Transcript of Conference Call on CFIUS-like Regulators in Europe: Risk and Mitigation

Mar 21, 2023

On March 14, The Capitol Forum hosted a virtual conference with national security experts Antonia Tzinova, Stephen Whitfield, Stephan Müller and Gerrit Oosterhuis, to discuss the emerging trend among countries of conducting reviews of proposed foreign investment to protect their national security. The full transcript, which has been modified slightly for accuracy, can be found below. 

IVAN KELLY: Good afternoon, everyone. Thank you for joining us here today. Thank you for joining The Capitol Forum conference about CFIUS-like regulators in Europe.  

I’m joined by our esteemed panel of experts, Antonia Tzinova, Stephan Müller, Gerrit Oosterhuis and Stephen Whitfield. That will be a tongue twister for me. Thank you for joining us. You can read the bios. They are in the program. We’ve got an hour. We’ve got lots of ground to cover, so we’ll just go ahead and start this one. 

Antonia, I wanted to ask you about CFIUS, specifically, how do we approach CFIUS let’s say since two years ago when we had the new regulation in place? What implications does that new law FERMA have on other regimes in Europe specifically? 

ANTONIA TZINOVA: Thank you, Ivan, and good morning, everyone, good afternoon. It’s a pleasure to be here. CFIUS has a longer history compared to other countries in Europe and around the world. For those of you familiar, you know that until a few years ago, it was an esoteric topic. It was only known to the few practitioners and M&A participants or the parties or the lawyers that were involved in the most complex or highest-valued transactions.  

Since the implementation of FERMA and new regulations, this has come to the forefront. At the minimum the way it affected M&A transactions is not CFIUS review or CFIUS due diligence rather is not a de facto requirement in any transaction that has a cross-border element. It’s a no-brainer if we have a foreign buyer, but sometimes the foreign element does not necessarily present immediately to the surface. The foreign ownership may be a few steps removed.  

Also, it may not be immediately apparent that CFIUS might have jurisdiction in what appears on the surface a foreign transaction. Two foreign parties participating, but there may be some small U.S. nexus, maybe a U.S. subsidiary, maybe just a representative’s office. CFIUS is the one that determines its own jurisdiction and in the last few years, they have been quite aggressive in claiming jurisdiction.  

We’ve seen a change in behavior. Parties are now much better learned on the CFIUS matters. They do know to ask the questions and we do include due diligence early on in the transaction so that we build in the time if there is a mandatory filing requirement. That’s another change. 

Now we have transactions that are subject to mandatory reviews. This is new for CFIUS. It used to be a voluntary regime, but no longer so. As a result of all this taking place, you now have quite an increased number of transactions that actually do undergo review. We jumped from 90 to 150 transactions in the last ten years to 250 immediately after FERMA to 430 to 450 in the last couple of years.  

I think we will be seeing this more and more because CFIUS has been quite active. I like to call them the “activist” agency. They have dedicated a lot of money to monitoring the market and if you follow statistics, two years ago in the report that they published statistics for 2021, the unreported transactions that came to their attention were 117. Of those, they directed 17 to file a notice. You should expect to hear from them and deal with them on a more regular basis. 

IVAN KELLY: Thank you. On the FDI screening in other countries obviously, we’ve seen CFIUS doing a lot of work in the international arena through multilateral relationships specifically with the Five Eyes countries and now we see a lot of activity in Europe and the United Kingdom.  

If I can pass it on to Stephen Whitfield, please? Could you give us a brief overview of the NSIA, the National Security and Investment bill, and probably just give us a little bit more, brief background and timelines and what impact you’ve seen so far? 

STEPHEN WHITFIELD: Sure, just as a preliminary point, and probably a bit different than Ann Harris and Stephan on the call. The UK operates a national security regime rather than strictly speaking a foreign investment regime. It’s still a relatively new one, the National Security and Investment Act Regime, and in general terms, governmental control over investments perhaps especially foreign investments is a relatively new concept in the UK.  

The path to the introduction of the act actually began some number of years ago back in 2018 with the publication of a whitepaper by the government and the general thrust of that paper was that the previous, largely bond-free defense mergers regime in the UK was no longer fit for pathos in the then prevailing geopolitical climate.  

