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BIZCHINA / Center

M&As face security scrutiny

By Jiang Wei (China Daily)
Updated: 2007-06-25 08:26

Mandatory national security checks on foreign companies' acquisition of
domestic players have been included to the draft anti-monopoly law
submitted yesterday to the top legislature for a second reading.

"Foreign mergers and acquisitions (M&A s) of domestic companies or
foreign capital invested in domestic companies in other forms should be
examined if the cases are related to national security," said the draft
submitted to the 28th session of the Standing Committee of the National
People's Congress (NPC).

There is already a national-security check framework in place for foreign
M&As, but it has been included in draft legislation for the first time.

According to a regulation jointly issued by six government agencies late
last year, foreign investors have to apply for approvals from the
Ministry of Commerce when their purchases of domestic companies affect
national economic security, are in key sectors or lead to the transfer of
operating rights of famous domestic brands.

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The legislative move reflects the government's efforts at clarifying the
legal framework for foreign M&As, said Meng Jianbing, an expert with
Seafront Law Office in Beijing, adding that lawmakers are learning from
other countries such as the United States on how to protect national
security.

The requirement was added to the long-awaited anti-monopoly law against
the backdrop of a fast-rising number of foreign M&As as well as foreign
companies acquiring major State-owned enterprises or companies with
famous brands.

One case which has drawn widespread attention is US private equity firm
Carlyle Group's attempted takeover of Xugong Construction Machinery,
which did not pass regulatory hurdles following fears that China is
selling strategic companies to foreign investors.

According to official statistics, foreign M&As accounted for 5 percent of
all forms of foreign direct investment annually up to 2004 but increased
dramatically to 11 percent in 2004 and nearly 20 percent in 2005.

Zhang Yansheng, director of the International Economic Research Institute
affiliated to the National Development and Reform Commission , said it is
crucial that foreign purchases of domestic firms go through security as
well as anti-monopoly checks.

But "the situation needs to be spelt out in more detail. For example,
what kind of merger cases are related to national security"?

The draft anti-monopoly law, which aims to provide for fair competition,
was submitted for first review in June 2006.

Xinhua contributed to the story

(For more biz stories, please visit Industry Updates)

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