Germany Weighs Tighter Rules After Geely Takes Daimler Stake

Germany said on Wednesday it would investigate tightening the rules that govern when an investor needed to disclose a holding in a company after China’s Geely purchased a $9 billion stake in Daimler, surprising the market.

Geely’s founder and main owner, Li Shufu, revealed on Friday that he had built up a 9.7 percent stake in Daimler, the owner of the Mercedes-Benz brand, without having previously disclosed that he had crossed regulatory thresholds of 3 percent and 5 percent.

The stake purchase has rekindled fears in Germany of its highly prized expertise falling into Chinese hands.

An Economy Ministry report to the economics committee of the Bundestag, Germany’s parliament, said on Wednesday, “Against the backdrop of the current case, the federal government will examine whether the existing rules are sufficient to provide an adequate level of transparency, or if further guidelines are necessary,” according to Reuters.

Any decisions would be made by the new German coalition government.

Geely worked with Bank of America Merrill Lynch, which declined to comment, to help secure a 9.69 percent voting stake using derivatives to help skirt disclosure requirements.

The economy minister, Brigitte Zypries stuck, to Berlin’s position that Geely’s move was a business matter, but said that Germany’s openness must not be exploited by other countries.

Geely, which owns rival Swedish carmaker Volvo, is pushing Daimler for access to know-how in electric and autonomous cars.

On Wednesday, a German parliamentary committee was to question government officials on whether Geely has violated disclosure rules and whether loopholes in securities trading law need to be closed, the Stuttgarter Zeitung and Stuttgarter Nachrichten newspaper reported on Tuesday.

The Chinese carmaker first approached Daimler in November and asked it to issue shares so thatit could buy a stake, as well as for access to battery technology to help set up an electric car joint venture in Wuhan, China.

Daimler, which employs 289,000 people, declined to do a deal, since it had reservations about a new industrial alliance for fear of alienating its existing Chinese joint venture partner BAIC, according to Reuters.

Germany tightened its rules on foreign takeovers last year, the first European Union country to do so, after a series of deals saw China gain access to high-tech know-how, while attempts by German companies to buy full control of Chinese rivals remains prohibited.

The country also tightened disclosure policies to prevent “sneak attacks” from succeeding after the car manufacturer Porsche in 2008 accumulated a stake of about 30 percent in Volkswagen while keeping investors in the dark. Porsche used “cash-settled options” to buy the stake by stealth, officials said. The buyer of regular stock options gets the right to buy or sell stock at a certain price by a certain date.

But in cash-settled options, the buyer gets the right not to stock itself but the cash difference between the options’ “strike price” and the market price of the shares when the options are exercised.

The German auto-parts supplier Schaeffler did something similar, secretly cornering about one-third of the shares of its larger rival Continental.

Some investors complained that Porsche and Schaeffler had crossed the boundaries of fair play, taking advantage of disclosure rules that were too loose and regulators that were too tentative.

“Hidden ownership to try to avoid disclosure of large stakes, if successful, creates a uneven playing field,” said Henry Hu, Allan Shivers Chair in the Law of Banking and Finance at the University of Texas at Austin.

“It would undermine the interests of investors and target companies, and be inconsistent with the core values of transparency.”