Wind it forward a few years and by the fourth of January, 2022, the beginning of last year, we had our new National Security and Investment Act. It introduced a distinct regime with standalone powers which enabled the UK government to review transactions and investments in UK businesses, specifically on national security grounds. It introduced a new governmental unit, the Investment Security Unit which, up until recently, sat within the business department within the UK government but has recently moved to the Cabinet’s Office and therefore we think we’re a little bit closer to the center of political power. 

As a result, we’ve been very much for the first year or two or better gaining experience with the National Security Regime. As Antonia mentioned, the U.S. has much more experience with handling matters of that nature.  

Timeline-wise, just briefly touching on that, it breaks down into two. There is an initial review period and then a detailed assessment phase. The initial review period in effect acts as a kind of screen to divide the complicated from the less complicated cases and broadly speaking and perhaps we’ll touch on prices later, but it’s a pretty efficient process. It’s a 30 working day review process for the initial review period and generally speaking, the vast majority of transactions are cleared at that stage. 

The timeline is somewhat different for more complex cases once you’re into the detailed assessment phase. While there are such true timelines, in practice, the UK government really has as much time as it needs to complete a national security review to its satisfaction which may not be a surprise either to other people on the call. 

It has mandatory components as well. Actually, it’s a very target-driven regime in terms of the assessment that you need to go through in order to understand whether you have a filing or not. We have a relatively low sensitive change of control thresholds down to equity interest or voting rights as low as 25% for the mandatory regime.  

We have 17 mandatory sectors and if a target is active in those sectors, they’ll be familiar to many people on the call as well I’m sure, artificial intelligence communications data defense transport and so on to the extent that the target is active in the UK in one of those 17 sectors. Then you have an equity state that’s at a relatively modest level or above you have a filing.  

Because there are a number of penalties for noncompliance but also notably a failure to file a mandatory transaction resulting in your transaction being regarded as void rather than voidable I would say is generally common through the first year of the regime. We’ve tended to see a rather defensive approach to filing strategies by comparison with what you might expect in other areas of law.  

That’s the NSI Act in a nutshell. I’ll hand it back to you, Ivan. 

IVAN KELLY: Thank you. Stephan, could you give us a quick overview of the German FDI regime administered by BWMi? 

STEPHAN MULLER: Right, thank you. I’m happy to do so. Actually, Germany has a longstanding history of foreign investment control reviews at least in theory or on paper. We had these provisions not as detailed as they are nowadays in the law for decades, but basically, no one took notice. Also, the Administration was not very keen on that and in these days it’s very much focused on the defense sector, in particular combat weapons, so it was quite narrow. There was no explicit procedure in these days.  

When I started to do this type of work, also some decades ago actually, I just gave the respective person in the ministry a call and we discussed what was going on there. Then he said, “That’s not of so much interest to us.” That was how the proceeding was ended and everybody was happy with that. 

But then, within the last ten years, in particular the last five, probably the legislation has very much developed and now we have a fully-fledged procedure out here in Germany which is twofold. We have sector specific and a cross sector review. Sector specific is very much focusing again on the defense area but now not only on the combat weapons, but any defense article whatever kind, surveillance technology for the internet and telephone and these types of things and encryption, certain encryption of a very high quality. That is the sector specific area. 

On top of that we have the cross sector which are all other areas so to speak although we have a list of 27 critical infrastructures, industries which definitely trigger a review process like water supply from [inaudible] and medical [inaudible] infrastructure in general terms or whatever it may be, port infrastructure for example.  

On top of that we have a general opening clause which allows the ministry to trigger a review procedure with respect to any foreign investment if the ministry thinks it could have a negative impact on the border and security of Germany. We have seen that also in the past that the ministry became active when its own right to speak and passed the parties transaction to hand in a filing. 

What we also have seen not surprisingly is that the number of procedures have increased dramatically. In 2019, we had 78 of these procedures and in 2022, last year we had 306, so it’s really an enormous increase. And as you Antonia said already, it is now a standup aspect of basically any M&A transaction if it is cross border one way or the other. 

