 ¶1. (SBU) Summary: The German Ministry of Economics has published a first draft of a law establishing a review mechanism for foreign investments that seeks to address national security considerations without deterring legitimate business. Ministry officials say the draft, significantly narrower in scope than a recent CDU proposal to restrict foreign investments, keeps Germany open to foreign investment and in line with European Community Law. Drafters took steps to minimize unwarranted scrutiny or politicization of foreign investments by limiting the number of agencies involved, setting aside any specific role for the legislature, keeping the review period short, and not targeting particular sectors. Following discussion within the government and among stakeholders (such as business organizations),a new draft will be presented to the Cabinet and Bundestag for approval. The goal is to have it pass through Cabinet before the end of the year. End summary. -------------- ECONOMICS MINISTRY?S DOMAIN -------------- ¶2. (SBU) By amending Germany?s Foreign Trade and Payments Act, the Economics Ministry?s draft creates an investment security mechanism to allow the government to veto investments in German companies that compromise ?public order and security.? The review procedure will be established through changes to Germany?s Foreign Trade and Payments Order, the German Securities Acquisition and Takeover Act, and the Cartel Law. The government will discuss the draft internally and invite input from business organizations. Although the draft will likely change before it is presented to the Cabinet and Bundestag for approval, Ministry officials told the Embassy that they expected its spirit to remain intact. ¶3. (SBU) The Economics Ministry would have exclusive authority to initiate a review and would rule on investments in consultation with the Foreign Ministry. Ministry officials said the draft contains no role for the Bundestag, and that the Ministry would not have to report on transactions to the legislative branch. Dr. Ursina Krumpholz, Head of the Ministry?s Division for Foreign Trade Law, said Parliament could insist on reporting provisions before approving the proposed law, but that it is traditionally hesitant to do so. When military and encryption technology were first included in the Foreign Trade and Payments Act in 2003, for example, Bundestag deputies did not add any provisions to this effect and actually narrowed the scope for a government veto. Nevertheless, the emergence of sovereign wealth funds is a widely debated issue in Germany, and a recent Russian power play involving German energy companies has led to a heightened interest in economic security issues. ¶4. (SBU) Economics Ministry officials indicated that they expect other Ministries will request inclusion in the review process. The Finance Ministry, which had been closely involved in the drafting and which supervises the German Financial Supervisory Authority (BaFin),is a likely candidate, but others may also put in a bid. At a recent meeting of the metal workers union, a senior Ministry of Labor official told Econ Counselor that his Ministry is keenly interested in a role. -------------- CRITERIA FOR SCRUTINY -------------- ¶5. (U) Under the proposed changes, the German government could veto any investment, regardless of economic size or sector, in which a foreign entity acquires more than a 25 percent voting stake. (Note: Investors not legally established in Germany, or one legally established in Germany in which a non-resident holds a 25 percent stake or more qualify as foreign entities. End note.) One likely amendment will be a rule combining voting rights of direct and indirect holdings of any single non-resident investor in a takeover consortium for the purpose of calculating the 25 percent threshold. BERLIN 00002064 002 OF 003 ¶6. (SBU) According to Ministry officials, however, the scope of the law is limited by European Union legislation guaranteeing the free movement of capital. Member states are allowed to limit this freedom only if ?public order and public security? are clearly at stake (Article 58 EC Treaty). The European Court of Justice would have the ultimate jurisdiction on the legality of any banned transaction if it were challenged in court. Econ Ministry officials noted that the European Court of Justice has interpreted Article 58 narrowly in its case law and its scope is therefore limited. Sectors where the court has upheld national decisions based on Article 58 have been telecoms, energy and some essential (public) services. -------------- REVIEW PROCESS -------------- ¶7. (U) While the proposed law does not require investors to notify the government, they can file a planned transaction for review to gain legal certainty. Alternatively, the Ministry could act on its own initiative if it believes a transaction may raise concerns. The Ministry has three months from the date the transaction is published or the contract is signed to initiate a review, after which a transaction cannot be re-evaluated. While the review is in progress, the deal is suspended. In such a case, the Ministry would notify the companies involved and ask for background information on the proposed investment. After it has received the information requested, the Ministry has one month to evaluate and decide whether to impose conditions on the transaction or veto it entirely. If the Ministry chooses to take no action, the deal is automatically approved. Ministry officials emphasized that these time periods were kept to an absolute minimum to allow investors to have legal certainty very quickly. ¶8. (SBU) It is unclear under which circumstances the Ministry would decide to review a transaction. The draft requires the financial watchdog BaFin and the Cartel Office to provide information if requested by the Ministry, but these two entities do not have authority to act on their own. Asked how the Ministry would obtain information on any critical transactions, officials at the Economics Ministry mentioned the media as a source of information. In all likelihood, public opposition to, or political controversy over a particular transaction would be the main grounds for possible review. -------------- REACTIONS TO THE LAW -------------- ¶9. (U) Reactions to the proposed law have varied. The Federation of German Industries, Germany?s powerful industry association, though questioning the need for such legislation, has welcomed the short review periods and their legal certainty. Yet the German Council of Economic Experts, which advises the government on economic policy, issued a sharp warning in early November that an investment review mechanism would ?create a tool inviting abuse in takeover attempts that public opinion considers undesirable, to the detriment of the economy as a whole?. A recent CDU proposal on investment review if anything calls for stricter controls on foreign investment. ¶10. (SBU) Comment: We expect the draft law to receive careful scrutiny as various ministries and stakeholders jockey for position. The Ministry of Economics has been treading a careful line between recognizing the increasing political sensitivities of some foreign investments while striving to ensure that Germany maintains an open investment climate without political intrusion. Clearly, however, Chancellery and Ministry of Economics officials would prefer a less restrictive law that reinforces the message that Germany is still open for investment, and fully expect the law in its final form will be narrowly enforced. The debate on the draft over the coming weeks will show where the balance between public concern and economic orthodoxy will fall. During consultations this week in Washington on export controls, the BERLIN 00002064 003 OF 003 Economic Ministry will likely use the opportunity to reach out to CFIUS interlocutors at both Treasury and State to discuss both the draft and the current state of play. End comment. KOENIG