| Cross-border M&A has become increasingly frequent in recent years.While bringingprosperity to trade and commerce,it also hasa significant impactonthe host economy to the extent that national security may be at stake.In response,many countries around the world,most notably developed countries in the west,are starting to roll out a full set of legal and regulatory framework for security review in cross-border M&A deals.China’s 2010 Government Work Report points out,"while encouraging foreign investment in the reorganization,restructuring and M&A of domestic companies,a security review process for cross-border M&A needs to be established at a faster pace".This legislative motion was already taken forward in 2011.On 3 February 2011,the State Council officially promulgated the Notice on the Establishment of Security Review System for Foreign Investment in the Merger and Acquisition of Domestic Companies.This was the first official document regarding the security review system for cross-border M&A.It marks China’s first step towards establishing a robust security review system for cross-border M&A.In conjunction with the Notice,the Ministry of Commerce(MOFCOM)subsequently promulgated the Provisional Regulations of MOFCOM for the Implementation of the Security Review System for Foreign Investment in the Merger and Acquisition of Domestic Companies.These two official documents further improved China’s legal framework on foreign investment administration.It means after three decades of reform and opening-up,as foreign investment penetrates further,China is finally working on a defensive legal system to safeguard national security.This paper examines the basics of security review in cross-border M&A deals.It follows with a comparison of security review legislations in the US,Canada and Germany and a summary of the playbook for security review in cross-border M&A and issues of international harmonization.Next it analyzes the key components of security review in cross-border M&A,namely,building the system of security review and the subject,criteria and process of security review.The last chapter presents recommendations and analysis on how to further improve the security review system for cross-border M&A and the author’s proposed solution to the existing problems based on previous arguments.In addition to the introduction and conclusion,this paper consists of eight chapters.Chapter 2:Basics of Security Review for Foreign Investment in Cross-border M&AThis chapter starts with the traditional and practical definitions of an M&A deal.It examines the diverse and complex internal components and external implications of foreign-funded M&A.It points out that the prevailing practice is not to separate the internal components and external implications and cross-examine them conceptually,but rather to review the merits of the deal.The term "security",either narrowly defined economic security or more complicated national security,is in constant change.Security defined in this paper aims to break free from the shackles of the traditional"national security" and "economic security".It aims to fully describe the various security concerns related to a foreign-funded M&A deal.In an increasingly globalized economy,the security implications of such a deal are permeated in many walks of life,political,economic,technical and cultural.It is a multi-faceted concept made up of many singular concepts.Chapter 3:Principles for Developing the Legal Framework for Security Review of Foreign-funded M&AUsing relevant provisions of the OECD and its reports on investment liberalization as a basis,this chapter examines the principles to be observed for establishing the legal framework for security review for foreign-related M&A.In 2006,the members of the OECD held extensive and heated debates on the issue of balancing national security protection with investment liberalization.In May 2009,the OECD published the Guidelines for Recipient Country Investment Policies Relating to National Security.The Guidelines set forth some famous principles such as non-discriminatory treatment,regulatory balance,transparency,predictability and accountability.These ground rules together provide a basic reference for the development of a security review system.Chapter 4:The Comparison of Legislative Context for Security Review of Foreign-funded M&A and Review Frameworks across CountriesThis chapter examines the trends and legislative backgrounds of foreign-funded M&A.It then selects the US,Canada and Germany for a comprehensive analysis and comparison,with a view to developing a perceptual and general framework of security review legislations for foreign-invested M&A.The US legislative system on the whole is the first,most complete and operable system.It is the best example of balance between maintaining trade liberalization and national security.Canada was the first to introduce a catch-all statute law,even ahead of the US which has by far the most comprehensive system.Second,the Canadian security review legislator acted very swiftly on all fronts.Many amendments and supplements have been made to the Canadian security review legislation at a fast pace.Third,Canada has set up its one-in-a-kind independent criterion,namely the "net interest" criterion,which differs from the general approach of other countries in determining the security review criteria.Germany is an example of continental law.For legacy reasons and the need to stimulate economic demand,the Germany system appears more relaxed on many counts.Chapter 5:Development and Institutional Framework of a Security Review Legal SystemThis chapter first examines the two legislative approaches to security review for foreign-related M&A:ad hoc approach and hybrid approach.The ad hoc approach means the legislator sets up a separate legislative process for the review of security concerns related to a foreign-invested M&A deal.It defines the scope and criteria of the review and the review authority for each step and the corresponding power of each authority.The hybrid approach means no separate legislative process,but rather use foreign investment law,commercial law,antimonopoly law,foreign exchange control law and other economic laws and regulations to govern the matter of security review for foreign-related M&A.In a general sense,the ad hoc approach has more advantages than the hybrid approach.In terms of institutional setup,security review authority falls into two types.One type is a stand-alone security review authority that decides on a comprehensive review process and the final enforcement.The other type is the"separation of powers" whereby several institutions together coordinate on the security review.Between these two types,having multiple institutional layers usually means the supervising body could play a bigger role.Chapter 6:Subject of Security Review and Access ProtocolThe subject of the review means making objective determination on the relevant factors of the deal.The focus is on the parties to the deal and its own merits.These are issues that need to be made clear before initiating the review protocol.This chapter first examines country-specific provisions on review subject and how they make a distinction between natural persons and institutions.It reveals that for security review,besides the fact that the parties to the deal are foreign-related,the industry they belong to is also the other single most important factor after establishing the foreign-related nature of the deal.A full scan of the deal has become a big trend in security review nowadays.Chapter 7:Security Review CriteriaThe security review criteria are the centerpiece of the whole legal framework,but relative to other building blocks such as review scope,process and institutional setup,they are also the most ambivalent and least definitive.This chapter first takes a look at the security review criteria of countries around the world and summarizes the likely preferences and focuses of the criteria.In most cases,the focuses would include national defense,economic and industry interests and combined interests.In terms of the manifestation,the criteria could be a checklist or a few definitions of key terms.Last not but not the least,security review criteria are closely tied to public policy,whereas public policy must be effectively scoped if it is applied as a criterion in security review.Chapter 8:Security Review ProcessA complete process of security review for foreign-related M&A includes four steps,namely initiation,investigation,deliberation based on all available information by the relevant authorities and the announcement of review results.Depending on how active a country is on FDI attraction,the rights and obligations of the parties and the review authorities in a given stage may vary significantly.In the initiation stage where filing and notification was made,the investor may file on its own initiative,or the authority may issue a review notification or initiate the process in extraordinary circumstances.In the investigation stage,it could be a general investigation or an extraordinary investigation with the involvement of intelligence unit and others.In the review process,some countries even set up a consultation mechanism to increase the predictability and transparency of the security review,but on the remedies available to process and the parties,no country has so far set forth a complete process.This is an area that needs to be improved further.Chapter 9:Improvement of China’s Legal Framework for Security Review for Foreign-related M&ABased on a thorough examination and discussion of the legal framework for security review for foreign-related M&A,the last chapter of the paper presents some recommendations for improvement.The proposed actions focus on the flaw and weakness of the legislative process,the harmonization with other laws,the clarification of review subject,improvement of criteria and the setup of the process. |
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