With respect to timelines, we do have review periods provided in the law, in particular in [inaudible] phase one when the Ministry is considering whether they want to actually initiate a review process. The Ministry has two months’ time to come to a decision otherwise the transaction is either being regarded as approved or at least the Ministry has no longer the power to demand any actions from the parties. The Ministry never misses these two-month periods, so this does not play a role really in practice. 

Afterwards in phase two, the Ministry has basically all means they need to expand the second period to the duration as long as they need to actually come to a proper decision there. We also have the possibility for the Ministry and that is what they do if they think they can only give the approval under certain conditions, that these have to be negotiated and the ministry tends to close agreements with the parties of the transaction, public law agreements, and once you are entering this negotiation period, there are no time limitations at all anymore. That can go on for as long as the Ministry needs and the parties are happy to speak to the Ministry. The longest procedure I have been in working with was 18 months with a frustrated investor walking away. That was not a very good experience. 

Probably, in the interest of time, another aspect, who are the investors we have to deal with most in these procedures? Interestingly, in order are the United States, UK and then China. Those are the review procedures that we do see most here in Germany. 

I think that should be it for the introduction. 

IVAN KELLY: Gerrit, could you talk to us a little bit more about a very novel screening process in the Netherlands and whether it came into force and a brief background on the Investment Assessment Agency? 

GERRIT OOSTERHUIS: Sure, a pleasure. Indeed The Netherlands has had investment screening in the energy and telecom sectors for a number of years, but never a general regime. That was introduced, and the final push was given during the first lockdown when people realize, hey, we are so much dependent on other countries, we should do something about this. That is also the purpose of the act. If you look at it, what the government has done is identify the number of sectors that are considered critical and any company/business that is there that if you pulled it away, the whole house would tumble down, those kinds of companies should be protected. 

What does that mean? That means support of Rotterdam, Schiphol Airport, banking infrastructure, energy infrastructure, a couple of sensitive technologies that the military uses, semiconductors and photonics. Quite focused bearing in mind that The Netherlands is a small and open economy and wants to be able to do business.  

The goal of the BTI, the agency of the Ministry of Economic Affairs that will maintain the law is also, we want investments to go through if we see a risk. Our first idea is that we should find remedies to still allow the investment. 

It applies to all buyers. It’s not limited to only new investors or even Netherland investors it applies to everyone but it looks of course at the people and the institution that are behind the investing entity. 

The timelines are very scary. It’s eight weeks first phase and eight weeks second phase, but a delay of six months is possible for those two phases combined. If the deal goes into the EU information sharing system, another three months are added. And then of course, in the big Dutch tradition of stopping the clock. If the authority asks formal questions, the clock will be stopped. Still, we do expect things not to be that scary in practice. Simple deals should be able to go through very quickly. 

I guess that’s all I wanted to say for now. 

IVAN KELLY: Let’s go from simple deals. I will ask a little bit later in the program, your view on the U.S. role in your country’s FDI, but I think it will be incorporated better with the elephant in the room which is China. We can’t avoid discussing this because we’ve seen the majority of prohibitions in the United Kingdom, in the United States, and even in Germany, Chinese investments mostly, so this is something we want to discuss.  

Let’s start with this question. I will open it up for discussion. How much do decisions in the U.S., in Washington D.C. impact the deal assessments in your own country? I guess I would want to hear more about information sharing between the governments and whether you’ve seen the invisible hand of the U.S. Government when it comes to FDI investments in respective jurisdictions. 

I’m opening it up for discussion, please. 

ANTONIA TZINOVA: Maybe Stephan can take us through the 2016 experience of Extron because this is when we start to see something really big. 

STEPHAN MULLER: Actually, that was probably the one where the invisible hand of the U.S. Government became very visible here in Germany. The Extron case is probably quite well-known. Extron was a German company located in a rather small town in the south of Germany and they did microchips. They were financially in trouble and therefore looking for investors, at the end of the day a Chinese investor although the direct investment of course was through German GMBH, but behind the German GMBH there were other Chinese companies and also a Chinese institution and companies headed by the Chinese State, so it was clearly a Chinese investment.  

