German approval of Chinese stake in Hamburg container terminal – a veto in disguise?

On 26 October, the German government partially prohibited the acquisition of a 35% interest in one of Hamburg port’s container terminals by China's state-owned shipping and logistics company COSCO. As a compromise, the German government allowed COSCO to buy a stake of only 24.9% in the terminal instead.

The key points of the decision are:

• Instead of 35% the federal government only approved acquisition of a 24.9% stake. 
• COSCO is also prohibited from acquiring any interest giving it influence beyond that conveyed by voting rights below 25%. The investment would therefore have a more financial rather than a strategic nature (despite COSCO being able to appoint one member of the supervisory board).
• According to the government press release, the proposed acquisition constituted a risk to Germany’s public order and security. 
• COSCO has not yet confirmed that they will close the transaction as approved.
• The decision was taken shortly before the German Chancellor’s visit to China with a delegation of German business representatives at the beginning of November.

The known details of the case

The 35% acquisition would have meant the Hamburg port becoming a “preferred hub” for COSCO in Europe.

The German government’s decision was preceded by the involvement of a wide range of political actors: six ministries and at least two German intelligence agencies had voiced their opposition to the deal. The European Commission and other governments, including several Member States, had also expressed reservations.

But German chancellor Olaf Scholz reportedly backed the transaction and stressed the importance of strong trade ties between China and Europe's biggest economy.

Legal and political background

Germany is a frontrunner in the screening of foreign direct investment (FDI) in Europe and has steadily tightened FDI rules over the past years. Nonetheless, prohibitions have been relatively rare until recently. Since 2017, only two prohibitions (IMST and Heyer), both against Chinese acquirers, have been made public, though other transactions have been abandoned informally. But the level of publicity that the COSCO deal received in Germany due to the controversial views within the German government is unprecedented.

Putting maritime infrastructures, such as seaports, under heightened FDI scrutiny is by no means peculiar to Germany. For example, in 2006 the US regulator prohibited the indirect acquisition of the port management in six major US ports by Dubai Ports World. Also, the new Dutch national security regime requires FDI approval for certain investments in Rotterdam port. Several other acquisitions of EU ports by COSCO have also made the news. For example, when a 67% stake of the Port of Piraeus was sold to COSCO in 2016, media attention was very high.

Both a complete and a partial prohibition of foreign investments require the consent of the Federal Government under German FDI law in accordance with section 13(3) sentence 1 of the Foreign Trade and Payments Act (Außenwirtschaftsgesetz - AWG).

Under the “cross-sectoral” regime the BMWK examines whether an investment “is likely to affect public order or security in Germany, another EU member state or projects of EU interest”. Therefore, two points are crucial: First, the identity of the investor (investor risk) and, second, the target’s activities (target risk).

• Regarding the investor risk, the fact that COSCO is owned by the Chinese state is likely to have been pivotal for the government’s decision. In this regard, a classified risk analysis of the BMWK said that the acquisition by COSCO would lead to a "substantial deepening" of Chinese influence on port operations in Germany and the EU. Further, the development of CTT became part of the Chinese “Belt-and-Road Initiative” – which conflicted with Trans-European Transport Network’s goals.
• Regarding the target risk, it is clear that the Hamburg port (of which the terminal is an integral part) is considered critical infrastructure vital to the German economy. According to news reports, the BMWK’s risk analysis saw a danger of "increased vulnerability to unilateral Chinese measures and a restriction of Europe's strategic autonomy". This is in line with other regulators’ point of view. E.g., the US authority has previously requested COSCO to divest a container terminal over security concerns.

The decision can be appealed within one month from the prohibition, or an injunction sought. However, judicial recourse against such decisions has been relatively rare and, in most cases, unsuccessful.

Outlook 

This partial clearance appears to be a prohibition rather than a clearance, replacing the intended strategic participation with a mere financial participation below the 25% threshold, and it took a long time – presumably close to a year from application to (partial) clearance. While the decision has triggered a lot of criticism against the German chancellor allegedly taking a too lenient approach vis-à-vis China, it showcases the government’s overall tightened grip on Chinese investments given it reduces a strategic investment into a mere financial minority investment, despite political backing from the very top. It might also have been the only face-saving solution for the parties involved.

Investors from China must therefore continue to carefully review FDI filing obligations and clearance prospects when investing in Germany. Lengthy proceedings and a high risk of remedies or prohibition must be factored in when negotiating the deal terms and transaction timeline.

Having said that, the COSCO case is unusual, in the heated public discussions it generated and the fact that it concerns important port infrastructure. Even today, some Chinese acquisitions of German companies or assets in sensitive sectors get cleared. Assessing potential risks and mitigating them as early as possible is key to approval.

With thanks to Sophia Meyer and Sinan Özen for their contributions to this theme.