Implication of Merger and Acquisitions by Foreign Investors on National Security in China

[Master Thesis]

ABSTRACT
In recent years, Merger and Acquisitions by foreign investors have become a main mode of foreign direct investments around the world. In China, M&A has been booming, too. Fast development of cross-border M&A absorbs attentions of many countries in consideration of the national security protection. Concept of national security has been expanded after World War II, and national economic security has become new and important consideration of every country when they absorb foreign investment.
How the cross-border M&A will influence national security of host country? The thesis will provide a rational assessment to cross-border M&A. Cross-border M&A is a sword with two sides. Positively it will facilitate economic development and enhance national security protection of host countries, but negatively it will bring threat to national security of host countries.
How to regulate cross-border with legal weapons in order to make best benefit and get least risk? The thesis will introduce traditional measures like industrial policy, competition legal system, direct investment restriction and the newly rising means national security review, the objectives, legality, reasonability and necessity of national security review system will be discussed.
How does national security review system work? How is China’s national security review system established and whether it works well? The thesis will comparatively study national security review systems on cross-border M&A in different countries. Especially, systems of the U.S., Canada and Japan will be compared in details. The thesis will introduce regulatory system on cross-border M&A in concerning with national security in China. National security review system of China will be analyzed from three aspects: review object, review standard and review procedures. Problems in present legal system will be summarized.
To complete national security review system of China, principle of economic sovereignty, principle of economic development and principle of state moderate intervention should be followed as theoretical basis. Improvement of legal framework and institutional framework will be discussed and the core problem, clarification of the definition of national security as standard of national security review system, will be emphasized.
In addition to discuss national review system of China, the future to establish a balance framework at bilateral, multilateral and international levels will be proposed as an expectation.

DECLARATION
This is to certify that
i. the thesis comprises only my original work towards the Master of International Law,
ii. Due acknowledgement has been made in the text to all other material used, and
iii. The thesis is in length of about 35, 200 words, table of cases, appendices, annexes, notes and bibliography excluded.
Signature:

ABBREVIATIONS
APEC -- Asia-Pacific Economic Cooperation

ARC -- Act against Restraints of Competition
BIT -- Bilateral Investment Treaty

BOFTEC -- Bureaus of Foreign Trade and Economic Cooperation

CFIUS -- Committee on Foreign Investments in the United States
CNOOC -- China National Offshore Oil Corporation
CSRC -- China Securities Regulatory Commission
ECT -- Energy Constitutional Treaty
EJV -- equity joint venture
FDI -- Foreign Direct Investment
FINSA -- Foreign Investment and National Security Act of 2007 of the United States
FIRA -- Foreign Investment Review Act
FTA -- free trade agreement
GDP -- gross domestic product
HSR -- Hart-Scott-Rodino Antitrust Improvements Act of 1976
Huawei -- Huawei Technologies Co. Ltd.
ICA -- Foreign Investment Law of Canada
ICSID -- International Centre for Settlement of Investment Disputes
IIA -- international investment agreement
M &A -- Merger and Acquisition
MAI -- Multilateral Agreement on Investment
MIGA -- Multilateral Investment Guarantee Agency
MIT -- multilateral investment treaty
MNC -- Multinational Corporation
MOFCOM -- Ministry of Commerce
MOFTEC -- Ministry of Foreign Trade and Economic Cooperation
NAFTA -- North American Free Trade Agreement
NDRC -- National Development and Reform Commission
OECD -- Organization for Economic Co - operation and Development
OPEC -- Organization of the Petroleum Exporting Countries
SAFE -- State Administration of Foreign Exchange
SAIC -- State Administration of Industry and Commerce
SASAC -- State-Owned Assets Supervision and Administration Commission
SAT -- State Administration of Taxation
TNC -- transnational corporation
TRIMs -- Trade-Related Investment Measures
TRIPS -- The Agreement on Trade Related Aspects of Intellectual Property Rights
UNCTAD -- United Nations Conference on Trade and Development
WB -- World Bank
WTO -- World Trade Organization

TABLE OF CONTENTS

CHAPTER I: INTRODUCTION

§1.1 BACKGROUND

§1.1.1 Rapidly Growing Foreign Direct Investment

§1.1.2 Rising of Cross-border M&A

§1.1.3 National Security Issues

§1.1.4 Conflict between Restriction and Liberalization

§1.1.5 Present Situation of Cross-border M&A in China[specific cross-border M&A]

§1.2 LITERATURE REVIEW

§1.2.1 Development of Legal System of Access of Foreign Investment

§1.2.2 Use of Foreign Investment and National Security Control

§1.2.3 Positive and Negative Influence of Foreign Investment

§1.2.4 Effect of China’s Absorption of Foreign Investment

§1.3 OBJECTIVES OF THIS THESIS

§1.4 METHODOLOGY

§1.5 SCOPE AND LIMITATION

§1.6 CHAPTER LAYOUT

CHAPTER II: HOW DOES CROSS-BORDER M&A INFLUENCE NATIONAL SECURITY OF CHINA

§2.1 DEVELOPMENT OF NATIONAL SECURITY IN THE ERA OF GLOBALIZATION

§2.1.1 Non-traditional Securities Become Outstanding

§2.1.2 Economic Security Turns into the Most Significant Concerning

§2.1.3 Energy Security

§2.1.4 Environment Security

§2.2 ADVANTAGE AND DISADVANTAGE OF CROSS-BORDER M&A TO NATIONAL SECURITY OF CHINA

§2.2.1 Positive Implication to National Security Interests

§2.2.2 Perceived Risks to National Security from Cross-border M&A

§2.2.3 Case Analysis

§2.2.4 Summary and Analysis.