Everything went on in a quite regular manner and actually, the Ministry already approved the investment and gave the green light for the Chinese to take over I think it was at that point in time 60% of the shares that should be acquired. Actually, that was a particularity here. When the positive decision had been taken by the ministry already, there was some information given to the German Government through the U.S. Secret Services, that is what you could read in the newspapers though it has never really been made public who were acting there at the end of the day, which institutions precisely. It was always intelligence sources from the U.S. so it was always a little bit weighed, but it was definitely coming from the United States and the U.S. government through whatever institution made clear that they were very concerned with that investment and did not like that to happen.  

Actually, the German Ministry then withdraw the already given positive approval for the transaction, so we were then back to square one. At the same time in parallel there was a CFIUS procedure going on in the U.S. That was properly denied, not with giving approval first and then withdrawing the approval afterwards. They just said, “No, we don’t want that to happen.”  

That then also had an effect on the German transaction because the approval in the U.S. under CFIUS was a closing condition, a transaction to go through and therefore then the transaction died altogether irrespective of what was going on in Germany with first approval, second withdrawal. That was a little bit shaky. I think it was actually also brought in front of the administrative courts in Germany, but the decision had never been taken because then it was a closing condition not being one-third, the transaction died anyway and there was no longer reason to pursue this question in court.  

That was Extron. That clearly showed how important it is more generally to understand what is going on foreign investment-wise in other jurisdictions and always in particular with respect to the USA because the United States often times have very clear and outspoken ideas how projections should be handled, what should go through what not, and if they can take [inaudible] that will happen. 

IVAN KELLY: Antonia, could you just give us a little bit more idea of what was going on at the time on the U.S. front here and probably what type of engagement CFIUS is involved when it comes to reaching out? Are they doing it through the National Security Council? Are they doing it through the State Department? What are the structures in place to reach out to a foreign government to express such concerns?  Also, some information that was given was classified information so obviously, there was a procedure for declassifying it. It seems to me that it was done through the NSA, but what can you tell us about the actual process and how it happened? 

ANTONIA TZINOVA: I don’t know how much I can share about the process, but we do know that in the U.S. there was a formal review by CFIUS. You know that CFISUS has 16 agencies involved and you know the Office of the Director of National Intelligence reviews the transaction there de facto non-voting member. The intelligence community is involved through such agencies or just informally and in that particular case, CFIUS did not just simply deny the transaction. The President issued a Presidential Order prohibiting the transaction. That was quite a thing because I believe it hasn’t happened for a while before that particular transaction.  

The share of the U.S. portion of the business was relatively small. Only about 20% of the revenue was generated in the U.S. and so you could see that this was not so much affecting (this is my personal opinion) the U.S. market per say, but it was the U.S. perception of how this affects global alliances if you will. With respect to China particularly and semiconductors is a very touchy subject. We understand that they will get the technology, but it’s pretty much the stated policy of the U.S. that even if they get it, we want to- 

IVAN KELLY: Antonia I think we lost you for a second. All right, let’s continue. We have technical problems.  

Stephen, can you please just give me a little bit more information on the UK’s cooperation with the United States? You are accepted state now. There are some benefits. 

ANTONIA TZINOVA: I think that they did exercise their diplomatic long arm. 

IVAN KELLY: Antonia, we lost you for a second.  

ANTONIA TZINOVA: Sorry, I lost the last couple of minutes. I apologize. 

IVAN KELLY: Antonia, we’ll continue with Stephen and then we’ll come back to you. Stephen, my question is, basically what have you seen with respect to the U.S. involvement in your foreign investment review regime? 

STEPHEN WHITFIELD: So, I think it’s a good question and I think it raises one of the potential challenges that we have with the UK regime in general at the moment which is something of a lack of transparency both in terms of information available to the outside world but even quite often information available to the matching parties on what’s going on. 

I think the assumption has always been that it would be naïve to think that any national security assessment on a complex international transaction would be devoid of the international context. I think it would be naïve to think particularly where a transaction impacts the U.S. as well. There wouldn’t be coordination between two countries who already have a fancier mechanism for coordination in those regards, national security. I think that’s a sensible working assumption. 

Moreover, it’s not necessarily just cooperation through existing national security mechanisms for example with regard to the Nexperia Newport Wayfair case. Obviously it was well reported that President Biden was to press the UK Government to prevent that transaction from occurring and indeed, some politicians even wanted to reconsider whether the UK should maintain its own rightly status with regards to CFIUS as well. 

