Abstract
State enterprises (SEs) are playing an increasingly important role in cross-border mergers and acquisitions (M&A). Due to their special relationship with the government, SEs often have undue competitive advantages over their private competitors. SEs may leverage these undue competitive advantages in cross-border M&A to outbid private investors. This results in an inefficient allocation of production resources and prevents private competitors from reaching their full potential of economic efficiency. Although this problem is accentuated in the context of Chinese SEs, it is also of general importance, as SEs in numerous countries benefit from undue competitive advantages. However, the current national competition laws, international investment agreements (IIAs) and domestic investment screening regimes inadequately address this concern. In particular, international investment agreements traditionally focus on investor protection and less on achieving competitive neutrality. Even the provisions on competitive neutrality contained in recently concluded international investment and trade agreements do not apply to cross-border M&A. Investment screening regimes, on the other hand, primarily assess foreign acquisitions with regard to national security. Merger control under competition law also has a limited focus. It deals with the impact of M&A on the relevant markets and does not assess whether the acquisition itself is in accordance with the principle of competitive neutrality. Regulatory reform proposals in this regard are largely missing. A three-pillar approach, focusing on international investment principles, international investment agreements and domestic investment screening and competition law regimes, may prove useful for further regulatory attempts to ensure competitive neutrality in cross-border M&A.
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Notes
- 1.
As pointed out by Kowalski and Rabaioli (2017), p. 7, the definitions used of state enterprises, state-owned enterprises, state-controlled or state-influenced enterprises vary in the different legal and policy contexts in which they are used. Following Kowalski and Rabaioli (2017), the term SE in this chapter does not only apply to situations where there is a de jure ownership or control by a state, but also to enterprises whose commercial operations are de facto either influenced or controlled by a state. By using this rather broad definition, it is more likely that all relevant constellations are captured. It should be noted however, that many studies focused on state-owned enterprises (SOEs), which is the reason why this term is used when referring to the respective studies.
- 2.
- 3.
Kowalski and Rabaioli (2017), pp. 8 et seq.
- 4.
- 5.
OECD (2016), p. 50.
- 6.
- 7.
- 8.
- 9.
See for an overview of this kind of concerns OECD (2016), pp. 59 et seq.
- 10.
Chaisse (2016b), p. 586.
- 11.
See e.g. The Economist, How to safeguard national security without scaring off investment, 11 August 2018, https://www.economist.com/leaders/2018/08/11/how-to-safeguard-national-security-without-scaring-off-investment.
- 12.
- 13.
Yun (2016), p. 22.
- 14.
OECD (2012), p. 9; see further Sauvant et al. (2014), pp. 97 et seq. For a concise description of competitive neutrality distinguishing between competitive neutrality at the domestic level (i.e., equal treatment of public and private entities within the same regulatory environment) and at the international level (i.e. in an economic market no entity provides over undue competitive advantages).
- 15.
- 16.
Gordon and Milhaupt (2018), p. 2.
- 17.
Milhaupt and Zheng (2015), pp. 676 and 710.
- 18.
Collier (2018), pp. 12 et seq.
- 19.
Collier (2018), pp. 12 et seq.; Financial Times, ChemChina edges closer to sealing Syngenta deal, 31 May 2017, https://www.ft.com/content/2dc58756-45dd-11e7-8519-9f94ee97d996.
- 20.
Reuters, Syngenta rejects $45 billion Monsanto takeover offer, 8 May 2015, https://www.reuters.com/article/us-syngenta-m-a-monsanto-reject/syngenta-rejects-45-billion-monsanto-takeover-offer-idUSKBN0NT0JM20150508.
- 21.
Neue Zürcher Zeitung, Wie chinesisch wird die Schweizer Syngenta?, 5 April 2017, https://www.nzz.ch/wirtschaft/fragen-und-antworten-zur-uebernahme-durch-chem-china-wie-chinesisch-wird-syngenta-ld.155475?reduced=true. According to this report, the different deal structure seems to be one of the main reasons why the board of directors of Syngenta agreed to the deal with ChemChina and opposed the Monsanto-offer.
- 22.
