On October 26, 2022, the German government permitted (with conditions) an investment by Chinese state-owned COSCO Shipping Group (“COSCO”) in one of Hamburg’s four shipping container terminals. Pursuant to foreign direct investment (“FDI”) laws, the German Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz, “BMWK”) had been notified of the proposed acquisition by COSCO of a 35% minority interest in the port terminal, a strategic location on the German coastline. The BMWK ordered that COSCO’s acquisition of voting rights must remain below 25%. The details of the decision remain confidential, but the BMWK justified its partial prohibition on the grounds that the acquisition of 35% as notified would constitute a “threat to public order and security”. According to the BMWK’s press release, the partial prohibition decision prevents COSCO from acquiring a ‘strategic’ shareholding, and reduces the acquisition to a mere financial participation. As a safeguard in this respect, the decision contains provisions prohibiting COSCO from acquiring any additional influence, for example, through a grant of rights that would be atypical for a holder of a less than 25% interest. Furthermore, under the German FDI regime, any follow-on acquisition of additional voting rights by COSCO would be subject to a new notification requirement.

Facts and Background

According to public sources, the transaction has been highly debated within and outside Germany since the announcement of the transaction in September 2021. Parties closely related to the commercial development of the Hamburg port (including the selling Hamburg port operator, the current mayor of the city of Hamburg, and the trade union) favoured an unconditional approval pointing to the economic significance of the investment. But a number of stakeholders, including apparently the European Commission, which provided an opinion within the framework of the EU FDI Regulation, would have preferred an outright prohibition of the transaction.

This was also true for the vast majority of stakeholders in the German decision-making process. Under the German FDI regime, a (partial) prohibition decision has to be made by the federal government (the “Cabinet”). The BMWK, five other German ministries and at least two German intelligence agencies involved in the decision-making process argued for an outright prohibition of the notified transaction. It appears that former mayor of the city of Hamburg and current German chancellor Olaf Scholz (and thus the chancellor’s office) was the only stakeholder in the decision-making process in favor of only a partial prohibition. In a rare move and according to public sources, the Ministry of Foreign Affairs even made a formal protocol statement in the aftermath of the Cabinets’ meeting stating that the acquisition disproportionally increases the strategic influence of China on German and European transport infrastructure as well as Germany’s dependency on China.

Key Issues

The decision deserves further reflection on a number of issues.

  • The chancellor’s leverage: With six ministries in favor of a full prohibition, the chancellor was able to impose his preferred outcome due to a procedural mechanism that caused a deadlock situation. This deadlock arose because, under the German FDI regime, a transaction is deemed to be approved as notified in the event the statutory review period elapses without any decision, and according to public sources, the review period was about to end very soon. The six ministries, therefore, were faced with a choice between agreeing on the conditional approval (which could be done within the statutory review period) and seeing the transaction be approved in full (if the German government could not resolve its disagreement before the end of the statutory period).
  • Legal vs. economic dependency: According to public sources, the main argument of chancellor Scholz in favor of conditionally approving the notified transaction was that under German corporate law a shareholding below 25% COSCO would not establish the ‘strategic dependency’ of the Hamburg terminal. This legal perspective, however, does not seem to take into account the apparent significant economic dependency of the container terminal from COSCO’s shipping activities which has been the basis for many supporters of the notified transaction and who referred to a threat that the port of Hamburg as a whole would suffer if COSCO decided to walk away absent an approval. This is particularly relevant, as COSCO already has shareholdings in port infrastructure throughout Europe and in particular in rival port infrastructures in Rotterdam, Antwerp, and Le Havre.
  • What about (non-strategic) 10% or 20% investments: COSCO’s acquisition in the Hamburg terminal occurs in a sector the German FDI regime qualifies as critical infrastructure for which foreign investors are required to file a suspensory notification for an acquisition of 10% or more of voting rights. The main argument to grant conditional approval for COSCO’s acquisition was that an interest of less than 25% does not typically give rise to strategic influence and therefore would not raise public order or security concerns. An important question is whether there is a contradiction between this argument and the mandatory and suspensory filing obligations the German FDI regime puts on investors at thresholds as low as 10% or 20% for investments for example in the defense, critical infrastructure and critical technologies sectors (see our blog post). If public order and security concerns can be addressed by limiting a participation to below 25% and prohibiting special contractual agreements, the question may arise whether such low filing thresholds can be justified. But a potential watering down of German thresholds does not seem to be on the political agenda: in the aftermaths of the COSCO decision recent press articles reveal that parts of the German government are rather thinking about further tightening the FDI regime with regard to critical infrastructures.

