A rare thing: Some insights into the leaked German prohibition decision concerning IMST

Germany has an active and well-established foreign investment control regime, which has been significantly tightened over the past few years – and the next round of reforms is already in the pipeline. Yet, prohibition decisions are very rare events in German foreign investment control. To our knowledge, the case at hand is only the third ever prohibition decision in around 12 years since the regime was introduced in Germany (besides a couple more deals which were abandoned by transaction parties amid foreign investment concerns). Also, this case is a rare exception to the norm that foreign investment proceedings are a “black box”. Usually, no details are known to the public unless parties decide to publish such information, but this decision was leaked during the final political stretch when it was put to vote in the cabinet of the Federal Government in Germany.

The case relates to the proposed acquisition by Addsino (a subsidiary of Chinese State-owned enterprise CASIC) of 94.4% of voting rights in German telecommunication technology provider IMST. Besides the general fact that investments by Chinese SOEs in high-tech German companies face considerable scrutiny, the case offers some interesting insights.

The specific facts of the IMST case:

• IMST is a small German company with only EUR 15 million in revenues but which boasts a strong R&D position and long-standing expertise in the telecommunication technology sector, including as regards 5G and other sensitive technology. This shows, once again, that the scale of a business is not a relevant factor in terms of sensitivity from a foreign investment control perspective.
• Around 40% of IMST revenues over the last 10 years were attributable to German state funding, a factor which should have set alarm bells ringing during the transaction feasibility analysis.
• Some of IMST’s technology allegedly (also) has military applications and could have been used in defence and airspace programmes supported by CASIC, a company that designs, develops and manufactures a range of launch vehicles, strategic and tactical missile systems, as well as ground equipment and which is the largest missiles manufacturer in China. In November 2020, CASIC was blacklisted by way of executive order in the U.S.
• IMST products were thought to be subject to certain export licenses which the Parties failed to disclose proactively.
• The proceedings lasted more than 1.5 years, which is testimony to the fact that it is essential to be proactive and transparent in foreign investment proceedings and to manage the process duration actively.
• Typical behavioural commitments were offered by the Parties but were regarded as insufficient to protect German public interests.

What were the German government’s concerns?

The German State considered IMST to be a strategic company due to:

• its highly technology-driven business,
• its strong R&D activities and co-operations with other companies in the field of R&D,
• the amount of public funding it had received, and
• the (alleged) military nexus, alongside CASIC’s activities in China and the support it provides to Chinese defence sector programmes.

We understand that the Parties also failed to proactively submit essential information, including the investor’s links to the Chinese government and the rationale for the transaction. This appears to have led to significant levels of distrust towards the acquirer which could not be assuaged by means of behavioural commitments – leading to exceptionally long proceedings and, in the end, a prohibition decision.

The way forward

Looking at the key facts of the deal, the IMST case can certainly be regarded as a more obvious case for strict intervention by the German State in light of the large number of red flags it raised. There is no doubt that the combination of a Chinese SOE with military links and the acquisition of a high-tech business funded by the German state is a highly problematic combination from a foreign investment perspective.

This case highlights that foreign investment control should not be taken lightly - in certain instances transactions may be fated for a prohibition decision. Additionally, it shows that Chinese investments are subject to more scrutiny than investments from many other countries. However, in parallel to the assessment of the IMST case, a number of other Chinese investments underwent foreign investment review in Germany and were ultimately cleared (albeit in some instances subject to behavioural commitments). Chinese investments in Germany remain possible, but transaction parties should conduct a thorough risk analysis upfront.

If a transaction requires notification, it will be essential:

• to manage disclosure obligations carefully, with a view to being as transparent as reasonably possible,
• to maintain a trustful and cooperative working relationship with the authority,
• to demonstrate a solid investment rationale, including a compelling reason as to why the investment is ultimately also beneficial for the German target company and does not conflict with public interest considerations, and
• to be prepared for a longer review process (including on the sell side), which can often, however, be reduced to six months or slightly longer, even for more complex cases. A solution often adopted by foreign investors to manage the duration of proceedings is to offer a behavioural commitment protecting certain German operations of the target business – in most cases such a strategy ultimately results in foreign investment approval being granted.