Collier (2018), pp. 89 et seq.; see also New York Times, To Pay for Syngenta, ChemChina Looks to Beijing for Help, 26 May 2017, https://www.nytimes.com/2017/05/26/business/dealbook/to-pay-for-syngenta-chemchina-looks-to-beijing-for-help.html.
- 23.
Collier (2018), pp. 89 et seq., pointing out that ChemChina’s profit ratios were either negative or below average in the years before the Syngenta-Deal.
- 24.
Financial Times, Beijing rules out direct aid of ChemChina’s $44bn Syngenta purchase, 28 September 2017, https://www.ft.com/content/4a449fc4-a411-11e7-9e4f-7f5e6a7c98a2.
- 25.
Financial Times, ChemChina edges closer to sealing Syngenta deal, 31 May 2017, https://www.ft.com/content/2dc58756-45dd-11e7-8519-9f94ee97d996; New York Times, To Pay for Syngenta, ChemChina Looks to Beijing for Help, 26 May 2017, https://www.nytimes.com/2017/05/26/business/dealbook/to-pay-for-syngenta-chemchina-looks-to-beijing-for-help.html. The Chinese financial institutions were Bank of China ($10 bn), China Reform Holdings ($7 bn) and China Reform and Industrial Bank ($1 bn). As a foreign bank, Morgan Stanly bought $2 bn in convertible preference shares.
- 26.
New York Times, To Pay for Syngenta, ChemChina Looks to Beijing for Help, 26 May 2017, https://www.nytimes.com/2017/05/26/business/dealbook/to-pay-for-syngenta-chemchina-looks-to-beijing-for-help.html. According to Lin and Milhaupt (2017), pp. 24 et seq., due to the absence of default, SOEs in China not only benefit from preferential access to bank loans from the state-owned banking sector but also from preferential access to low-cost capital provided by the bond market.
- 27.
The ChemChina-Syngenta deal was reviewed by 13 regulatory authorities. Among others, it was subject to EU and U.S. antitrust approval and was assessed by the Committee on Foreign Investment in the United States (CFIUS) and the Swiss Takeover Board (see Neue Zürcher Zeitung, Syngenta auf der Zielgeraden, 8 February 2017, https://www.nzz.ch/wirtschaft/vor-chem-china-uebernahme-syngenta-mit-gewinnrueckgang-ld.144271).
- 28.
Jones and Davies (2014), pp. 453 et seq. With further references.
- 29.
OECD (2007), pp. 68 et seq.
- 30.
Globermann (2015), p. 1.
- 31.
Gordon and Milhaupt (2018), p. 36.
- 32.
Gordon and Milhaupt (2018), p. 36.
- 33.
Geddes (2004), p. 29.
- 34.
Globermann (2015), p. 2.
- 35.
Globermann (2015), p. 2.
- 36.
- 37.
Sauvant et al. (2014), pp. 4 et seq.
- 38.
Sauvant et al. (2014), pp. 11 et seq.
- 39.
- 40.
- 41.
Baker McKenzie, Rising tension, assessing China’s FDI drop in Europe and North America, 2018, https://www.bakermckenzie.com/en/insight/publications/2018/04/rising-tension-china-fdi. According to UNCTAD (2018), pp. 6 and 85, recently, Chinese investment in Europe and North America has dropped, which is partly attributed to growing regulatory scrutiny towards Chinese investment in these regions and Chinese policies clamping down on outward investments.
- 42.
- 43.
Guo and Clougherty (2015), pp. 144 et seq.
- 44.
Nielsen (1981), pp. 58 et seq.
- 45.
Credit Opinion by Moody’s, 7 April 2017, https://www.swisscom.ch/content/dam/swisscom/de/about/investoren/fremdkapital/2017/moody-s_credit-opinion20170407.pdf.res/moody-s_credit-opinion20170407.pdf; Credit Rating by Standard and Poors, 19 December 2016, https://geschaeftsbericht.post.ch/app/themes/post-gb/downloads/de/DE_Post_S&P_Ratingreport_2016.pdf.
- 46.
Christiansen and Kim (2014), p. 17.
- 47.
OECD (2016), p. 55.