Whether through formal information sharing mechanisms which is along with many other things in the UK an obscure corner of the regime or through that pressure I think it would be naïve to think that there isn’t a good degree of influence coming from the United States on complex international transactions. 

A couple of caveats to that. Number one, I think in principle, it may be a little bit more challenging for the UK or any other national state to overly coordinate on questions of national security concern because of course each one raises very specific issues from a national interest or a public interest standpoints and that places a degree of practical limitation the amount of coordination that can be achieved. 

Number two, at least when you look at the [inaudible] cases that have involved intervention over the course of the last year, many of them have actually been quite local and there again, while there might be a degree of inspiration that the government might take from the U.S. in terms of how to handle remedies for example of what conditions [inaudible] merger. It’s very fundamentally quite local cases to do with our electricity distribution network or supplying equipment to UK government customers, fiber broadband and things of that nature.  

In summary, I think it’s a safe working assumption to assume that on a complex international transaction, there will be a degree of influence from the United States coming from those sources I outlined, but those parallel cases may turn out to be rarer in practice than somewhat more local cases. 

IVAN KELLY: Gerrit, a couple months ago there was an article and politicians in Holland and the Netherlands who were saying things like the U.S. is not going to tell us what to do. We have our own interests then time flies and I see that a deal is struck between Japan, the Netherlands and the United States and Export Controls. Talk us through the thinking there with respect to cooperating with the United States. Is everything off limits or are there certain areas you would reserve autonomy to decide on your own? 

GERRIT OOSTERHUIS: It’s difficult to be autonomous when you are such a medium sized country as The Netherlands of course. Let me start with a general comment. I think the Extron case shows a slight difference in purpose of the thinking. As I started saying, the idea behind the Dutch Investment Screening Act is to make sure that The Netherlands itself remains safe and is less vulnerable towards foreign powers pulling a plug somewhere.  

Typically, in a case like [inaudible] what I read in what was the purpose of the U.S. being excited about it was that we don’t want the Chinese to have that technique. That would come only second in the Dutch thinking. First purpose is that we want to be safe ourselves and if others have smart techniques, that’s less of a concern. 

That of course also showed up in what you are referring to that is the whole story around ASML. ASML is rather special Dutch company that is a spinoff of Philips that makes machines with which you make semiconductors. They seem to be the best machines that are made worldwide.  

It was a concern that the Chinese would have access to the latest generations of machines that are made by ASML. And indeed, a deal has been struck where ASML will not get export permission from the Dutch government to export the latest generation of machines to China thereby delaying access by China to that latest generation of very complex semiconductors.  

And yes, of course, then you will have people in The Netherlands saying those bossy Americans are trying to tell us what to do. Well, yes, that’s to be expected, right? It’s just a geopolitical deal that was struck again. You see that the main purpose of the Dutch here is just to make money and everything that stands in the way of that is not good, but there are other geopolitical forces at work as well.  

Does that answer your question? 

IVAN KELLY: Yes, that was fantastic. Stephan, you wanted to add something.  

STEPHAN MULLER: No, no, no. I just enjoyed what Gerrit was saying. It sounded quite familiar to me. 

IVAN KELLY: There is a lot of interest from our subscribers about China. Are there some sectors of the Western economy that are now off limits when it comes to their investment? Let’s talk a little bit more about how to structure deals. Is it from now on all the deals should be passive investments by Chinese entities where they have no controls, no access to information? What’s the remedy here?  

I’ll start with Antonia on this one. 

ANTONIA TZINOVA: Thank you, Ivan. There are Chinese transactions that are closing. Based on published statistics by CFIUS we know that in 2021, 45 transactions had been reviewed. This number may be a bit misleading because if there is withdraw and refile, this is counted. The number is likely smaller, but Chinese transactions do go through.  

There was a bit of a self-restraint on the part of the Chinese Ambassadors. They are the ones who do not come that often. They are the ones who are looking for ways to restructure so they don’t have to come in front of CFIUS. They would take a minority investment, non-voting rights, not to allow them to go in.  

