| This paper analysed how China reviews mergers and acquisitions of a domestic company by a foreign investor regarding national security concerns. The goal is to understand how the codification of informal security review performed in the past-as shown by case studies- has resulted either in lacunas or in practices in line with international standards. The angle is on comparing the Chinese system with other security review frameworks, especially its US model, and with the expectations of legal and business commentators.The national security review for mergers and acquisitions of a domestic company by a foreign investor is a critical process for both the foreign investor and the State. If it is too lenient, national security issues can arise from a foreign entity owning critical assets of the country. If it is too strict, it will deter foreigner to invest in a country and slow down its economic growth. Several major jurisdictions around the world have such national security review framework. In 2011 China promulgated its own framework, in a context where Chinese companies' investment abroad was often blocked because of national security concern. This was the codification of a previous informal security review with some improvements. Because some cases raised concerns, legal and business communities are worried that the new law might give discretional power to the government to block transactions for political or protectionism reasons instead of going toward international standards.Foreign direct investment(FDI) is an investment carried out by an economic actor resident in an economy other than the place of investment in order to exercise a significant influence over the management as part of a long-term relationship. The international law treaties about foreign investment don't regulate national security reviews, which therefore continue to be governed solely by the domestic law of the States, suggesting the value of a comparative study. This study focuses on mergers and acquisitions as foreign direct investment.National security is a concept with a vague definition when it comes to FDI control. Concerning at first only the defence sector, it now encompasses energy, communications, construction, high technology and other sectors affecting the sovereignty and economic development a nation. The scope is becoming so wide that the topic is a serious concern for foreign investors.The review mechanism aims at eventually approving or not any relevant transactions. This is not to prohibit any investment, but to negotiate and thus control the conditions under which foreign investment is made. With the evolution of international standards, procedures have become more transparent in the United States, China and Europe, but certain vagueness remains about the definition of transactions that could be controlled, creating legal uncertainty for investors. National security review mechanisms are exceptions to the freedom of investment and to the legal certainty that is necessary to conduct business. Therefore it must be applied cautiously so as not to interfere with the economic attractiveness of the State. In that regard, a careful study must be conducted as to understand the scope of national security review in China, which is wider than most of the foreign security review mechanisms.Before laws in 2011 codified it, China was already performing a security review. Because this review was happening without transparent rules regulating it, commentators called it “informal review” or “ad-hoc” review. The study of past cases can therefore show how China handles these issues. This is of first importance, as the 2011 laws don't provide with an obligation for the authorities to disclose any information about the result of the review to the public. National security is a sensitive topic, little information is published, the wording of the provisions gives discretion power to the authorities, and practice can differ from theory. Therefore a careful study of the implementation of national security review is needed.Other national security review systems in the world will be briefly introduced, especially from America and Europe. Not only the Chinese system has mirrored some of their characteristics but it also helps understanding it better the international standards currently being built in other countries, as some comparisons will be made all along the study. The legal history of national security review in China is presented, as a way to understand how the matter was rising up during many years due to the increasing number of M&A. This helps addressing a frequent concern about the new system, as to know if it is motivated or not by retaliation against other countries. Chinese companies have faced numerous difficulties in their acquisitions abroad, especially in the US, because of national security concerns. According to some commentators, China could have chosen to give these countries the taste of their own medicine. But the goal of the present study is to show that China's system has been motivated essentially by economic concerns, due to different key factors such as the tremendous number of M&A over Chinese leaders and the need for China to secure some important sectors to ensure its development. This is of first importance for FDI because sound legal logic can reassure foreign investors and give them more confidence about investing in China.Another goal of the research is to address the lack of transparency which is a major problem of security reviews. It's not only a problem in China but it is especially strong there. Careful case studies help to unveil some practices. This is true both for protectionism and politicisation problems. China suffers a lot from these critics, especially because of its political system and high-profile cases rising controversy. Some commentators are still referring only to those polemic cases. This research tries to answer these critics by underlying the Chinese logic and new cases that came out that don't present the same problems.But the Chinese system