China as a "National Strategic Buyer": Towards a Multilateral Regime for Cross-Border M&A
Unlike the case of cross-border trade, there is no explicit international governance regime for cross-border M&A; rather, there is a shared understanding that publicly traded companies are generally available for purchase to any bidder—domestic or foreign—willing to offer a sufficiently large premium over a target’s stock market price. This expectation is of course limited by the shifting boundaries of host country protectionism and the prevailing patterns of corporate ownership in different countries. But the unspoken premise that undergirds the system is that the prospective buyer is motivated by private economic gain-seeking.
The entry of China into the global M&A market threatens the fundamental assumptions of the current permissive international regime. The rise of China-related M&A reflects not only consolidation in its domestic economy but, most important, China’s increasing share of cross-border transactions. In 2016, for example, China accounted for $92 billion of net purchases in cross-border acquisitions, 10 percent of the worldwide total and more than the United States, with $78 billion. A significant fraction of these transactions related to advanced physical and digital technology, domains of an articulated Chinese state objective to become a world leader.
The central claim of our paper is that the cross-border M&A regime will require a new rules-of-the game structure to take account of China’s ascension. This is because cross-border M&A with a Chinese acquirer adds a new dimension: what we will call the “national strategic buyer” (NSB), whose objective is to further the interests of a nation state in the pursuit of national industrial policy or perhaps national security concerns. Thus, China presents a problem of “asymmetric motives” in the global M&A market: sellers to Chinese firms have private motives for pursuing transactions, while at least some Chinese acquirers have non-economic motivations; they are NSBs. Yet distinguishing commercial and financial motives from national strategic motives with a given Chinese acquirer is difficult: high levels of state ownership, the murkiness of corporate ownership in many cases, and the Communist Party’s extensive levers of influence over all firms, whether “state-owned” or “private,” creates the potential for national strategic motives to be involved in many transactions.
To date, the only mechanisms for addressing the NSB problem are national security review regimes for cross-border acquisitions of domestic targets at the level of separate nation states. In the United States, this mechanism is the so-called CFIUS process. Although the details differ, a number of other countries have adopted similar screening regimes. Concern over Chinese acquisitions has prompted recent legislative proposals to reform the CFIUS process. Similar concerns have led to a proposal to adopt a national security screening mechanism at the EU level, where none currently exists.
In our view, this approach fails to take on the crucial long-term concern of assimilating China as a normal actor in the global economic system. A cross-border M&A regime featuring acquirers with asymmetric motives is not stable over the long term. Eventually, the presence of actors in the global M&A market with asymmetric motives will lead to a backlash that could disrupt global capital markets. Indeed, there are already signs of backlash against China building.
The problem of asymmetric motives could be eliminated through a multilateral regime of mutual contestability—i.e., a requirement that every acquirer in a cross-border deal must itself be susceptible to takeover by a foreign buyer. In such a regime, value-reducing acquisitions to serve national strategic objectives could elicit a hostile bid; this would serve as a check on such state insistence. Such a regime is not politically feasible, however, as demonstrated by the collapse of an effort to agree to such a regime at the EU level almost two decades ago.
Our paper sets forth the framework for a second-best solution, in which the problem of asymmetric motives can be mitigated through adoption of a multilateral regime under which firms subject to the potential for direct government influence in their corporate decision-making must demonstrate “eligibility” to engage in outbound M&A. Our proposal contemplates that state-owned-enterprises, firms subject to a golden share held by a governmental body, or privately owned enterprises with governing-party-based internal governance organs would commit to an “eligibility regime” before undertaking acquisitions of foreign firms. This regime would require a commitment to own-firm commercial or financial motives in cross-border acquisitions made credible through a corporate governance set-up that could verify adherence. The elements of our eligibility regime (elaborated in the paper) are foreign ownership of a significant block of shares of the acquirer; selection rights lodged with such foreign investors over a number of independent directors, who are in turn charged with responsibility to investigate and certify the absence of government influence in the transaction; disclosure of financing; and an enforcement apparatus. These specifics are offered by way of example—other possible solutions to the credible commitment problem are conceivable.
The regime could be developed through governmental agreement, for example, as an add-on to the G20 Guiding Principles for Global Investment Policymaking, agreed to in 2016 during China’s presidency of the G20. Alternatively, the regime could be developed through a public-private consultative process led by the OECD. The regime could be implemented on an opt-in basis at the national level, for example as a new element added to an existing cross-border screening regime in lieu of an ever-expanding definition of “national security.”
We anticipate some likely objections to our proposal. The most obvious one, of course, is: why would China (or any other country that imposes an NSB obligation) permit its firms to subject themselves to such discipline? We have no illusions that China’s political leadership would find the loss of this lever of influence over the economy attractive. But as the national security screening mechanisms in advanced western economies proliferate and tighten, it will be in China’s national interest to accede to a harmonized M&A regime that minimizes the “suspicion tax” under which many Chinese firms currently operate in global markets. Without some type of intervention along the lines we suggest, the present cross-border M&A regime may unravel.