General picture, I think the executive order that was published in September of last year is a good indicator of the way things are going. Semiconductors have been on the mind of the United States for a long time. This is not new, so it should not be surprising to anyone. You do know how this plays with the tensions over Taiwan, right? Taiwan is the biggest supplier of chips. This is why the big tension. U.S. National Security does not have access to those, but to the point that I made earlier, and I think Gerrit also made, the U.S. wants to delay the ability of China to get the latest technology in this sector. 

Some other sectors that are of particular concern, quantum technology, biotech. There is still quite a lot of Chinese investment in health sciences, but it’s a borderline and biotech has specifically been cold in the executive order. Artificial intelligence, although this is so hard to define and limit what should be controlled and what shouldn’t be. Pretty much everything is AI. Initially they started circulating in the space back three or four years ago. Companies were really livid. This platform that we’re using right now is AI on some level.  

These are the sectors that should be expected to be of concern. What the pandemic taught us is that the National Security cannot be squarely set into defense simply. Basic medical supplies became an issue during the pandemic, so now the U.S. is extremely focused on supply chains. 

There is this reshoring movement going on. I just attended an inter-Pacific Bar Association conference, and everybody was saying trade is becoming less global and more regional. We should expect that in the next ten to 15 years. It reflects the national security issues we were discussing today. The one that is of particular concern and showing up in transactions is big data, specifically, what type of data and who gets it. 

All that being said, there are transactions that are cleared and what we see is that Chinese transactions by companies not publicly listed and you have clear private money involved and no government involvement, these go through including a transaction that was actually cleared recently, the Siltronic one. It was across borders where we had Germany involved. CFIUS did clear that particular investment and was in semiconductors, so it’s not completely off limits.  

The U.S. prides itself in being the most open investment environment in the world and we want to take the money, back to Gerrit’s point. Companies want to do business and there will be continued activities [inaudible] investors need to be more mindful. 

IVAN KELLY: Stephen, can you talk us through a little bit more on the mitigation side, especially in the United Kingdom because there were a couple of recent deals that remedies were prescribed. How does it work? What experience did you glean from what CFIUS is doing is now being prescribed to the way you prescribe that mitigation? 

STEPHEN WHITFIELD: Sure, I think just to preface that with a couple of statistics to put it into context. You mentioned at the top of the call that probably the majority of the interventions that we’ve had in the UK have been with regards to Chinese investors and that is the case. That is likely to end up being a pretty small minority of the overall notifications that are made in the UK. The governments’ estimate when the regime came into force was that they were expecting in the region of 1,800 notifications a year, so higher numbers than what we’ve been talking about on this call up until now. That was very much by design. They thought around 100 or so of those cases would go through a detailed assessment.  

We’re lacking data at the moment, but it would appear that we are broadly tracking the estimated numbers and we’re standing at 15 interventions at the moment. By my count about eight of those were Chinese backed investors and indeed [inaudible] prohibitions, I think four of them involved Chinese investors. I don’t think that that necessarily means that there are any sectors which are completely off limits to Chinese investors, mainly for the reasons that Antonia covered and I won’t add too much gloss to that. 

If the government can achieve remedies on cases, then they absolutely will try to do that. That’s been the evidence of the National Securities and Investment Act, but it’s also been the evidence from the old defense mergers regime as well. What kinds of remedies have we seen? Some of them, the more usual kind you might expect, controls to protect sensitive information and technology from unauthorized access, maintenance of manufacturing and certain capabilities in the UK.  

We’ve had some more interesting ones as well, which stray into the world of public interest more than national security maybe, commitments to increase R&D, spend for example to a certain level of [inaudible]. We’ve had requirements to carry out security audits by UK government-approved auditors. In one case or a couple of cases, we’ve had a requirement to obtain government approval before contracting with certain counterparties.  

Some of these measures can be quite interventionist, but they’re all predominantly behavioral and in many respects, I think they’re all evidence that the government is willing to think in a flexible way to try to preserve a transaction if there is a transaction to be preserved from a national security standpoint. I think all of that is very positive. 

I think the experience of the last year has shown that to come back to my enduring theme of this call, transparency could be a little bit better perhaps in the regime for parties involved in that protest there are no clear case management milestones whereby you know when the national security review has ended, and the remedies phase begins.  