CHAPTER III: MEASURES TO BALANCE NATIONAL SECURITY AND CROSS-BORDER M&A

§3.1 NORMAL BALANCE AND DEFENSE MEANS AND THEIR SHORTAGES

§3.1.1 Industrial Policy

§3.1.2 Competition Legal System

§3.1.3 Direct Restriction to “Foreign Control”

§3.2 NATIONAL SECURITY REVIEW SYSTEM

§3.2.1 Rising Means to Protect National Interest

§3.2.2 Make Full Use of the Principle of National Sovereignty

§3.2.3 Protect National Interest Comprehensively and Nimbly

CHAPTER IV: A COMPARATIVE STUDY OF LEGAL RESTRICTIONS ON CROSS-BORDER M&A IN CONCERN WITH THREAT TO NATIONAL SECURITY

§4.1 A RESTRICTION TIDE IN INTERNATIONAL COMMUNITY LED BY SOME IMPORTANT DEVELOPED COUNTRIES

§4.1.1 The U.S.

§4.1.2 The EU

§4.1.3 Canada

§4.1.4 Australia

§4.1.5 Germany

§4.1.6 The U.K.

§4.1.7 France

§4.1.8 Japan

§4.1.9 Russia

§4.2 COMPARATIVE STUDY OF NATIONAL SECURITY REVIEW SYSTEMS OF THE U.S., CANADA AND JAPAN

§4.2.1 Review Object

§4.2.2 Standard of National Security Review of Cross-border M&A

§4.2.3 Review Procedure

CHAPTER V: NATIONAL SECURITY REVIEW SYSTEM OF CHINA

§5.1 DEVELOPMENT OF REGULATORY SYSTEM ON CROSS-BORDER M&A IN CHINA

§5.1.1 General Laws and Regulations

§5.1.2 Special Legal Regulations Concerning Cross-border M&A of Listed Companies

§5.1.3 Special Legal Regulations Concerning Cross-border M&A of Non-listed Companies

§5.1.4 New Constituted Anti-monopoly Law of China Pays Special Attention to Merger Control to Cross-border M&A

§5.2 ESTABLISHMENT PROCESS OF THE PRINCIPLE “MAINTAINING NATIONAL SECURITY”

§5.3 NATIONAL SECURITY REVIEW OF CROSS-BORDER M&A IN CHINA

§5.3.1 Review Object

§5.3.2 Review Standard

§5.3.3 Procedure Rules of National Security Review of China

§5.4 PROBLEMS IN PRESENT LEGAL SYSTEM OF CHINA

§5.4.1 Conflicts between Different Legal Documents

§5.4.2 Unreasonable Allocation of Right and Power

§5.4.3 Lack of Defined Review Reasons

§5.4.4 Unclear Relationship between Review Processes

CHAPTER VI: COMPLETE NATIONAL SECURITY REVIEW SYSTEM OF CHINA

§6.1 THEORETICAL BASIS

§6.1.1 Principle of Economic Sovereignty

§6.1.2 Principle of Economic Development

§6.1.3 Principle of State Moderate Intervention

§6.2 SPECIFIC SUGGESTIONS TO COMPLETE NATIONAL SECURITY REVIEW SYSTEM OF CHINA

§6.2.1 Clean up Legal System of International Investment and Develop Separate Investment Review Law

§6.2.2 Improve the Legal Framework of Supervision of Cross-border M&A

§6.2.3 Establishment of a Permanent National Security Review Body

§6.2.4 Clarify the National Security Review Procedure

§6.2.5 Review Standard

§6.3 INVESTMENT LIBERALIZATION SHOULD CONTINUE TO BE ENCOURAGED

§6.3.1 Correct Positioning of National Security Review System

§6.3.2 Essential Principles to Avoid Investment Protectionism

CHAPTER VII: CONCLUSION AND EXPECTATION

§7.1 MAKE A RATIONAL EVALUATION FOR IMPLICATIONS OF CROSS-BORDER M&A TO NATIONAL SECURITY

§7.2 TAKE REASONABLE MEASURES TO AVOID NATIONAL SECURITY RISK CAUSED BY CROSS-BORDER M&A

§7.3 OBJECTIVES, LEGALITY, REASONABILITY AND NECESSITY OF NATIONAL SECURITY REVIEW

§7.4 ENHANCE AND COMPLETE NATIONAL SECURITY REVIEW SYSTEM OF CHINA

§7.4.1 Unreasonable Legal Framework and Institutional Obstacles

§7.4.2 Important Principles to be Followed

§7.4.3 Improvement of Foreign Investment Legal Framework

§7.4.4 Institutional Adjustment: Establishing a Permanent National Security Review Body

