During a retreat in the Swiss alps a news item on the takeover bid by the Chinese state-financed company ChemChina of Swiss agricultural chemical company Syngenta drew our attention. The deal would be worth approximately 38.5 billion euros and would be the biggest acquisition of an overseas company by China. The board has advised shareholders to vote in favour of the bid, but the takeover is not a done deal yet. It awaits the approval of antitrust regulators in Europe and also the Committee on Foreign Investment in the United States (CFIUS) could take steps to block deals that are deemed a threat to US national security. The chairman of Syngenta Michel Demaré insists that the takeover is not a nationalisation by the Chinese government and he emphasizes the fantastic track record of ChemChina ‘of having not only bought companies outside of China but also having kept investing in them and developing them and keeping the culture and values in place’. However, one could argue that some further thought on the balancing of the interests of the need for capital and the wish for control with regard to the companies’ activities would not be a bad idea.
Some argue that the acquisition of an agrochemicals business by China is likely motivated by a desire to ensure food security, and control of a company with many genetically modified seeds and seed patents. The importance of seeds and crop chemicals should not be underestimated as the efforts of the Federal Bureau of Investigation to prevent Chinese nationals leaving the US with seeds prove. The relationship between the ideal of a free market economy and the protection of public interests can be difficult. It is a lot like communicating vessels. The more freedom equals less government intervention and regulation and therefore less possibilities for safeguarding public interests. This is the backdrop against which mergers and acquisitions take place. We will briefly illustrate two different perspectives on takeover bids of companies with a certain strategic value; A Dutch and Chinese comparative perspective.
A Dutch perspective
In 2013 a Mexican company tried to buy a majority share in formerly state-owned Dutch landline and mobile telecommunications company KPN. From a Dutch perspective, this was deemed undesirable by the Dutch Parliament because KPN operates not only the regular telecommunications network, but also the military mobile phone network. Both have strategic value for the Netherlands and one could say by proxy for the EU as a whole. A private foundation blocked the acquisition which was fortunate since the Dutch government did not have direct legal possibilities to do so. From the Dutch perspective, the loss of control of a company with strategic value such as KPN is (politically) unacceptable. However, the legal reality may need to catch up with this view since government control has diminished over the past decades.
A Chinese perspective
If a foreign company intended to take over a domestic company in China such as Syngenta, would it raise similar legal issues or concerns such as those raised in the current deal between ChemChina and Syngenta? The answer is affirmative. In China, there are at least three legal barriers to block such a deal: (a) the test under the Catalogue of Industries for Guiding Foreign Investment, (b) the test under China's Anti-Monopoly Law, and (c) the test under the Security Review System for Foreign Direct Investment. With the exception of the antitrust check, the other two tests only apply to foreign investors. This shows what China’s position is. To protect Chinese public interests, these legal instruments offer the possibility to exclude foreign investments (and therefore legal control by these investors) from certain areas. It should be noted that such an exclusion does not mean that only Chinese state-owned companies may play a role in protecting public interests. For example, private Chinese companies, instead of state-owned companies, already constitute the majority of the top 50 seed production companies in China since 2011. However, the aforementioned tests on foreign investments may raise the concern of protectionism. The difficulties of finding a balance between public interests and the free movement of capital can also be found in the deal between ChemChina and Syngenta. As a good example, a press release on 17 February 2016 from the Ministry of Commerce of the People's Republic of China (MOFCOM), the authority regulating outbound investment, urged that relevant governments should treat the acquisition proposed by ChemChina in an “objective and rational” way.
A look at the different possible perspectives on the desirability of blocking a takeover bid on a strategically important company as briefly described in this blog, raises the question whether we should be concerned and if so, how public interests could be better protected in takeover bids.