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FDI screening: German government prohibits sales in the semiconductor industry

The German government prohibited the sale of a chip factory of the German chip manufacturer Elmos to a Swedish subsidiary of a Chinese company as well as of the semiconductor equipment manufacturer ERS Electronic to a Chinese investor.

The German Ministry of Economics and Climate Protection (BMWK), which is responsible for the investment appraisal procedure, said that the acquisitions endangered Germany's public order and security. The BMWK had considered less severe measures, such as approving the acquisition subject to certain conditions and limitations, but found them not suitable to eliminate the danger.

"We have to look closely at company takeovers when it comes to critical infrastructures or when there is a risk of technology flowing away to acquirers from non-EU countries," said Robert Habeck, Germany’s minister of economics. "Especially in the semiconductor industry, it is important for us to protect the technological and economic sovereignty of Germany and also Europe."

In February another semiconductor deal was cancelled due to Germany’s foreign direct investment (FDI) screening: GlobalWafers could not take over Siltronic AG because the BMWK did not approve the deal.

Proposed investments in German security-relevant sectors from outside the EU must be reported to the BMWK if certain thresholds are reached in terms of voting rights or control rights. The BMWK can then initiate an FDI screening. Germany’s Foreign Trade and Payments Act defines which areas are security-relevant. These include some technologies as well as military industry and critical infrastructure. FDI screenings investigate whether the takeover could harm the security interests of Germany or the EU. The decisive factor here is who the buyer is or who is behind the purchase. Experts observe that investors from Asia Pacific are viewed critically in this regard - as the recent examples of Elmos and ERS Electronic confirm.

The decision joins a list of takeovers by Chinese investors that have been prohibited by the German government or only allowed under certain conditions. However, the BMWK only recently cleared the indirect acquisition of a German company by the Chinese automotive supplier Huizhou Desay SV Automotive Co., Ltd. subject to conditions after the target company and the acquirer gave certain undertakings to the BMWK.

"The clearance shows that despite the German government's search for a new China strategy, acquisitions of German companies by Chinese investors are still possible; Germany as a business location is still open to foreign investors," said Dr Markus J. Friedl of Pinsent Masons, who advised the Chinese acquirer in the clearance procedure.

"Nevertheless, the German government is serious about the protection of key technologies propagated by it and the European Commission”, Dr Friedl said. “For investors intending to invest in German businesses, it is therefore inevitable to clarify at an early stage whether the products and services of the German company are related to the protected key technologies and what the nature of this connection is. Accordingly, conducting an investment control due diligence is essential in tech M&A transactions of foreign acquirers."

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