§7.4.5 Clarify Review Procedures and Review Standard

§7.5 PREVENT INVESTMENT PROTECTIONISM UNDER THE BACKGROUND OF TRADE AND INVESTMENT LIBERALIZATION

§7.6 SEEK SETTLEMENT IN BILATERAL, MULTILATERAL AND INTERNATIONAL APPROACHES UNDER ECONOMIC GLOBALIZATION

BIBLIOGRAPHY

A. PRIMARY SOURCES

B. SECONDARY SOURCES

APPENDIX (I). ANTI-MONOPOLY LAW OF PEOPLE’S REPUBLIC OF CHINA

Chapter I: Introduction
§1.1 Background
§1.1.1 Rapidly Growing Foreign Direct Investment
In the past scores of years, Foreign Direct Investment has been increasing because of rapid development of transportation and information, prosperity of transnational transactions and reduction of restriction to foreign investors. Presently, almost every country, no matter developed or developing country, welcomes FDI because it provides job opportunity to residents, brings precious asset to the host country, including capital, technology, information and distribution network1. In terms of developing countries, such scarce resources play a significant importance to their economic development2. There are more and more countries which absorb foreign investments by providing favorable policies, such as motivation of tax and finance, fundamental constructions, “One Station” service, legal privilege and even trade protection.
From statistics of United Nations Conference on Trade and Development (UNCTAD), Global FDI inflows soared in 2006 to reach $1,306 billion-a growth of 38%, which marked the third consecutive year of growth, and approached the record level of $1,411 billion reached in 20003. It reflected strong economic performance in many parts of the world. Inflows increased in all three groups of economies: developed countries, developing countries and the transition economies of South-East Europe and the Commonwealth of Independent States (CIS).
The upward trend in FDI is expected to continue in 2008 and beyond-albeit at a somewhat slower rate than before. This would be in line with global economic growth, which should remain above its longer term trend, although it might slow down moderately.
In UNCTAD's World Investment Prospects Survey, more than 63% of the responding Transnational Corporations (TNCs) expressed optimism that FDI flows would increase over the period 2007-2009. According to the survey, the most attractive FDI destination countries are China and India, while East, South and South-East Asia is considered the most attractive region. This is reinforced by several international organizations and research institutes, as well as by another survey conducted by UNCTAD/WAIPA4, in which 76% of the responding CEOs of foreign affiliates expected to continue to increase investments in host economies over the next three years.
§1.1.2 Rising of Cross-border M&A
Add concept of cross-border M&A
M&A5 is a big part of the corporate finance world6. Since 1990s, TNCs have launched a strong wave of M&A all over the world by advantage of capital, technology and management for implementing their global development strategy under the tendency of world economic integration and regional economic collectivization. Increased cross-border M&A activity supports the current rise in global FDI. According to UNCTAD7, such transactions rose significantly in 2006, both in value (by 23%, to reach $880 billion) and in number (by 14% to 6,974). This growth was driven by higher stock market valuations, rising corporate profits and favorable financing conditions. In contrast with the M&A boom of the late 1990s, this time transactions have been predominantly financed by cash and debt, rather than through an exchange of shares. As many as 172 mega deals were recorded in 2006, accounting for about two thirds of the total value of cross-border M&A.
The higher stock prices, increased purchasing power of investors, and the desire of firms to capture a growing market share in global competition led to a further increase in the number of mega deals (i.e. cross-border deals worth over $1 billion). In 2006, the number of such deals rose to 172, compared to 141 in 2005 and close to the record of 20008. They accounted for two thirds of the total value of global cross-border M&A-a higher share than in 2005, but still below that of 2000.
After the entrance of China into the WTO, as economy of China continues involving into world economy, M&A has become the most important way of direct investment from foreign investors into China.
§1.1.3 National Security Issues
National security was just a concept related with politics and military9. However, as international economy developing, it began to be used in economic area. In a number of countries, concerning about international investment and, in particular, foreign takeovers of national enterprises is on the rise10. Governments have reassessed their priorities in response to a changing international environment for national security. The protection of technologies considered vital to national sovereignty and competitiveness has also become an issue. In addition, several countries have tightened their regulation and administrative practices in recent years11. New restrictions on foreign ownership or measures, which were the most common in extractive industries and in industries deemed to be of “strategic” importance, to secure a greater government share in revenues were observed in some countries12.
For example, in Algeria, State-owned oil and gas enterprises must now hold a minimum of a 51% stake, and in Bolivia, by signing new contracts TNCs have returned ownership of petroleum reserves to the State oil company13. France and Germany have both introduced “closed lists” of sectors and activities which restrict access for foreign investors on security grounds14. In the United States, Congress is considering tightening the procedures under the Exon-Florio security legislation15. Canada currently ponders the introduction of security provisions in investment legislation. Updating foreign investment regulations related to national security is also an issue now under examination in Japan16. Russia is in the process of establishing a framework for addressing national security concerns in investment policy. In the Russian Federation, foreign investment is to be restricted in “strategic sectors” such as defense and extractive industries, with only minority stakes permitted in the latter17. China has introduced new screening requirements on M&A by foreign investors in “major” industries having an impact on “national economic security”18.
What’s more, anti-trust regulation, financial supervision and other regulatory approaches not formally related to investment policy have also allegedly been employed to protect strategic enterprises. Private sector devices to prevent takeovers and other anti-competitive practices may also have been used selectively to discourage cross-border transactions19. Devices with a degree of government involvement that can be used to a similar effect include the actions of publicly owned banks and golden shares in privatized enterprises.
§1.1.4 Conflict between Restriction and Liberalization
These new-rising restriction to cross-border M&A seems a historical retroversion. The perception that might trigger renewed protectionism has led to some concern. It is well-accepted that international direct investment was a significant motivation to international economy. Most empirical studies conclude that FDI contributes to both factor productivity and income growth in host countries, beyond what domestic investment normally would trigger20. Even though there seems to be a trend of investment protectionism all over the world, most governments continue to adopt measures to facilitate FDI.
In 2006, 147 policy changes making host-country environments more favorable to FDI were observed. Most of them (74%) were introduced by developing countries21. They included in particular measures aimed at lowering corporate income taxes (as in Egypt, Ghana and Singapore) and expanding promotional efforts (as in Brazil and India). Further liberalization of specific industries is under way in various countries, such as that relating to professional services (Italy), telecommunications (Botswana and Cape Verde), banking (the Lao People's Democratic Republic and Mali) and energy (Albania and Bulgaria)22.
