Investment Screening: It’s All About the Investor

https://doi.org/10.63189/SDQA5750

The global economic order is undergoing significant shifts, with exceptions traditionally reserved for the defence industry, which are now being expanded to other sectors of the economy. Exceptions based on essential security interests—which are reserved for defence-related economic measures, such as the one contained in Article 346(1)(b) Treaty on the Functioning of the European Union—can now be invoked in relation to economic activity that is deemed sensitive, strategic, or plainly unwanted. This is a result of the inclusion of the national security exception in various domestic legal mechanisms, such as investment screening. The adoption and continuous adaptation of such mechanisms are part of a shift in the international economic order.

Several economic activities are being classified as strategic and treated as defence or security related. A wide range of products fall into this category because of their considerable dual-use potential, such as semiconductors, drones, quantum technology, and even clean energy. This broadening has profound legal consequences, particularly within a neoliberal economic framework. Various dimensions of national security have also gradually come under focus, such as economic, data, and knowledge security. These concepts are part of a shift in regulatory boundaries that is reshaping the flow of capital and signifies a transition to a new international economic order, which some scholars have called the geoeconomicworld order.

One significant challenge of the geoeconomic shift lies in developing legal mechanisms that allow for significant state discretion while remaining compliant with rule of law requirements. One such mechanism is investment screening. Restricting capital flows and de-risking imply greater state involvement in the economy. There is a bumpy road ahead in accommodating the use of these new legal instruments. Part of the process will happen in the courts, and thus might appear in the press, which will allow commentators some insight into the process of accommodation. Part of it will happen outside of courts, behind closed doors, and in confidence.

What is strategic?

From a security perspective, what is strategic or significant can be determined in several ways. Laws establishing investment screening mechanisms contain various criteria that qualify certain economic activities as significant in terms of national security and public order. Investors in these areas have to report their activities and wait for a decision from the competent authorities, who have the option to allow, conditionally allow, or prohibit a certain investment. The decision depends on the risks perceived by the authorities for a certain investment.

A company may not consider itself particularly significant from a strategic perspective. However, it is not up to it to make the decision. Companies in defence-related industries may be considered more sensitive or critical and are likely to receive more attention from authorities. Screening authorities will also consider investors’ origins and business ties. Finally, the level of control or influence an investor is seeking will also constitute an important factor, albeit one that changes according to the sensitivity of the target company’s economic activity.

It is an open secret that investment screening mechanisms and other investment control mechanisms target adversaries and systemic rivals. This means that investments from such countries will very likely face more scrutiny and be met with decisions on prohibition where reviews are triggered.

The authorities will tell you…

In a screening case from Germany, owners of a company sought to sell it to a Chinese business partner, but the transaction was blocked by the authorities. Chinese defence company Addsino Co. Ltd. was planning to acquire the satellite and radar technology firm IMST GmbH, which triggered a review of the investment under German investment screening law. The transaction was blocked in consideration of several reasons, including various details surrounding the acquirer, and the activities of the target company. The prohibiting decision was subsequently leaked to the public, allowing for its brief presentation herein.

The prospective acquirer is Addsino Co. Ltd., a subsidiary of a Chinese state-owned enterprise called China Aerospace Science and Industry Corporation (CASIC). CASIC, the largest missile maker in China, appears on the US Department of Defense’s list of Chinese companies tied to the Chinese military. The target company, IMST GmbH, is an industrial engineering company that focused on the research and production of radio systems, chip designs, antennas, and electronic design automation. One of the most sensitive matters pertains to the fact that the target company supplied certain components to the German military. Part of the research conducted by the target company also benefited from state funding. Therefore, the transaction was prohibited.

Dissatisfied with the decision, owners of the target company decided to contest the prohibiting decision of the authorities in court. They also took the matter to the press, revealing further details that may have been of interest to them. Owners of the target company completely disagreed with the authorities regarding their company being a strategic asset. They argued that the state funding they obtained resulted in research that was subsequently published and made publicly available. Regarding supplying equipment to the German military, the owners argued that the equipment supplied was to a particular satellite for civilian use, and the Bundeswehr only later started using it. The owners also argued that their company had been conducting business with Chinese partners for several years.^[1]

Despite protests from the target company’s owners, the authorities deemed the acquisition too sensitive and maintained the prohibition. The owners later withdrew their case from court, which precluded the case from being concluded, leaving us to guess what the courts might have had to say.^[2]

The case serves as an illustrative example of the unintended consequences of the interplay between military and civilian technologies, a dynamic that has developed over the past few decades as part of broader cost-saving strategies. The case also provides interesting insights into the (in)effectiveness of factual arguments in investment screening cases. Whether courts would have censored the blocking decisions of the authorities remains a question. In this case, the acquirer’s identity may have been weighted more than the activity of the target company.

^[1] Neßhöver, C., Slodczyk, K. (2012) Altmaier verbietet Verkauf von Kleinfirma nach China, Manager Magazin, 3 December 2012. [Online]. Available at: https://www.manager-magazin.de/unternehmen/industrie/peter-altmaier-wirtschaftsminister-bremst-chinesische-investoren-aus-a-1083ae9e-14cd-4eea-9fc4-29e18b7c388a (Accessed: 5 August 2024)

^[2] Von Rummel, L. F., Stein, R. M. (2024) Snapshot: foreign investment law and policy in Germany, Lexology, 16 January 2024. [Online]. Available at: https://www.lexology.com/library/detail.aspx?g=7b44bbc8-3553-4396-8a9b-cd4ca5876f37 (Accessed: 5 August 2024)