Industrial policy and increasing protectionism add complexity to M&A transactions in Europe


Financier Worldwide Magazine

March 2018 Issue

Recent years have seen growing activity in the area of national industrial policy, in Europe and worldwide. This was accompanied by political developments heading in a protectionist direction. Foreign investment control regimes are in the process of being tightened. All of this adds elements of complexity to M&A transactions, making their structuring and execution increasingly difficult.

Germany, once known for its liberal investment climate, serves as an example of this phenomenon. For quite some time, foreign investments in German enterprises only came under the scrutiny of the investment control regime when the respective target company was involved in the weapons industry, in satellite data system technology or the cryptography sector. Given the increasing number of inbound investments by foreign sovereign wealth funds – and also the lack of other political topics the then governing coalition of conservatives and social democrats could agree on – the German investment control regime was tightened in 2009.

Any transaction in which a non-EU/European Free Trade Association (EFTA) investor acquires at least 25 percent in a German company could henceforth be investigated by the Federal Ministry of Economics. If a transaction potentially threatened the public order or security in Germany, conditions could be imposed and, ultimately, the whole transaction could be blocked. The German government reacted to the ensuing outcry in the market, stating that irrespective of this broad and vague test, investigations of transactions would remain a rare exception, and would be applied only if they affected critical infrastructure in areas such as telecommunications or energy. Indeed, the markets were spared, administrative restraint was exercised, comparably few transactions were investigated and no deals were blocked.

A wave of inbound transactions by Asian investors changed the outlook. When a Chinese investor offered to take over leading robotics specialist Kuka, the federal minister of economic affairs actively lobbied for a “German transaction”. A German acquirer would help safeguard and maintain important know-how in Germany. Ultimately, no such deal could be orchestrated and even the stricter investment control regime failed to provide any protection. Accompanying political endeavours were in vain. In response to this situation, and again having run out of other common ground, another coalition of conservatives and social democrats agreed to add further constraints to the investment control regime in 2017.

Although the test remains for threats to public order and security, and the main focus is still on critical infrastructure, the government’s interpretation of such infrastructure has broadened to now explicitly include, among others, health, transport and payment systems. Further, a list of guiding examples was introduced based on which transactions need to be notified, and investigation periods were extended. As a consequence of the latter, the main tool available to potential foreign acquirers to obtain transaction certainty quickly – applying to the Federal Ministry of Economics for a non-objection certificate – no longer fits into regular transaction processes.

The respective periods are no longer synchronised with Phase 1 antitrust proceedings, as they – deliberately – were previously. However, despite having significant influence on the regular M&A process, the most disturbing feature is not the introduction of notification requirements or the extension of investigation periods. Rather it is the fact that there are no precedents on how the new foreign investment control regime will be applied. There is a common expectation, however, that, based on recent developments in the area of industrial policy, far more administrative involvement is to be anticipated. Thus, complexity and uncertainty have been added to the M&A process, both arch-enemies of smooth dealmaking.

This is not merely a German phenomenon. Fears that the upcoming Brexit and related weakness of sterling might lead to a ‘sell-out’ of UK enterprises have added an additional pinch of protectionism to the political debate in Westminster. The failed approach of Kraft towards Unilever can in part be seen in this context, and work on a tight new investment control regime is in progress. Structurally comparable arguments have also found their way into Dutch politics. French president Macron recently instructed the minister of economy and finance Le Maire to expand national control of foreign investments in France. Based on a comprehensive investment control regime, the French state is already entitled to thoroughly investigate foreign investments in strategic sectors and to take measures to protect not only French research and development functions but also French jobs. Strategic sectors will now be understood more broadly and additional sanctions will be introduced. Ultimately, industrial policy has always been close to the centre of French politics.

Backed by Germany, France, Italy and Spain, the European Commission last summer published a draft regulation addressing the control of foreign investments in Member States. Within this ‘toolbox’, a suggested European cooperation mechanism has the potential to significantly infringe upon M&A processes. Member States would be obliged to notify the European Commission as well as other Member States when undertaking any investigation of foreign investments. The other Member States and also the European Commission would be entitled to comment on the situation, leading to a significant protraction of national control proceedings.

The outcome of M&A processes would become far less predictable. Even in less problematic cases, the process would drag on for months – this in an environment in which just a few additional days may lead to external influences killing a deal. Successfully closing a challenging transaction would become the lucky exception to a rule, which nobody involved in M&A transactions on a regular basis even dares to think about.

There is still a possibility that ‘Fortress Europe’ will not be reinforced by this wall and the hope that politicians will involve M&A practitioners in a meaningful way when discussing whether and how foreign investments in a Member State should be controlled. Some have strong reservations, however, that chauvinist industrial policy and increasing protectionism will lead to investment control regimes that render successful dealmaking in Europe a scarce phenomenon.


Michael J. Ulmer is a partner at Cleary Gottlieb Steen & Hamilton LLP. He can be contacted on +49 69 9710 3180 or by email:

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Michael J. Ulmer

Cleary Gottlieb Steen & Hamilton LLP

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