The number of international investment agreements (IIAs) has continued to grow, reaching a total of almost 5,500 at the end of 2006: 2,573 bilateral investment treaties, 2,651 double taxation treaties and 241 Free Trade Agreements and economic cooperation arrangements containing investment provisions. The number of preferential trade agreements with investment provisions has almost doubled in the past five years. Developing countries are becoming increasingly important participants in international investment rule-making, partly reflecting growing South-South FDI23.
Whether cross-border M&A should be restricted or continued to be liberalized? Considering their own national interest, different countries institute different legal regulations. As there is no consensus in this problem, a lot of conflicts come into being.
§1.1.5 Present Situation of Cross-border M&A in China[specific cross-border M&A]
According to statistic of the UNTCAD, China retained its position as the largest FDI recipient of foreign investment in Asia. Inflows to China fell in 2006 for the first time in seven years. FDI outflows from Asia as a whole rose by 60%, with higher investments from all sub regions and major economies24. China consolidated its position as a major investor. Its emergence as important sources of FDI is challenging the dominance of the Asian newly industrializing economies (NIEs) in outward FDI from the region25.
In 2008, foreign investment in China continued to surge in the first quarter, according to the latest figures. Realized foreign investment reached $27.4 billion during the first three months of the year, up 61.26 percent year-on-year26. Foreign investment in March alone was $9.28 billion, up 39.6 percent year-on-year. Experts said the continuous increase in FDI reflects China is still attractive for foreign investors despite the tax increase for foreign enterprises, a policy put in place this year27.
It shows China remains an attractive market for multinationals because of its large market, vast manufacturing capacity and relatively low costs. Large enterprises are increasing their investment in some large projects. The number of projects with an investment of over $30 million for the first two months increased 2.5 times than the same period last year.
FDI inflows have surged since the country joined the World Trade Organization in 2001. But many had worried the corporate income tax law that took effect this year might hinder the flow. Income tax rates for domestic and foreign companies have been unified at 25 percent from this year, compared with the previous 33 percent for domestic companies and 15 percent for foreign firms.
§1.2 Literature Review
For more than fifty years, scholars have researched cross-border M&A. At the beginning, scholars focused on benefit brought by cross-border M&A to the host countries. However, in recent years, they become more and more interested with negative effects of cross-border M&A, especially those from the U.S. Among different impacts, national security is not a new issue but a new hot-discussing one. Several developed countries, led by the U.S., emphasize the passive influence of M&A from foreign investors to their national security. While most developing countries, together with international and regional organizations, such as the WTO, OECD, and the UNTCAD, fear that focusing on national security too much will damage international investment liberalization.
§1.2.1 Development of Legal System of Access of Foreign Investment
Access of foreign investment, as an important system of international investment law, has been always a focus issue of foreign investment legislation in every country. According to the Declaration on Permanent Sovereignty over Natural Resources, national administration power of access of foreign investment has been universally admitted in international community28. XuQuan thought that investigation issues of access should begin with principle of national economic sovereignty and both developing and developed countries have rights to regulate foreign investment practices according to principle of national economic sovereignty29. Fu Zhigang noted that legislation reform had the following tendency: 1) Liberalization evolution of legislation methods of access regulations; 2) Expansion of investment areas, investment variety and weakness of share rights of foreign investment; 3) Reduction of review procedure; 4) Implementation of principle of National Treatment and; 5) reduction or abolishment of investment measures and performance requirements30. Chen An said access issues was important content in host countries’ regulation of cross-border investment within their border in traditional international investment law31.
§1.2.2 Use of Foreign Investment and National Security Control
National security is not a new concept. But relating it with cross-border M&A is really a new consideration. In contrast, economic security is a new theoretical issue in academic region.
Xu Quan thought there is no one implicit definition of economic security, every country had its own explanation and understanding because of different national situation and economic strategies32. Nevertheless, most scholars and experts agree with that economic security has something to do with the control capability of one country to its national economy, especially preventing from threat and erosion coming inwards33. Zhang Changyu noted that presently, national economic security emphasized whole security of one country’s economy, that is, on condition of development of economic internationalization and premise of political sovereignty’s stability, one country has stung power to dispute inner risk and resist outer strike, protecting national economy developing continuously, swiftly and healthily34.
On this basis, discussions about how to protect national economic security from risk in the process of economic globalization have been made.
§1.2.3 Positive and Negative Influence of Foreign Investment
In terms of influence of foreign investment to national security, different scholars possess different opinions. Wen Qingyao thinks that investment absorption will bring in significant external economic interest and also contains a large economic risk35, because when facilitating economic development of host country, foreign investment also obtains control power of some resource, accordingly, if there is no limitation to foreign investment, it will form monopoly and threaten national economic security of host country36. American scholar Martin and Susan Tolchin had sharply criticized that accession of foreign investment not only corroded economy of host country but also made it lose the dignity37.
William H.Peterson said practice of global economic development showed that absorption of foreign investment had more advantage than disadvantage to economic development of one country; general target of national economic security decided the necessity to absorb foreign investment38.
§1.2.4 Effect of China’s Absorption of Foreign Investment
In China, some scholars specially evaluate economic security, providing valuable research result which can be guidance for China to seek interest and avoid risk.
