In September, Germany announced that it plans to tighten its investment screening regulations, in a move designed to keep Chinese entities out of industries the German government believes are vital to national security.

China was Germany’s largest trade partner for the seventh straight year in 2022, with bilateral trade increasing year-on-year by 21 per cent. Concern over Germany’s increasing dependency reached a tipping point in early 2023, when it emerged that a Chinese shipping company had invested in a German asset that was subsequently classified as ‘critical infrastructure’.

According to a report published in May by the Berlin-based Mercator Institute for China Studies and New York-based Rhodium Group, FDI in Europe from China sank to $8.7bn in 2022, a 22 per cent decline from the previous year and its lowest point in almost a decade. The report highlighted that at least ten out of 16 investment deals pursued in 2022 by Chinese entities couldn’t be completed in the technology and infrastructure sectors, principally because of objections raised by national authorities in Denmark, Germany, Italy and the UK.

Paris-based Karl Hepp de Sevelinges, co-managing partner of Jeantet and another speaker on the panel, described Europe’s regulatory hurdles as a ‘grim challenge’ for Chinese companies. He cited the three main regulatory challenges facing Chinese companies as the EU FDI Regulation, the EU Foreign Subsidies Regulation (FSR) and various compliance rules and supply regulations.

‘But to think that these regulations were made to prevent Chinese investments is not totally right,’ said Hepp de Sevelinges. ‘There is a country in Europe that does not have these regulatory limitations and that’s Switzerland. It suffered the same decrease in Chinese investment as other European countries, which proves that it’s not only regulations that have an impact on business. It’s also about other criteria such as the pandemic and geopolitics.’

European motivation to put in place regulation governing FDI dates back to the 2007-2008 global financial crisis, after which China increasingly focused its FDI towards the European market. Germany, in particular, became a target due to its strong manufacturing base and leading technology companies.

In 2016, Chinese companies announced or completed purchases of German companies collectively worth €11.3bn. The most significant was the $5bn acquisition of industrial robotics manufacturer Kuka AG by Chinese home appliance maker Midea Group. That deal is now viewed as a watershed moment in the German discourse on China’s investment activities. ‘The acquisition was realised without the need for any authorisation and this triggered, at least in Germany, a willingness to put in place a regulation,’ said Hepp de Sevelinges.

‘France has probably the most complex regulations that prohibit or control foreign investment, but I don’t recall a Chinese investment that was forbidden,’ he adds, noting that these rules also limit investments coming from Germany or the Czech Republic, because they apply to European countries.

For Hepp de Sevelinges, the FSR is more problematic as it applies to companies worth over €500m that have received financial support from the state. ‘Once this happens, you have to advise the European Commission and, for many Chinese companies, it will be difficult to explain that they are not at all supported by the Chinese government,’ he explained.

He said the third regulatory hurdle – various compliance rules and supply regulations that target corruption and child labour/human rights abuses – restrict investment but also don’t target China specifically. ‘They […] are probably focused more on Africa. Although it’s not the highest hurdle, it is still a hurdle for investors coming from countries with different cultures and different work conditions’, said Hepp de Sevelinges.

Although Chinese companies were never previously blocked by the EU’s FDI review from investing in Germany, Wang admitted that the situation has changed dramatically due to Covid-19 and geopolitics and stated that regulatory hurdles such as the new FSR are a major problem for Chinese investors in Europe. They are ‘still interested in European markets and in manufacturing in sectors like the automobile industry,’ said Wang. ‘But to be successful in their investments in Europe, greenfield investment will be preferred by Chinese companies as they can create new local companies rather than attempt buyouts.’

Fellow panellist David Liu, Co-Chair of the IBA China Working Group and a partner at JunHe in Shanghai, said there are opportunities for Chinese companies in different industries that provide a good match in regards to the green policies of Europe. ‘Greenfield investment has dominated the past 20 years and accounted for more than 70 per cent of last year’s deals,’ he said. ‘This was mainly due to the EV [electric vehicle] sector, which saw the leading giants invest billions to set up plants in Germany, UK, France, and recently Hungary.’

While there’s an obvious need for technical cooperation between European and Chinese companies, Hepp de Sevelinges highlighted that the shift toward greenfield investments in EV batteries only partially offsets a steep decline in mergers and acquisitions in 2022. ‘We have been talking about greenfield investments because we’re happy to show the figures,’ he said. ‘But greenfield is not an alternative to an acquisition. Greenfield is complex: you need to buy land, get authorisation to build something, and basically you need to have the know-how yourself.’