Very little is made publicly available to with regards to remedies in other cases. It’s quite hard for parties to self-profess going into a transaction. My personal view is that there is work that could be done there to improve the ability of parties to self-assess before going in, improve the ability of parties to craft remedies prior to needing them reactively without really being detrimental to UK national security interests, but that’s a procedural comment really. I think substantively that the UK appears to have taken quite a flexible approach to behavioral remedies up until now. 

IVAN KELLY: Stephan, I wanted to ask you about Hamburg port terminal case and Cosco because that signifies and shows that not all investments are off limits and that Germany is open to certain investments, especially it appears to me infrastructure in this case, which is sensitive in many countries, probably also in Germany. Could you talk to us about the Hamburg port terminal case and what it signifies? 

STEPHAN MULLER: That was probably the acquisition that got most public attention in Germany. It was over long periods on the daily news because it also showed some internal political fights between the government parties within the coalition and it all went off with the interest of Cosco which is really a somewhat sensitive company because there are rumors that they are involved in weapons shipments, from a Western perspective, illegal weapons shipments, so it was really a sensitive investor. And of course [inaudible] is critical infrastructure also under German laws and German conventions.  

What one needs to know is that the particular part that was the subject of the intended acquisition was the container terminal Tollerort as it is phrased in German and it is only one out of four terminals and it is by far the smallest terminal. All these terminals are handled by subsidiaries of the Hamburg Port Authority. It was actually only a tiny bit of the entire Hamburg port, however the Chinese Cosco wanted to acquire 35% of that Hamburg port subsidiary if I may say so, the Tollerort container terminal. 

Then the question arose, is that container terminal actually critical infrastructure? Under the German law, it’s not sufficient that you are a container terminal at all, but you need to have a certain annual freight load that must be about three million metric tons. Apparently, Tollerort did not quite cross this line not so clearly therefore that was how the solution at the end of the day was found. If it would qualify as a critical infrastructure under the law, then already an acquisition of only 10% would have triggered the review.  

Now, after many weeks of [inaudible] they found out that they were a bit below that critical threshold. It was 25% and therefore one could agree on a reduction of the acquisition from 35% to 24.9%. That wasn’t okay and actually brought the entire acquisition out of the scope of investment review procedure.  

The Ministry of Economics couldn’t do anything at all. The interesting thing was politically that all ministries involved were against the acquisition, in particular the Ministry of Economics led by the Green Party who also is in charge of administering the review process and probably all the other jurisdictions here on that event. We do have a concertation process with other ministries and this is easily another six, eight, ten ministries being involved also the Ministry of Infrastructure, Foreign Affairs, you name it and they were all against it.  

Then the Chancellor came in who of course can have the last word under the German Constitution if he wants to. He fostered and pursued that solution that one looks at Tollerort as a piece of the Hamburg Port which does not qualify as critical infrastructure, therefore we could apply the higher threshold that would somewhat reduce acquisition from 35% to 24.9% and then the acquisition went through.  

But that was something politically that was very much criticized here in Germany because the majority of the other parties in the coalition were clearly against it. Industry was very much in favor of that solution because until recently, I think the wish to be as free to do business with whoever you want was very strong. Now we see developments in Russia and Ukraine and showing where these dependencies can lead to. It has been seen more and more critical, but we were not yet at that stage when the discussion around Tollerort and Cosco were at the peak. That was a solution. 

IVAN KELLY: Can I just give you a follow up question? Briefly if you can, it seems to me that they got off on a technicality here. Doesn’t it show the limitations of the regime? Are there conversations in Germany about expanding the powers or expanding the jurisdiction to cover this type of transaction? 

STEPHAN MULLER: Yeah, that’s a very good point because actually, if you follow that, everyone was a bit uneasy and said that it was little bit oversophisticated, how that issue has been solved at the end of the day. It shows where the weaknesses are.  

On the other hand, I think you will have to work with thresholds and definitions. If the definition for critical infrastructure in a port is that you have to be handling more than three million metric tons of freight. You have to draw the line somewhere. I think there is clearly still the desire of German industry that the controls do not expand too far.  

Generally, I think it’s being felt that there is already a very high level of control in particular, as I told you in the beginning, since we have all sorts of possibilities for the Ministry to subject any transaction even if it’s not touching critical infrastructure under the review procedure just because of the general danger of the negative impact on Germany’s security and order interests. Therefore, I think there is at that point in time not much room for expanding the controls even further.  