Wei Hao and Ma Yeqing analyzed relationship between economic security and foreign investment and concluded that presently FDI has controlled part of industries of China, which increases financial and resource risks; accordingly FDI has brought obvious implication to national economic security39. Zhang Zhen and Yang Jian thought that inflows of foreign investment had close relationship with exchange rate of RMB, which will increase revaluation pressure of RMB40. Han Jiyun also took this point of view41. Duan Junshan found that FDI will evoke crisis of the international balance; several financial crisis proofed this opinion; there is such risk in China which should be cautioned42. Zhao Ming analyzed issue of monopoly and concluded that favorable policies of China allowed foreign investment to take up control position and ascendancy; enterprises owned by foreign capital have huge scale and restrict competition by right of this market advantage, which seriously damage free market of China and the development of national industries43.
Some other scholars did not agree with such negative opinions. Ma Xiuhong, Vice Minister of MOFCOM of China, made a speech at The Second International Investment Facilitation Forum and indicated that positive, reasonable and effective use of foreign investment would enhance the progress of China’s participating in international division of labor, push the formation of China Opening Economy and make China’s economy develop by leaps and bounds44. Gu Kejian thought that use of FDI had made up the gap of capital lack and its long-term effect has also become obvious, showing at (1) facilitating domestic competition; (2) pushing regional economic development forward; and (3) changing trade flows45.
§1.3 Objectives of This Thesis
There are many legal issues relating with M&A from foreign investors, in which the relation between it and national security is the most involved one from angle of market order and national interest. In consideration of feasibility and importance of economic control and monopoly from foreign investors in M&A, this thesis will investigate legal problems related to national security to M&A from foreign investors.
Main objectives of this thesis are that:
1) To illuminate the concept and introduce general content of cross-border M&A and national security; To analyze the advantage and disadvantage caused to national security by cross-border M&A;
2) To analyze in details relationships which are needed to harmonize between national security and cross-border M&A, value orientation, objectives of legislation and fundamental principles of legal system in China;
3) To compare different measures to solve conflicts between protecting national security and facilitating cross-border M&A and find the most favorable one;
4) To research national security review system in details: comparing national security review systems in different countries and find their common features and problems;
5) To analyze national security review system of China and give scientific appraisal: investigating its shortcomings and provide completing measures referring to legal systems of other developed countries.
§1.4 Methodology
In the thesis, several analytical methods will be used comprehensively to investigate legal issues of antitrust control to M&A from foreign investors systematically.
Firstly, historical analysis will be utilized to define national security.
Secondly, theoretical analysis will be combined to summarize the tendency and features of contemporary investment restriction and antitrust control to cross-border M&A in the world on the basis of investigation of legislation and cases from the U.S., the EU and other international organizations, subsequently.
Thirdly, comparative analysis will be used to compare differences of legal system and practices between China and developed countries.
Fourthly, case study will be emphasized in this thesis to illuminate urgent problems existing in M&A from foreign investors in China.
Then, deduction and concluding will be other important methods to sum up successful experience and conclude the most feasible measures to solve controversies.
Another method can be called provision study, by which those important provisions in the new consolidated law will be read deeply to explain their importance and application.
§1.5 Scope and Limitation
The study is limited by the availability of documents. The subject under consideration is relatively new in international community. As to complex of foreign investment problems and foreland character of national security issues, discussion and research of this thesis will not be too perfect.
This thesis will be limited to discuss issues of foreign direct investment but not indirect investment, because FDI consists most part of international investment and indirect investment contains a too large area and very difficult to be discussed.
In this thesis, the research area will be confined within relationship between national security and M&A from foreign investors. The concept of National security has developed to be a very complex composition, but in this study, national security is mostly dealt with economic security. The thesis will try to provide legal analysis to the topic, so purely economic, financial and political issues may not be included.
§1.6 Chapter Layout
Implication of merger and acquisitions by foreign investors on national security in China will be expatiated by following chapters.
Chapter I is the introduction. This Chapter includes background of this topic, in which we will see the fast development of cross-border M&A and national security protection concerning in most countries, literature review, which summarizes research development in China and other countries, objectives of this thesis, methodology and scope and limitation.
Chapter II will analyze how cross-border M&A influences national security in the era of economic globalization. Concept of national security has been expanded after World War II, and national economic security has become new and important consideration of every country when they absorb foreign investment. Cross-border M&A is a sword with two sides. Positively it will facilitate economic development and enhance national security protection of host countries, but negatively it will bring threat to national security of host countries.
Chapter III will introduce measures to balance national security and cross-border M&A. Such measures can be classified into normal balance and defense means which contains industrial policy, competition legal system and direct restriction to “foreign control” and the newly rising means national security review, the objectives, legality, reasonability and necessity of which will be discussed.
Chapter IV will comparatively study national security review systems of on cross-border M&A in different countries. Especially, systems of the U.S., Canada and Japan will be compared in details.
Chapter V will introduce regulatory system on cross-border M&A in concerning with national security in China. As adopting Reform and Opening policy, cross-border M&A develops swiftly in China. New Anti-monopoly Law was passed and came into force. Before that, China has made a series of laws and regulations related with foreign investment. National security review system of China will be analyzed from three aspects: review object, review standard and review procedures. Problems in present legal system will be summarized.
Chapter VI chapter will try to clarify theoretical basis and provide reasonable measures to complete national security review system of china. In this chapter, principle of economic sovereignty, principle of economic development and principle of state moderate intervention will be discussed. Specific suggestions such as to clean up legal system of international investment and develop separate investment review law, to improve the legal framework of supervision of cross-border M&A, to establish a permanent national security review body and to clarify the national security review procedure and review standard will be provided. A concerning of facilitating investment liberalization will be discussed as a complement to avoid investment protectionism when making laws and regulations to restrict cross-border M&A.
Chapter VII is the conclusion and expectation. The main issues discussed in the thesis will be summarized and the future to establish a balance framework at bilateral, multilateral and international level will be proposed as an expectation.