Conclusions

The BMWK’s decision shows the continuously increasing scrutiny applied to foreign investments into Germany and the regulator’s willingness to apply the FDI regime to minority investments. The authors of this blog have an article forthcoming in the European Competition Law Review that will provide more detail on FDI scrutiny of minority investments. COSCO as the addressee of the decision will need to decide whether the conditional approval satisfies its commercial interest or, in light of the partial prohibition, removes its incentive to conclude the transaction.

In addition, foreign investors need to factor in considerable review periods for their transactions – the present decision was made more than one year after agreement was reached in respect of COSCO’s investment. Moreover, the process surrounding the COSCO decision remains opaque, but has certainly proven to be subject to heavy political debate. The intra-governmental dispute including the use of procedural subtleties preceding the conditional approval is not likely to strengthen confidence in a predictable and orderly process. On the other hand, the decision yet demonstrates that even sensitive transactions may ultimately get (partial) approval. If prepared to go through a lengthy and intensive process, foreign investors may still be able to obtain FDI approval (with some conditions).

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Photo of Peter Camesasca Peter Camesasca

Peter D. Camesasca is a partner in Covington’s Brussels and London offices, with 25 years of experience in all major aspects of EU competition law. Peter also co-chairs the firm’s Foreign Direct Investment Regulation initiative, and, has a particular focus on in-…

Peter D. Camesasca is a partner in Covington’s Brussels and London offices, with 25 years of experience in all major aspects of EU competition law. Peter also co-chairs the firm’s Foreign Direct Investment Regulation initiative, and, has a particular focus on in- and outbound aspects of the Asia/Europe interface.

Peter’s experience includes cases under Articles 101, 102 and 106 TFEU, national and multijurisdictional merger and joint venture notifications (including FDI assessments), investigations by multiple enforcement authorities and global antitrust litigation and monopolization issues (including IP cross-over issues). In addition, he advises and litigates on horizontal and vertical cooperation issues, prepares and executes various compliance and dawn raid programs and participates in the installation of in-house training programs, and heads a vibrant private enforcement practice.

Peter has acted before the European Commission, the European courts, the German Bundeskartellamt, the UK Office of Fair Trading and the Competition and Markets Authority, the Belgian Competition Council, and various national courts.

Photo of Horst Henschen Horst Henschen

Horst Henschen is an of counsel in Covington’s Frankfurt office and a member of the firm’s global antitrust and competition team.

Leveraging over 20 years of experience in antitrust matters, Horst provides advice in complex M&A and joint venture transactions requiring international antitrust…

Horst Henschen is an of counsel in Covington’s Frankfurt office and a member of the firm’s global antitrust and competition team.

Leveraging over 20 years of experience in antitrust matters, Horst provides advice in complex M&A and joint venture transactions requiring international antitrust merger control approvals both in Europe, including in Germany and worldwide. Horst also represents clients with fine proceedings before the Federal Cartel Office and the European Commission and coordinates immunity/leniency proceedings on a worldwide basis.

In addition, Horst represented a number of non-EU companies in their foreign investment application to the German Federal Ministry of Economic Affairs and Energy securing a Certificate of Non-objection (“Unbedenklichkeitsbescheinigung”) for their acquisition of shares in a German company.

Horst has represented companies of a range of sectors, including life sciences and financial services, advising on all aspects of EU, German and international antitrust law, in particular in connection with merger control, cartel investigations and antitrust compliance programs and internal investigations.

Photo of Katherine Kingsbury Katherine Kingsbury

Katherine has experience advising on a broad range of corporate matters, including joint ventures, private M&A, takeovers, other significant transactions for public companies, venture capital, restructurings, and general advisory work. She has over 13 years’ experience in corporate practice, including responsibility for knowledge…

Katherine has experience advising on a broad range of corporate matters, including joint ventures, private M&A, takeovers, other significant transactions for public companies, venture capital, restructurings, and general advisory work. She has over 13 years’ experience in corporate practice, including responsibility for knowledge management and training.

In addition, Katherine has particular interest in UK corporate governance and its application to listed companies, larger private companies, and private equity.

Photo of Martin Juhasz Martin Juhasz

Martin Juhasz is an associate in Covington’s Frankfurt office and a member of the antitrust and EU competition team. He advises clients on all aspects of European and German competition law from a broad range of sectors, including technology, internet, healthcare, and manufacturing.

Martin Juhasz is an associate in Covington’s Frankfurt office and a member of the antitrust and EU competition team. He advises clients on all aspects of European and German competition law from a broad range of sectors, including technology, internet, healthcare, and manufacturing. He also counsels foreign investors with regard to foreign direct investment regulations (FDI).

Ron Thoma

Ron Thoma is a Legal intern who attended Augsburg University (Universität Augsburg).