- 48.
OECD (2016), p. 59.
- 49.
- 50.
OECD (2016), pp. 55 et seq.
- 51.
Christiansen and Kim (2014), p. 22.
- 52.
OECD (2016), p. 51.
- 53.
Gordon and Milhaupt (2018), p. 2; see Nakagawa (2012), pp. 3 et seq., for an assessment of how undue competitive advantages of SEs are addressed under the multilateral rules of trade, emphasizing that WTO law does not secure a level playing field between SEs and private entities in investment markets; see also OECD (2016), pp. 83 et seq. and 156, pointing out that trade regulators are generally well equipped to deal with undue advantages of SEs in the global trading system; see further Wu (2016), pp. 302 et seq., describing with reference to recent WTO case law, that preferential loans provided by state-owned banks are considered to be subsidies subject to WTO-rules if such state-owned banks exercise governmental functions.
- 54.
See for instance Chaisse (2016a), p. 247, stating that foreign direct investment is also covered through the General Agreement on Trade in Services (GATS) commercial presence mode of supply. However, with regard to the issue at hand it seems unlikely that the basic principles and general obligations of the GATS will have a disciplinary effect.
- 55.
Subedi (2016), p. 8.
- 56.
Chaisse (2016b), p. 604, for a description of these two types.
- 57.
- 58.
Shima (2015), p. 15.
- 59.
An illustrative example for such a provision is Article II.7 of the US-Senegal BIT (1983): “The Parties recognize that, consistent with paragraphs 1 and 2 of this Article, conditions of competitive equality should be maintained where investments owned or controlled by a Party or its agencies or instrumentalities are in competition, within the territory of such Party, with privately owned or controlled investments of national or companies of the other Party.” See also Article II.5 of the US-Bangladesh BIT (1986).
- 60.
See the examples given by Shima (2015), pp. 15 et seq.
- 61.
OECD (2016), p. 80.
- 62.
Matsushita (2017), p. 188. In comparison to the initial Trans-Pacific Partnership Agreement (TPP) the chapter on SOEs has not been altered in the CPTPP.
- 63.
Matsushita (2017), p. 190.
- 64.
- 65.
Kawase and Ambashi (2017), p. 19.
- 66.
- 67.
Article 17.6 of the CPTPP.
- 68.
See Article 18.5 para. 1 of CETA.
- 69.
Joubin-Bret and Chiffelle (2017), p. 10.
- 70.
- 71.
See GAPP 4.1 and 19.
- 72.
GAPP 20.
- 73.
Furthermore, SWFs provide over very specific investment patterns (risk-averse, passive, long-term oriented) that not necessarily apply to SEs in general (see Kratsas and Truby (2015), pp. 99 et seq.).
- 74.
Joubin-Bret and Chiffelle (2017), p. 10.
- 75.
Sauvant (2018), p. 10.
- 76.
OECD (2016), p. 72.
- 77.
OECD (2016), p. 71.
- 78.
OECD (2016), p. 72.
- 79.
- 80.
50 USCA §4565(b)(2)(A) and (B). See Gordon and Milhaupt, pp. 22 et seq. and Schweitzer, pp. 259 et seq., for an overview of the national security review process in the USA.
- 81.
Shima (2015), p. 22.
- 82.
Enderwick (2017), p. 269.
- 83.
Gordon and Milhaupt (2018), p. 24, who note that foreign acquires usually withdraw their filings before such negative decisions in order to avoid adverse consequences resulting from a blocked transaction.
- 84.
- 85.
Treasurer of the Commonwealth of Australia, Australia’s Foreign Investment Policy, 2018 January 2018, https://cdn.tspace.gov.au/uploads/sites/82/2017/06/Australias-Foreign-Investment-Policy.pdf for an overview of the Australian regulatory regime for FDI.
- 86.
Treasurer of the Commonwealth of Australia, Australia’s Foreign Investment Policy, 2018 January 2018, https://cdn.tspace.gov.au/uploads/sites/82/2017/06/Australias-Foreign-Investment-Policy.pdf stating that the national interest test affords the treasurer a broad discretion to reject foreign acquisitions.
