The sharp sword of prohibiting an M&A transaction because of threats to public order or security is eventually being applied.
After years of continuous tightening of foreign trade law, several papers including German newspaper Handelsblatt today (4 December 2020) report – citing a prohibition notice from the Federal Ministry of Economics and Technology (the “Ministry”) – that the planned acquisition of North Rhine-Westphalia based radar specialist IMST GmbH by EMST GmbH, which is indirectly held by Chinese enterprise Addsino, is prohibited. The “Spiegel” adds that Addsino is a subsidiary of Chinese state-owned defence group Casic. Although the instrument of prohibiting an M&A transaction on the grounds of threat to public order or security has been possible for a long time, the instrument has – as far as apparent – typically not been used in practice. In cases of doubt, milder means were applied or the parties anticipated a prohibition. In 2018, for example, when the German government considered preventing a Chinese investor from acquiring a stake in Leifeld, the investor withdrew its offer for Leifeld thereby anticipating a prohibition.
What is the present case about in detail? Based on publicly available media reports, such as Handelsblatt and Spiegel, partly citing the Ministry’s prohibition notice available to them, the case may be summarized as follows:
According to Handelsblatt, the Federal Ministry of Economics explains on 36 pages why it prohibits the planned transaction.
IMST is described as having security-critical know-how in the fields of satellite communications, radar and radio technology which must be protected from Chinese access. The Ministry further explains, the transaction would involve “key know-how” for the defense sector. The target company is described as an important partner of the German Aerospace Centre (Deutsches Zentrum für Luft- und Raumfahrt – DLR). In various cases, IMST’s products and services were also supplied to the German Armed Forces.
The acquisition is furthermore qualified as endangering Germany’s technological sovereignty in the field of future mobile phone systems: IMST GmbH has been engaged in commercial radio technology for 25 years and 5G technology is regarded as a key digital technology.
IMST is also described as important for the police authorities of the Federation and the “Länder” in terms of security. “After the acquisition is completed, IMST GmbH would no longer be a reliable partner, because IMST GmbH would then be under the control of a Chinese defence company”, Handelsblatt cites the Ministry.
The fact that the acquiring company is a German GmbH does not hinder the prohibition. Sources report that the Ministry trace back the chain of title to shares in the immediate acquirer EMST GmbH to Chines enterprise Addsino which in turn is a subsidiary of state-owned defense enterprise Casic. According to the Media citing the Ministry, the German EMST GmbH and its immediate parent company, “qualify as mere acquisition vehicles”. They “do not carry out any significant business activity of their own”.
All in all, according to the Ministry of Economy, the reasons are sufficient to prohibit the acquisition by the Chinese investor under the Foreign Trade and Payments Ordinance (AWV). “Without a prohibition, this know-how would flow to China and contribute to China’s rearmament,” the Ministry’s is reported to have stated.
Börsenzeitung reported today (4 December 2020) citing a spokeswoman of the Ministry that this year there have already been 150 investment reviews. In 2019 there had been 107. In 2018 the number was 78 and in 2017 66 investment audits. Of course, the mere number of procedures says nothing about their outcome. However, the present case regarding the prohibited takeover of IMST GmbH shows the growing importance of foreign trade law control of M&A transactions and the willingness of the German government to apply recently tightened regulations consistently in practice. Investors need to be alert.