Chapter II: How Does Cross-border M&A Influence National Security of China
Cross-border M&A is a key driver of economic growth and sustainable development. An open, non-discriminatory environment for international investment brings significant demonstrated benefits. However, in a number of countries, concerns about foreign takeovers of national security are on the rise. Governments have reassessed their priorities in response to a changing international environment for national security. National security concerns play a role in most countries' investment policies, but few of them clarify or attempt to define what they mean by “security”.
§2.1 Development of National Security in the Era of Globalization
The concept of national security derived from 1940s46, and what essentially it is has been in controversy till now47. According to theories of nation and security, fundamental meaning of national security is an objective condition where a state is not facing danger48. To be specific, national security refers to the requirement to maintain the survival of the nation-state through the use of economic, military and political power and the exercise of diplomacy49. The late political scientist Hans Morgenthau, author of Politics among Nations, defines national security as the integrity of the national territory and its institutions. Concretely speaking, it can be understood from three aspects. Firstly, there is no threat and infringement to a state from outside, other states, social organizations or individuals. Secondly, there is no domestic confusion and illness. Thirdly, a state is in an objective condition fulfilling both of the above two situations.
§2.1.1 Non-traditional Securities Become Outstanding
National security is a historical concept. During the Cold War, national security was embodied intensively with national military security50, that is to say, withstanding external military invasion. Non-traditional security is also called new-security threats, which means these security threats that have never been encountered by human community51. Concretely speaking, national security expanded from target of survival to comprehensive security including economy, polity, military affairs, culture, science and technology, information, etc, and content of it expanded from survival interest to development interest52. As time went to 1990, national security distinctly contains the following content: territory and sovereignty integrity and effective protection of civil rights; stability of key departments, industries and regions directly referring to national economy; efficient resistance to all kinds of crisis related economy, polity and military affairs; and common safety and cooperation system with neighbor countries and districts53.
Thanks to fast development of economic globalization, Non-traditional security has become easier to spread. There is no doubt that transnational cooperation of economy will optimize collocation of social source in a much bigger market and bring in comparative benefits to every country, which is essential target of economic globalization54. However, economic globalization is a sword with two sides, one of whose byproduct is to make crisis of economy, resource, environment, and population of one country over through border to spread to other countries or regions. Financial crisis of Mexico in 1994, Asian financial storm in 1998 and economic crisis of Argentina in 2002 are obvious examples55.
§2.1.2 Economic Security Turns into the Most Significant Concerning
In present economic globalization, national economic security means that essential economic interest would not be encountered suddenly fateful damage56. Concretely speaking, it can be classified into two parts, domestic security and external security57. Domestic economic security means that springhead of economic security problems takes place in domestic economic operation, such as state-owned assets in national economic vitals are derogated, and, as lacking of competitiveness, state-owned enterprises cannot exert pillar importance anymore; risk of national debt, inflation or deflation, and bubble economy take place in financial area58. External economic security is related to such kind of risk originated from uncertain affairs influenced by foreign power, such as monopoly of important economic area from international idle fund and Multinational Corporation, mutation of foreign related economic relationship and strike from public sanitation affairs59.
According to the above concept, national economic security can be understood as composition of two aspects, one of which is security of holistic operation of national economy, that is, national economy keeps proper increase rate and inflation rate, diathesis of civilians is relative high and unemployment percentage is at low level and there is no outer risk causing in economic turbulence; the other of which is that every department of national economy keeps favorable circulation. Concretely speaking, national economic security contains national industrial security, national information technological security and national comprehensive power security.
National economic security is a sub-concept of national security. It holds a more and more important place in the national security system; meanwhile, traditional securities of polity and military stay their irreplaceable position.
The core of national security is national interest60. In general, under nowadays economic globalization, the most important and urgent national security for every country is to protect its essential securities related with financial market, international industry, trade freedom, environment, energy and economic information network, which will be analyzed in the following paragraphs.
§2.1.2.1 Financial Market Security
Financial security means financial interest of one country will not be invaded, its normal running of financial market system will not be destroyed or threatened and all damage caused by financial crisis will be defended61. Since 1980s, financial innovation has been all-time active in international community, new financial tools and productions come forth, financial technology becomes more and more complicated, international idle fund and virtual capital expand smartly, and coexistence of fight risk and high interest make price fluctuation of every kind of currency of every country will result in turbulence to international financial market. Especially a new international financial running system which is independent of financial supervision of every sovereign country has formed because of acceleration of transnational fusion of international financial speculation. This financial system brings more uncertainty to financial risk and also has much stronger infusibility, concealment and outburst62. In this situation, no country should ignore the problem of financial security.
Present situation of international capital fluxion and financial crisis of East-South Asia show that financial liberalization has indeed brought huge crisis to every country and it is an unavoidable flinty fact that finance of sovereign state is not safe. Presently, financial industry of developed countries has grown up to autumn, and they own fruitful capital and advanced management technology. However, to most developing countries, once financial liberalization is carried out, control power of national banks, insurance companies and share market will be obtained by others, which will result in colonialization in financial industry63. In this way, economic sovereignty will be lost.
§2.1.2.2 Domestic Industrial Security
