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 for purchase by any bidder – domestic or foreign – willing to offer a sufficiently large premium over a target’s stock market price. 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. China has become a significant player in the cross-border M&A market, particularly as an acquirer. The central claim of the article 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 China introduces a new dimension: what we call the “national strategic buyer” (NSB), whose objective is to further the interests of a nation state in the pursuit of industrial policy or out of 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. Yet distinguishing commercial and financial motives from national strategic motives in Chinese firms is difficult. To date, the only mechanisms for addressing the NSB problem are national security review mechanisms such as the CFIUS process in the United States. Currently there are proposals pending in Congress to expand the CFIUS process. In Europe a proposal to create a basic screening framework at the EU level is pending. But this approach fails to take on the long-term concern of fully assimilating China as a normal actor in the global economic system. To address the NSB problem, we propose adoption of a multilateral regime under which firms subject to potential government influence in their corporate decision-making must demonstrate their “eligibility” to engage in outbound M&A. For covered firms, the regime would require a commitment to exclusively commercial/financial motives in cross-border acquisitions, made credible through a corporate governance set up featuring independent directors (selected by foreign investors) who publicly verify adherence and disclose the source of acquisition financing. Enforcement would consist of a secretariat that can evaluate eligibility and monitor post-acquisition conduct, and national legislation that would permit rejection of an acquisition of a local target by an acquirer that does not meet the eligibility criteria.