is not perfect and has major loopholes that are also discussed in the study. This study eventually aims at giving ideas to fix those problems and improve the Chinese system, which could become a model in the next years, in a global context of rising national security concerns and the development of their legal framework all over the world.The research methodology is a step by step process. I first made a research about the acquisition of companies listed in China by foreign investors. I noticed that many of these high-profile deals encountered difficulties to get an administrative approval from MOFCOM, even when they eventually went through. From there, I narrowed my research over mergers & acquisitions control regarding national security, which is a sensitive and much discussed topic. National security review frameworks are rapidly evolving in the world since the beginning of the 21 st century. China promulgated its own one in 2011, which now allows us to gather the first feedback for analysing it.From there, I looked into different types of sources in French and English. First, the laws themselves; they are very short and the wording is quite broad and vague. It suggested to me that cases and comparative analysis will play an important role. Different books addressed the national security review systems and some past cases, but don't go much into positive or negative criticism. On such a sensitive topic, inevitably the legal doctrine will have strong opinions so the previous research papers are important. I looked into databases to find publications from international law journals. From there I found diverse studies focusing either on the economic or legal aspects of the question. Then I consulted the footnotes to find other relevant research. The comparison between the US and the Chinese system was made and drove me to use it to identify international standards and lacunas in both systems. European systems comparison wasn't made, because it isn't what China took as a model. But I chose to do some basic research on it in order to expand the comparative analysis to better understand the context and the closeness of the Chinese and US systems.Apart from research papers, I took a deep look into legal articles written by lawyers. The practitioners' commentaries are often the most focused on the Chinese loopholes and express a wide range of concerns. This drove me to densify my research in order to provide solid answers to the doctrine's concerns when related to the theory or practice.Internet research for press articles related to the cases studied has been important. Those articles aren't usually focused on the legal aspects of the question, but rather on political and economic issues. Nonetheless it was helpful to identify the facts and data and to get some outsiders opinion.In order to show a unique angle for the research and to provide a solid analysis, I combined, regrouped and overlapped these sources to spot differences and common points, as well as much discussed topics but also those left behind. From this, the goal was to take part to the discussion by taking side on the hot topics, but also to reveal and address other points by taking a different angle and focusing on transactions that went through or not.After analysing and confronting all the data, the result of this research is that the codification of China's national security review system brings clarity where there was no defined framework and this new mechanism is getting closer to international standards. The remaining lacunas are hopefully likely to be covered by future development, after the first feedbacks from the implementation have been received. A part of the negative criticism is too strong, especially when we compare the Chinese system to other countries' practices.On the way to this conclusion, it has been demonstrated that international standards are actually shaky at best, since other NSR systems in major jurisdictions share some of China's loopholes. The definition of the national security concept is indeed expanding and covers a wide range of sectors. The broad scope of the review resulting from it empowers the authorities to have a look on numerous foreign investments. About the process itself, the Chinese rules follow the US model but present more problems that may be real issues for foreign investors. The prefilling consultation being limited to procedure, the impossibility to mitigate in order to get the approval, and the unclear safe harbour for the deal passing the review aren't likely to reassure the investors. Only time will help improving the rules and understanding how it is conducted in practice. More transparency could also help ensuring the national security review is in line with what's in force abroad.It has been shown in the research that the 2011 laws in China are not a sudden reaction to foreign countries blocking proposed transaction by Chinese companies. On the contrary, the new framework is the result of a long process that slowly emerged from the beginning of the century. Addressed by a few terms in the texts, by the handling of certain high-profile case and the reaction it caused, the 2011 NSR system is merely the last step of an evolution. With no doubt it has become necessary to answer foreign investors concerns by giving a clearer framework. Like in other jurisdiction, the NSR is a way to balance the interest of the State and its attractiveness to foreign capital.As long as the EU doesn't have a strong and clear NSR and the Chinese one is new and unsettled, the US will continue to serve as a model for national security review systems. But if Europe is able to build a mechanism as efficient as its merger control system and China can prove to the world that its NSR is reliable, they could share more legal influence on these mechanisms.When all is said and done, it appears that China now has a system that is similar to what exists in other countries, in a context where international standards are still moving. |
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