German Government Seeks Power to Veto Takeovers By Sovereign Wealth Funds

The German government took new powers yesterday to veto foreign takeovers of firms by sovereign wealth funds (SWF) and other cash-rich overseas predators.

Its draft legislation, due to be ratified by the Bundestag in the autumn, has been widely criticized as a protectionist move on US and French lines to retain German ownership of key firms and frighten off foreign investors, dubbed "locusts", in the guise of private equity and hedge funds.

Michael Glos, economics minister, said most overseas investors would be unaffected by the "foreign economy law" and Germany "is and remains open" to them.

Current legislation, in line with EU law, applies only to the arms industry but the new draft extends the veto to other sectors. Earlier plans to protect "strategically important industries" were dropped.

Nevertheless, leading center-right politicians insist that it should be used to control investments in infrastructure such as airports, railways , ports, gas and electricity grids, and telecoms.

The new law is seen as a direct response to the rise of SWF, which, through the oil and commodity boom, are now estimated to control $3.85tr (£2tr) in assets.

Glos' ministry said SWFs tended to acquire far lower stakes in firms than the 25% minimum set out in the new law.

Several have been bailing out US and European banks such as UBS and Citigroup, crippled by the sub-prime crisis and credit crunch. German cabinet approval of the draft law came as Merrill Lynch courted fund capital in South Korea.

Germany has welcomed such moves but its legislation was initially triggered by the 5% stake in the aerospace group EADS taken by a Russian bank and it is now under pressure to scrutinize a potential takeover of the container shipping firm Hapag-Lloyd by Singapore's Temasek fund. There are fears the Russians could buy into Deutsche Bahn when the state-owned railway floats 24.9% of its services and logistics unit or into grids and power stations being sold by E.ON and RWE.

Glos said the law foresaw a "very restrained examination" of investments by entities outside the 31 EU and EFTA countries and did not require prior approval for their investments. Germany will be able to call in such investments for three months after a contract is signed and has then two months to decide whether to veto it as "a threat to public order or security".

Executives in the financial and manufacturing sectors voiced concerns over the impact overseas. Manfred Weber, head of the German Banking Association (BdB), said: "We must not squander away the indisputable benefits of the free flow of capital." Jürgen Thuman, head of the main industry lobby, the BDI, said: "Two million German jobs depend on [foreign investors]. We want more, not less, investment." The law also faces critical scrutiny from Charlie McCreevy, the EU internal market commissioner.