Abstract

This Article takes a comparative look at how governments review cross-border mergers for both competition and national security concerns. In particular, key factors are the institutional mechanisms through which these two reviews are separated or combined and how “national security” is defined in the context of economic activity. The focus is on the three major economic markets: the U.S., the EU (using the example of the UK as a member state), and China, with particular emphasis on China’s rapidly developing system.

In the U.S., antitrust review is wholly separate from the national security review conducted by the Committee on Foreign Investment in the United States (“CFIUS”). In Europe, large mergers are notified to the EC Directorate General for Competition, however, individual Member States may raise national security exceptions within the same competition review process. Though China has reviewed foreign investment for years, comprehensive competition review began when the Antimonopoly Law became effective in 2008. Recently, China’s State Council has implemented an interdepartmental national security review system for foreign mergers and acquisitions.

This Article examines the existent U.S. and EU systems alongside the emerging Chinese system of national security review. Examples demonstrate that national security review in the U.S. has often become politicized, though primarily by the U.S. Congress and not by CFIUS. Politicized mergers result in uncertainty for businesses and can harm diplomatic relations with key trading partners. The UK has had success avoiding the pitfalls of politicized reviews, however, the European system could not be successfully replicated by the U.S. or China due to their more centralized political systems.

Ultimately, the definition of “national security” will have the greatest impact on which cross-border mergers receive clearance. Though China has not explicitly defined national security, concerns about foreign investment relate to military defense, strategic economic security, and what has been called cultural security. The U.S. and EU have historically limited their definitions of national security to the defense arena. However, the Foreign Investment and National Security Act of 2007 significantly broadened the U.S.’s definition to include many sectors of the economy previously beyond CFIUS’s purview. This new definition and other changes make U.S. practice more likely to appeal to Chinese lawmakers and are likely to influence the emerging Chinese national security review committee.

Early merger reviews under the Antimonopoly Law, especially the Coca-Cola and Huiyuan case, have drawn criticism for apparently allowing factors other than competition to influence the Ministry of Commerce Antimonopoly Bureau’s decisions. China’s new national security review is likely to have a positive impact on the internal politics that may have influence the Antimonopoly Bureau. While politicization of merger reviews is likely to continue in the future, adopting a CFIUS-type interdepartmental review system can act as a lightning rod, freeing the Antimonopoly Bureau from pressure to consider non-competition factors. This will enhance transparency and improve external perceptions by investors and trading partners.

This Article concludes that the CFIUS model, taking account of the great increase in authority since 2007, is a good fit for China’s political climate. If properly implemented, creation of a national security review system will provide substantial, though limited, benefits to China.


I. Introduction

This paper takes a comparative look at how governments review cross-border mergers for both competition and national security concerns. In particular, this paper examines the structural and institutional mechanisms through which these two reviews are separated or combined and how “national security” is defined in the economic context. The focus is on the three major economic markets: the United States, the European Union (using the example of the United Kingdom as a Member State), and China.

Over the past decades, global competition law has been markedby a high degree of convergence in both substantive law and procedure. Indeed, multilateral institutions such as the International Competition Network and newly created international affairs offices of national enforcers have made convergence a top priority. While significant differences still remain, there is remarkable similaritybetween the substance and procedure followed by the world’s major antitrust enforcers.

China is a newcomer, with its first comprehensive competition law, the Antimonopoly Law (“AML”), coming into effect in 2008. Following the trend of convergence, China’s AML reflects its lengthy study of U.S., EU, and other competition enforcement regimes. It is widely accepted that China, as its economy continues to expand, will gradually take its place as a major regulator who will exercise concurrent jurisdiction with the U.S. and EU over nearly all large transnational mergers. Many expect that securing approval from the triumvirate of the U.S., EU, and China will be absolutely essential to completing the most significant deals in the future.

Notwithstanding the large similarities in competition law between these three economies, there are, of course, notable differences in how they review mergers. The U.S. and EU have occasionally reached starkly different conclusions, most notably in the GE Honeywell case. As the newest to the field, China’s enforcement practices are still developing and have been the subject of much speculation in government, business, and academic circles.

Amongst the remaining differences between the enforcers, there is a particularly notable lack of consensus on how to treat transnational mergers that raise questions of national security. The U.S. has a system of parallel merger reviews, using multiple agencies to keep examination of competition issues separate from national security review. The EU, lacking a formal unified conception of “European security,” must defer to the judgment of individual members states on their own national security. European Union Member States raise national security objections within the context of the same European Community (“EC”) review process that is focused almost entirely on competition concerns.

Alongside the U.S.’s dual processes and the EU’s single process, China has recently articulated a procedure for national security review. However, implementing regulations are still developing and China’s system is yet to issue any decisions. China’s national security review system may be welcome because there has been concern that some of the earliest decisions under China’s AML merger review system have been tainted by protectionism and   concerns about what China calls “economic security.” Regardless of whether some degree of protectionism continues after the creation of a national security review system, the clear separation of competition reasons from other considerations will increase transparency and help the future development of Chinese competition law. Given that China is still deciding how to treat national security issues in the context of transnational mergers, lessons and recommendations can be drawn from the examples of the U.S. and EU.

Sections 2 through 4 of this paper examine, in turn, the existing competition and national security merger review frameworks in the U.S., EU, and China. Each section notes the existing laws and regulators, and then examines how “national security” is defined (formally or informally) in each jurisdiction and how that conception of national security impacts the legal regime surrounding merger review. Section 5 embarks on a series of case studies designed to show how politics often interferes with the legal regimes apparent from simply reading the statute books. Section 6 builds off a case study of the unpopular Chinese antimonopoly enforcement action in the Coca-Cola and Huiyuan merger and examines how a forthcoming national security review system is likely to resolve some of the issues that led to that decision. Section 7 concludes with a brief review of this paper’s main points.