German law to target non-EU bids

Dubai's sovereign wealth fund has stakes in various UK firms

The German government has approved legislation that would enable it to prevent foreign buyers from taking big stakes in key domestic companies.

The measure applies to investments of 25% or more by buyers outside the EU or European Free Trade Association.

Designed to protect national champions from the hands of sovereign wealth funds, it is likely to be criticised for being protectionist.

The legislation requires approval by parliament before it can become law.

Germany is keen to prevent sovereign wealth funds, which are government-controlled investment funds, from taking control of the country's strategic assets.

Protectionist stance?

These investment funds are typically run on behalf of governments in the Middle East and East Asia, which have developed huge cash surpluses from foreign reserves or from oil and gas assets.

They have risen to prominence recently by making big investments in many Western companies.

Some of the main beneficiaries have been banks desperate to shore up their balance sheets after huge losses as a result of the credit crisis and the slowing US, UK and European economies.

The German government said that the new law would allow it to intervene within three months of the deal being made, but only if it was thought to pose a security threat.

Economy Minister Michael Glos, seeking to reassure investors, said: "Germany is and remains open to foreign investments.

"The majority of foreign investments will not be affected by the draft law," he added.

The International Monetary Fund is currently working on a voluntary code of conduct for the world's sovereign wealth funds, due to be announced in October.