IVAN KELLY: Gerrit, can you help us over here with the investment in infrastructure in The Netherlands? There has been concern about the Port of Rotterdam and other areas of concern. Could you briefly help us understand what has been done and what is being proposed to address historic investments in infrastructure in Holland? 

GERRIT OOSTERHUIS: That’s a big and complex question. In terms of energy and telecoms, specific regimes have been in place and what we see there is that minority investments have been allowed also by foreign investors, but much diligence is done on where the money comes from and the real influence. Apparently so far, nothing to be afraid of. 

In the case of the port terminals, it’s fascinating because you would say that The Netherlands would be rather alert to that having the biggest port in Europe in Rotterdam. The only thing that is in the scope of our Investment Screening Act is the Port Authority. Maybe that is because the biggest terminal freight is already owned by Hutchison Whampoa. Two individual Chinese investors already have around 30% in two other terminals. We’re stuck with an historic situation.  

Yet is there anything there to address such historic situations? My understanding is that there are no initiatives to call in those historic acquisitions. I guess the idea is that the Port Authority, which is of course quite a powerful institution has the tools to supervise the terminal operators and has them on a rather short leash. Whether that will work in practice if push comes to shove, of course that remains to be seen. 

IVAN KELLY: I see. I’ve been able to incorporate some of the questions from the audience in our discussion. I actually wanted to ask about sovereign wealth funds. This is not a new occurrence, but they are government and state sponsored entities. Could you briefly in half a minute each give me an idea of how your respective regimes address these concerns? These are big concerns that can be mitigated with respect to those investments. 

Antonia, you can start. 

ANTONIA TZINOVA: Thank you. As you know there have been sovereign wealth fund investments in the U.S. and the transactions have been approved. At the same time, with the FIRRMA changes, there is substantial foreign government investment term introduced, so now with respect to certain businesses, the ones operating in critical infrastructure, critical technology or big data if there is a foreign government interest involved, those will be subject to mandatory filing with CFIUS. 

I think that it’s just that they will be subject to higher scrutiny, not necessarily prohibited. There is a good perspective of getting some sort of national security agreement especially in the TID area to ensure that big data is protected, critical infrastructure is protected. But to the extent that the mitigation can be structured, I believe those transactions will continue. Then with [inaudible], when the Chinese government is involved, I think this is an actor that has concern right now. Probably the transaction will see a lot of scrutiny and may not be approved. 

IVAN KELLY: Stephen. 

STEPHEN WHITFIELD: Just from a UK perspective very briefly. Sovereign Wealth Funds have played an important role in investment in the UK for many years now particularly in sectors like infrastructure that might otherwise be described a sensitive from a national security standpoint.  

The UK Government has been clear that they will not regard Sovereign Wealth Funds as any more problematic than any other kind of investor in and of themselves. The question comes down to in the governments’ mind [inaudible] how much control are you getting over the target. Who is the acquirer? What that really means is there is a diversity of Sovereign Wealth Funds out there in the world as well and so the question will be what is the proximity of the nexus to the state really and who is the state in and of themselves Sovereign Wealth Funds the government has been fair [inaudible] one way or the other. 

IVAN KELLY: The question to Stephan on this to continue, not all sovereign funds are alike. 


IVAN KELLY: There are more concerned riskier ones and less risky, right? 

STEPHAN MULLER: Yes, and proximity to state and government is always one of the important aspects to be considered. I think it’s quite the same as the UK approach and Germany. 

IVAN KELLY: Gerrit. 

GERRIT OOSTERHUIS: Yes, same here absolutely. It will be investigated like any other foreign investment. Where does the money come from? Who gets influence through that? Then you can imagine that people would look more favorably upon something of the Norwegian big fund than something linked to the [inaudible] initiative. 

IVAN KELLY: Unfortunately, we are out of time, but we have actually covered most of the ground that we had to. I really thank you for joining us. Stephen, Antonia, Gerrit and Stephan I really appreciate your help. I think it was a fantastic conference thanks to you. Thanks for all who joined us today. I hope to see you very, very soon. That’s it for me. Goodbye.