Restricting Foreign M&A to Protect National Interests

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Regulation aimed at foreign purchases of Chinese companies were recently drafted by the Ministry of Commerce, and have been causing a bit of a stir since their release on 30 June. Caijing magazine reports on the thinking behind the new rules:

    “In recent years, foreign investment in Chinese companies has caused widespread controversy because of its large scale and high returns. Many of the target companies also happen to be large state-owned firms in key areas such as finance and equipment manufacturing. Several such M&A deals involving US buyout funds Carlyle and TPG Newbridge are now under close scrutiny by national regulators like MOFCOM.”

Other deals facing political scrutiny include:

    • Rotary Vortex’s (a Goldman Sachs fund) US$252 million bid for a stake in China’s largest meat processor, Shineway Group.

    • Schaeffler Group of germany’s US$138 million bid for Luoyang Bearing Group, one of the top three bearing producers in China.

In all these cases the underlying concern is that foreign companies will take control of strategic sectors or leading companies. This is a point well made in the All Roads Lead to China blog (h/t to China Law Blog), which makes the following comment on Carlyle’s bid for Xugong:

    “[China] is not protecting a company that just hauls rocks, but a company whose roots come out of one of China’s oldest industries that built a global brand and is successfully competing with American, European, and Japanese brands in third markets. for China, remaining a low end producer of components is not a position they wish to maintain and selling off on of the first companies to break away is in their eyes an issue of national security. Had Carlyle tried to buy into a second or third tier firm (Changlin; Linyi; or JingLong and used the investment to create a firm like XCMG, you can bet that the deal would have been approved as it would not have been seen as such a bold move to steal China’s crown jewel in the construction machinery equipment industry, but it would have been seen as providing funding to a Chinese manufacturer that would one day have a global brand of its own. Had that company bee in the hinterlands, Carlyle would have received double bonus points.”

Under the badge of “anti-trust” the new rules seek to restrict this threatening, top-end foreign M&A activity and increase the approvals burden (see more on the Anti-Monopoly Law here). The rules (which take effect from 8 September) specifically require declarations regarding deals that involve:

    • Transference of control rights of leading enterprises
    • Well-known or traditional Chinese brands
    • Companies with more than 2,000 employees
    • Factors that may influence “economic security”

As Caijing points out, this covers most likely M&A deals, and is much broader than earlier requirement for approvals of projects over US$30 million in value. The rules also leave a lot to “interpretation” by the Ministry of Commerce.

While hostility to foreign investment is far from universal, it is clear that foreign investors should be increasingly sensitive to the direction of the political wind, and should be aware that any significant deal involving leading, or strategically important, Chinese companies is likely to attract an unwelcome degree of scrutiny by the government.

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9 Responses to “Restricting Foreign M&A to Protect National Interests”

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