German government blocks Chinese takeover

On 2 December 2020, the German government approved the veto of a takeover attempt by a Chinese company. As these proceedings are treated as confidential, the German government did not disclose the identity of the companies.

However, the press reported that the target company is IMST GmbH, a company active in the field of satellite and radio technologies including 5G, and the buyer was Addsino, a subsidiary of state-owned China Aerospace Science and Industry Corporation which manufacturers military communication systems. The transaction is supposedly blocked due to national security risks involving IMST products in relation to components for an observation satellite whose data is used for 3D models by the military amongst others for simulation and weapon systems. Concerns were quoted that the company's know how would contribute to China's military capabilities. Additional concerns were quoted in relation to IMST's security relevance for the German police.

Based on the facts publicly available it remains unclear whether a mandatory filing or a voluntary filing under the broadened German investment screening regime was made. However, the move of the German government confirms that the changes introduced to the German foreign direct investment screening during this year (here) not only lowered the substantive review test but also enable a much earlier intervention.

Even though the latest changes to the German foreign investment screening were triggered by the corona crisis and related to the healthcare sector (see for the development of the German review here and here), the German government moved to block a transaction in an industry which is closer to "traditional" security concerns namely telecommunications and satellite technology.

Similarly, the German government also used its veto powers in a transaction in summer 2020 which gained less press attention. This transaction involved PPM Pure Metals GmbH and the German government raised security concerns in relation to the company's production technology for metals used in semiconductors and infrared detectors, including for military applications. This transaction was vetoed despite PPM having filed for insolvency.

The key takeaways for Chinese and other foreign investors from these latest developments are:

• Vetoing a transaction remains the last resort for the German government and is likely to be considered in transactions involving targets with products relevant for security agency or the military.

• The vast majority of foreign investments is cleared. If issues arise, these are resolved through "remedies" rather than a full veto of the transaction.

• Stricter scrutiny will be conducted if the investor is a state-owned company which was introduced in the law as a consideration in assessing the security relevance of a transaction.

• The move of the German government comes at a time when foreign direct investment receives a lot of attention by legislators around Europe (see our overview here).