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Cablegate: Germany?S Draft Investment Security Law

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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

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