- 87.
Guidelines—Investment by state-owned enterprises—Net benefit assessment, http://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk00064.html#p2.
- 88.
- 89.
Article 4 of Regulation (EU) 2019/452.
- 90.
OECD (2016), p. 98.
- 91.
- 92.
OECD (2016), pp. 98 et seq.
- 93.
Capobianco and Christiansen (2011), p. 22.
- 94.
Nourry and Jung (2012), p. 5; see further Capobianco and Christiansen (2011), p. 26; see with regard to Chinese antitrust regulations Zhang (2015), p. 228, who is of the opinion, that due to the lack of independent and effective judicial supervision, it is unlikely that China will have an effective antitrust policy to regulate SOEs.
- 95.
OECD (2009), p. 4.
- 96.
OECD (2016), p. 106.
- 97.
- 98.
OECD Secretariat (2016), p. 12.
- 99.
See also Chaisse (2016a), p. 246, using the example of Canada to show that also the commercial orientation of SEs is typically not assessed under merger control.
- 100.
Case No. COMP/M.7962 ChemChina/Syngenta, decision of 5 April 2017.
- 101.
COMP/M.7962, paras 80–88, see further Svetlicinii (2018), p. 35. The EU Commission did not decide whether ChemChina is to be regarded as one single entity with other Chinese state-owned companies but simply assumed it in the sense of a “worst case”-assessment. According to the single entity theory, the EU Commission will consider SOEs a forming only one common undertaking if there is a common center of commercial decision-making, Briguet (2018), p. 841.
- 102.
- 103.
OECD (2016), p. 113.
- 104.
- 105.
See e.g. EGC, case T-422/07, Djebel – SGPS SA v European Commission, ECLI:EU:T:2012:11, concerning planned aid for a commercial company in the form of a soft loan in order to help finance an investment by that company in Brazil. The decision declared the aid to be incompatible with the common market.
- 106.
Christiansen and Kim (2014), p. 48.
- 107.
Kratsas and Truby (2015), p. 106 are using this line of argument with regard to the regulation of SWF. For this reason, the Swiss government recently declined to introduce investment controls although it recognized the risk of violations of competitive neutrality by foreign SEs (see for the report by the Swiss government in this matter https://www.seco.admin.ch/seco/de/home/seco/nsb-news.msg-id-73973.html).
- 108.
Kowalski and Rabaioli (2017), p. 32.
- 109.
Chaisse (2016a), p. 258.
- 110.
- 111.
Sauvant and Nolan (2015), p. 900.
- 112.
With regard to HCM see Sauvant and Nolan (2015), p. 900 and Sauvant and Ortino (2013), pp. 116 et seq. See further explicitly with regard to China Milhaupt and Zheng (2015), pp. 707 et seq. and Zhang (2017), pp. 210 et seq., noting that in China, the line between SOEs and privately-owned enterprises will become increasingly blurred.
- 113.
See for a detailed description of their proposal Gordon and Milhaupt, pp. 32 et seq. It must be noted, however, that their proposal is not primarily aimed at addressing competitive neutrality concerns. Rather, according to their reasoning, it intends to deal with the problem that Chinese enterprises act as “national strategic buyers”, whose transactions are motivated mainly by the pursuit of industrial policy or national security concerns.
- 114.
- 115.
OECD (2016), p. 155.
- 116.
Joubin-Bret and Chiffelle (2017), p. 10.
- 117.
Christiansen and Kim (2014), p. 46.
- 118.
Christiansen and Kim (2014), pp. 15 et seq.
- 119.
- 120.
See e.g. Chapter 4a of the Finish Competition Act, according to which the Finish Competition and Consumer Authority has the authority to intervene, if SEs’ operation models or operating structures prevent or distort competition in the market.
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Baumann, P. (2020). When State Enterprises Have Deeper Pockets: Ensuring Competitive Neutrality in Cross-Border M&A. In: Fach Gómez, K., Gourgourinis, A., Titi, C. (eds) International Investment Law and Competition Law. European Yearbook of International Economic Law(). Springer, Cham. https://doi.org/10.1007/978-3-030-33916-6_4
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