VZCZCXRO6113
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHRL #2064/01 3181632
ZNR UUUUU ZZH
P 141632Z NOV 07
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 9786
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE

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