In contrast, acquirors often purchase a company because they want to have the know-how that exists within that company, not to mention access to customers, intellectual property rights and a host of other things. ‘The Chinese can still invest in areas that are not regulated,’ said Hepp de Sevelinges. ‘For example, in real estate, there are a lot of big distressed real estate companies. I’ve not seen many Chinese investors looking at that, but it could be an opportunity.’

Image credit: Artinun/AdobeStock.com

---

The UK Court of Appeal has found that parties to a dispute can be ordered by the court to engage in alternative dispute resolution (ADR). In a judgment handed down on 29 November 2023, Sir Geoffrey Vos, Master of the Rolls, states that ‘as a matter of law, the court can lawfully stay existing proceedings for, or order, the parties to engage in a non-court-based dispute resolution process’.

The judgment was handed down in the Churchill v Merthyr Tydfil County Borough Council case (Churchill). The case came before the UK Court of Appeal after Deputy District Judge Kempton Rees dismissed an application by Merthyr Tydfil Council to stay proceedings when a Mr Churchill made a claim against it. Churchill alleged that Japanese knotweed had encroached from council land onto his adjoining property, with detrimental effects.

The Council asked why Churchill hadn’t used its Corporate Complaints Procedure before making his claim and stated it would apply to the court for a stay in proceedings if he pursued the claim. Churchill did so, which prompted the Council to apply for a stay in proceedings.

The decision comes against the backdrop of growing support for ADR in the UK and internationally. Geoffrey Vos, Head of Civil Justice in the country, had previously spoken in favour of ADR. In 2021 he welcomed a report by the Civil Justice Council that ‘concluded that parties can lawfully be compelled to participate in ADR’.

This trend is emerging across jurisdictions. For example, the Singapore Convention on Mediation entered into force in autumn 2020. The Convention is a multilateral treaty that offers a framework for enforcing and invoking international settlement agreements resulting from mediation. To date the Convention has 55 signatories, of which eight are parties to the Convention.

Italy already has experience of mandatory mediation. According to Federico Antich, Co-Chair of the IBA Mediation Committee and Founder of Studio dell’Avvocato Antich in Florence, ‘the Italian experience shows [mandatory mediation] can be done in a very easy way, in a very accessible way.'

In India, Section 6 of the country’s draft Mediation Bill 2023 provided for compulsory pre-litigation mediation in civil or commercial disputes before parties could approach a court or a tribunal. However, this provision was not included in the final Mediation Act 2023, notified in September. Instead, the final Act makes pre-litigation mediation voluntary rather than mandatory. For some, India has missed an opportunity to embrace the international trend of promoting ADR.

According to Neerav Merchant, Conference Quality Officer of the IBA Litigation Committee and Head of Disputes at Majmudar & Partners in Mumbai, making mediation mandatory would absolve the intent that mediation is based on the mutual consent of the parties to the dispute. He says mandatory pre-trail mediation was removed from the final version of India’s Mediation Act on the basis of recommendations outlined in the country’s Standing Committee report. In particular, the report advised that mediation should be voluntary because making it mandatory would amount to a denial of justice where parties are unwilling to mediate.

Merchant believes that pre-trial mediation being voluntary in India doesn’t go against the international tend of promoting ADR. ‘The courts still have a right to encourage the parties to mediate’, he says, ‘even if it’s not part of the contract’. He sees the Mediation Act 2023 as a significant step towards promoting ADR in India.

The experience in India highlights two important aspects of the debate surrounding compulsory mediation, which have also been central to discourse in the UK. One is that, as Merchant argues, mediation cannot be made mandatory because it’s based on voluntary participation. However, an alternative argument is that voluntariness can be preserved in mandatory mediation if parties are only compelled to come to the table and aren’t forced to settle, and where they still have the option to go to trial if necessary. In this case the client remains in control of the process and the parties voluntarily try to reach a settlement.

The second argument against making mediation mandatory is that it constitutes a denial of justice, as set out by India’s Standing Committee report. This was also one of the central arguments in the Halsey judgment, overturned by Churchill, which had dominated the debate over compulsory ADR in the UK. Those who counter this argument emphasise that what clients really want is to resolve their dispute and are less concerned about the method used.

Proponents of mediation suggest that it offers an important pause where parties can review the facts and the costs of the case. It’s a creative process that looks at all the options and encourages parties to think hard about their criteria for a win. Further, it can offer outcomes that aren’t available in the courts, such as an apology – which is sometimes what parties are looking for above all.

Making mediation mandatory raises awareness of it as an option, proponents also argue. It relieves pressure on the courts and treats judges as a precious resource. A judge will know that, if a dispute reaches them, it means all attempts to settle the matter out of court have been unsuccessful.

Image credit: Andrii Yalanskyi/AdobeStock.com