Domestic industrial security means that sovereign state’s national industrial interest will not be infringed, control power of engender, grandness and development of underpinning industries is held within national government and national capital is able to withstand foreign interfere and destroy64. Presently, economic globalization has motivated international work-division and exchange, FDI as the main form, and TNC as the main carrier have become one of most important impetus of economic globalization.
However, the essential characteristic of cupidity of capital decides the only one target of capital export. To obtain interest in the near future, TNC can monopolize crucial industries of host country, influence production structure of host country and weaken its competitiveness by advantage of technology, management and distribution according to merger and acquisition.
TNC has brought a great threat to corrode and control national industries of every country, especially developing countries. Indeed, the U.S., as the No.1 developed country, has been concerning survival crisis of national industries caused by foreign investment.
Progress of external openness should be adapted for national economic development level and its international competitiveness, in order to protect national industry and national economy from monopolized or swallowed by international monopoly capital.
§2.1.2.3 Trade Security
Trade security contains import trade security and export trade security65. The former means to exclude substitute and strike to national production from import production in order to avoid influence on national industrial security and control of consumption market; the latter means to emphasize continuous increasing of export’s elongate effect to improvement of GDP, and actively protect and explore export market for domestic production66.
After the Second World War, sum of international trade has unprecedentedly increased, but unsafe elements of trade have also been grown in practical international trade area along with development of economic globalization, contradictions and frictions have emerged, and trade crisis of sovereign country has become an important problem of national economic security. Such as, antidumping war appears again and again between the U.S. and Japan, the EU and China. What’s more, discriminative trade bills and articles restricted international trade unequally, which blocked trade of sovereign countries, and made export companies’ bankruptcy and employment, among which, the typical discriminative clause is Trade Act Clause 301 and Super Clause 301. By right of strong economic power, the U.S. likes to adopt unilateral retorsion policy, and optionally find subterfuge like worker standard, environment protection etc, in order to push out its new trade protectionism67.
§2.1.2.4 Security of Economic Information Network
One of the typical characteristics of economic globalization is information globalization. Information and technology (IT) revolution happens every day, which promotes fast expanding and stretching of internet68. The Earth is becoming a twinkly alterable Earth Village. Information industry has become a significant industry to impulse development of international economy; exploration, control and utilization of information become main content of economic interest.
However, in the era of information, national security becomes influenced by information security. By right of strong economic and technical advantage, western developed countries carry out Economic Hegemony, controlling information unilaterally flowing, by which most of the international information market was controlled by them.
Information revolution is influencing or will influence every economic organization and the life and work habit of everybody69. How to protect economic information network security has been provided with fatefully practical meaningfulness.
§2.1.3 Energy Security
At present, without energy, all modern civilizations will disappear. Over the past few years, energy policy has once again come to be seen in terms of national security. Rising oil prices, growing competition for supplies from China and India, and political uncertainties in major oil-producing countries such as Russia, Venezuela, Iraq, and Iran have revived the energy security concerns of the 1970s70. Given the tightness of global energy markets and the instability and uncertainty in many significant energy-producing countries, national security interest does exist significant in preserving the integrity of global energy markets. Similarly, every government has obvious national security and nonproliferation interests at stake in the nuclear energy sector71. Energy is dynamical foundation of economic and social activities, and concerns strategic resources, sovereignty, national security, environment change and economic increase72. In era of economic globalization, energy has become not an economic problem of one country, but a global problem related with economy, politics, foreign relation and military. Energy is related with economic vitals and the people's livelihood of every country, and has significant importance to maintain world peace and enhance common development and prosperity73.
In this way, to solve energy problem, every country should make cooperative, global efforts to diversify sources of energy, expand efficient energy use, and facilitate cooperation in responding to oil supply disruptions.74 Unfortunately, because of the lack of decisive action and a comprehensive national strategy on energy security, energy security concerns have become commingled with ones about foreign ownership of energy companies.
§2.1.4 Environment Security
It is well-known that environment problem is one of the three big problems in present world. In 1990s, together with spring up of FDI and TNC, trash from companies and industrial countries with high energy-consumed, high resource-consumed and high pollution became surging to developing countries75. They spoliator limited resources on one hand and on the other hand, they polluted and damaged economic foundation and environment which human rely on to survive and develop.
Environment problem influence national economic security radically, it is related with sustainable development of sovereign countries and should draw attention of every country76.
§2.2 Advantage and Disadvantage of Cross-border M&A to National Security of China
Cross-border M&A exerts positive influence to national security in general. It can facilitate world economy going on to inosculate, enhance economic globalization, enlarge area for enterprises’ activities and reduce concentration of market. Given the appropriate host-country policies and a basic level of development, a preponderance of studies shows that cross-border M&A triggers technology spillovers, assists human capital’s formation, contributes to international trade integration, helps create a more competitive business environment and enhances enterprise development. Cross-border M&A promotes economic growth by raising total factor productivity and, more generally the efficiency of resource use in the host economy.
On the other side, cross-border M&A may bring negative influence to national security of host countries. In this part, the two sides of cross-border M&A will be discussed separately.
§2.2.1 Positive Implication to National Security Interests
In the following paragraphs, positive influence to national security of China by cross-border M&A will be analyzed concretely.
§2.2.1.1 Influence on National Industrial Security
Cross-border M&A will impulse optimization and upgrade of China’s industrial structure and advance industrial security of China, which is embodied by two aspects as follows.
§2.2.1.1.1 Conformity and Reconstruction of China’s Industry
