Counsel to Counsel - January 2008 - (Page 21) Agencies for Cross-Border Acquisition Review restrictive market impact of the two companies’ combined product portfolio on European companies) as evidence of significant selective enforcement, Hartnett takes a different view. He believes that “although the Commission still identifies portfolio concerns in focusing on companies with market dominance,” it now places more emphasis on the economics of business combinations. “In the past, the Commission’s competition decisions were not overburdened by serious economic analysis,” Hartnett notes, but its addition of a senior economist has shifted the focus of the analysis to pure competition issues. Tighter U.S.-European collaboration (along with Japan) in cartel enforcement also signals closer alignment. “However, greater agreement on methodology does not ensure an identical conclusion between U.S. and European regulators,” Hartnett notes. “European and American markets may be in a different state of development on any given transaction, producing different conclusions.” In addition to regulators responsible for general competition review, specialized agencies in major countries have focused responsibility for foreign investment approval. The Committee on Foreign Investment in the United States (CFIUS) is an interagency executive branch body that reviews foreign direct investment in the United States for national security concerns. Its scope includes thousands of transactions involving defense contractors and companies involved in technology, telecommunications and Internet applications. One of more than 30 directorates of the European Commission, the Directorate General for Competition enforces the competition rules and treaties of the European Union relating to cross-border acquisitions to ensure that competition in the EU market is not distorted and that markets operate efficiently. In China, the Ministry of Commerce currently reviews foreign acquisitions and mergers, and will be supplemented by a new anti-monopoly agency. The National Development and Reform Commission (NDRC), which oversees economic planning issues, is predicted to undertake national security review of foreign investments under the new Anti-Monopoly Law. a similar mechanism when needed for specific transactions.” In the Market for Cross-Border M&A? While there’s no widespread, comprehensive effort to limit cross-border M&A based on existing competition law frameworks, political pressures, when applied to available laws, can derail transactions. Corporate counsel should anticipate this politicization when planning for these types of deals in sensitive industries and not rely purely on economic or financial rationales when presenting transactions for competition agency review. In particular, this means making certain that due diligence investigation identifies any target company operations having national security or national interest implications such as those involving energy, military production or critical infrastructure. If such operations are not integral to the transaction, consider a spinoff or other ownership arrangement for them. If they are included in the final deal, consider using local counsel to identify the appropriate regulatory review agencies and personnel to proactively communicate the transaction’s advantages to the host country. Changes in China China strengthened competition regulation with the 2007 adoption of a new AntiMonopoly Law. It takes effect Aug. 1, 2008, and took 13 years to develop. Article 31 creates monopoly review for M&A transactions involving national security by domestic and foreign companies. But from his practice in Shanghai, Squire Sanders Partner Daniel F Roules sees the law as . problematic because it provides for this separate but undefined “national security review.” “Article 31 was added to the new law late in the process,” Roules says, “and while it has elements of the U.S. CFIUS national security review, it also could be used to protect the employees, technology or brand of domestic companies that are jeopardized by a foreign purchase.” The new law does not specify which government agency will conduct the national security review, though there is speculation that this review will be performed by the National Development and Reform Commission (NDRC, see sidebar). Overall, Roules believes, “the new law should not slow M&A activity in China by foreign companies. The government is committed to market reforms, but will likely use the law to respond to domestic pressures Among the strongest global law firms, Squire, Sanders & Dempsey L.L.P. combines sound legal counsel with effective, visionary leadership to resolve legal challenges. With more than 850 lawyers in 30 offices worldwide, Squire Sanders offers one of the most global legal service platforms answering business, advocacy, regulatory and capital market requirements. Article Participants: Brian Hartnett Partner, Economic Regulation, Brussels bhartnett@ssd.com Barry A. Pupkin Partner, Economic Regulation, Washington, D.C. bpupkin@ssd.com Peer Review Rated Daniel F. Roules Partner, Corporate Transactions & Securities Regulation, Shanghai droules@ssd.com if one of the country’s ‘crown jewel’ companies is threatened by acquisition.” There have been two such situations, involving a major manufacturer of construction equipment and a major steel company. “National security will likely be applied selectively,” Roules concludes. “China has seen this done in the U.S. with the Dubai Ports deal as well as the failed attempt by China’s national oil company to acquire Unocal, and wanted martindale.com/c2c JANUARY 2008 21 http://www.martindale.com/c2c
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