As a result of historical and political elements, China’s economy is facing a serious problem of structural over plus, especially in capital configuration of many industries like domestic appliances, vehicles, beer and medicine. According to statistics, there are more than 6,700 medicine companies in China, but there are only three or four big companies, most of which are middle or small companies. This situation results in high cost, bad benefit, and lack of technology as well as market competitiveness77. This bottleneck problem cannot be overthrown because of seriously short of capital. TNCs possess abundant capital, which can neither more nor less than be utilized to provide for China’s industrial recombination. Cross-border M&A can not only exert active effect to achieve industrial conformity, but also be favorable to reduce number of factories and enhance degree industrial concentration.
As China’s market opens wider and wider, M&A by foreign investors to China’s companies, especially large-scale state-owned enterprises, becomes increasing. Cross-border M&A will efficiently resolve contradictions between surplus of productivity and new construction of companies by foreign investors. At the same time, new management ideas, technology, global distribution network and resource of administration will be brought to mergered enterprises, which will be good for upgrade international competitiveness of China’s enterprises and further promote adjustment and upgrade of production structure and industrial structure of China, enlarge exports, increase job opportunities, boost tax of different levels of government and bring along development of this opening economy.
§2.2.1.1.2 Advancement of Technology to Industries
Golden Top International Consultants Ltd selected 67 cross-border M&A cases from January 1, 2002 to April 2006 to statistic and analyze. During that period, there are 33 about manufacturing, which takes up 49.3%; retailing 11 companies, taking up 16.4%; social service 6 companies, taking up 8.9%; finance and underwriting 12 companies, taking up 17.9%; transportation 1 company, taking up 1.5%; realty and electric power separately 2 companies, taking up 3%.78
According to the statistics, cross-border M&A mostly take place in manufacturing and services. 500 listed companies in the world invest 84.81% of their capitals into these two industries79.
In manufacturing, developed countries have been gradually losing their comparative advantage, so they are transferring their manufacture to developing countries. In China, there are abundant and low-cost human capital and huge market, which are attractive to that part industrial resource. By means of cross-border M&A, domestic enterprises will fleetly introduce advanced manufacture techniques, improve exploitation and research capability, upgrade technical level and production, increase international competitiveness of manufacturing and facilitate economic security of the Second Industry.
In service industry, developed countries possess priority of industries of information, consultation, technology and finance; while China takes precedence in traditional business and service, but some fundamental Third Industries (like postage and communication) and new rising Third Industries (like financial insurance, information, consultation and technology) grow insufficiency. By cross-border M&A, TNCs will infuse advanced administration system and idea and technology of management, which will optimize domestic structure of the Third Industry, as well as, in favor of industrial security of China.
§2.2.1.2 Influence on National Technical Security
Cross-border M&A will enhance technical improvement, which will bring benefit to technical security of China80. Economic literature identifies technology transfers as perhaps the most important channel through which foreign corporate presence may produce positive externalities in the host developing economy81. Impetus by cross-border M&A to technical development of domestic enterprises embodies in the following three aspects.
Firstly, by means of joint venture and cooperation, manufacturing industry of China grows fast on basis of absorption, assimilation, utilization and innovation of advanced technology of enterprises owned by foreign capital. Cross-border M&A provides new development space to such successful pattern.
Secondly, cross-border M&A maybe result in localization of research which is mainly serving China’s market, accordingly, TNCs will establish R&D center in China, which will induct domestic research orientation, accelerate relevant companies, upgrade technical standards and remedy the problem of shortage of R&D outlay82.
Thirdly, technology transfer caused by cross-border M&A will make China’s enterprises obtain spillover effect of technology. TNCs are the developed world’s most important source of corporate research and development (R&D) activity83, and they generally possess a higher level of technology than is available in China, so they have the potential to generate considerable technological spillovers. Technology spillovers are perhaps the most widely discussed potential benefit from cross-border M&A. Spillover Effect comes true according to the following aspects84. One is to affiliation effect, which means when TNC contacts with goods suppliers or clients, local companies maybe hitchhike from advanced production, technology or administration from subsidiary company of TNC. Another way is to obtain spillovers from competition effect and demonstration effect. By right of advanced technology and excellent management experience, TNCs join and prick up market competition of China, break the original market equilibrium, and compel China’s domestic enterprises to ameliorate management and administration, upgrade technical standard and make full use of local resources, in order to enhance competitiveness. At the same time, when cross-border M&A is successful, by means of demonstration effect, TNCs will provide motivation and opportunity of study to China’s domestic enterprises85. The last way is by movement of human capital. After successful M&A, TNCs will usually train their employees. When these trained workers leave and carve out by themselves, professional technology and management experiences they learned will spill over accordingly.
§2.2.1.3 Spillovers of Human Capital
The major impact of cross-border M&A on human capital in China appears to be indirect. Once individuals are employed by TNC subsidiaries, their human capital may be enhanced further through training and on-the-job learning. Those subsidiaries may also have a positive influence on human capital enhancement in other enterprises with which they develop links, including suppliers. Such enhancement can have further effects as that labor moves to other firms and as some employees become entrepreneurs. Thus, the issue of human capital development is intimately related with other, broader development issues. While considerable national and sectoral discrepancies persist, TNCs tend to provide more training and other upgrading of human capital than domestic enterprises do. However, evidence that the human capital thus created spills over to the rest of the host economy is much weaker. Policies to enhance labor-market flexibility and encourage entrepreneurship, among other strategies, could help buttress such spillovers.
Human capital levels and spillovers are closely interrelated with technology transfers. In particular, technologically advanced sectors and host countries are more likely to see human capital spillovers and, conversely, economies with a high human capital component lend themselves more easily to technology spillovers. The implication of this is that efforts to reap the benefits of technology and human capital spillovers could gain effectiveness when policies of technological and educational improvement are undertaken conjointly.
§2.2.1.4 Enhance Competition
Worldwide market concentration has increased significantly since the early 1990s due to a wave of M&A that has reshaped the global corporate landscape86. At the same time, a surge in the number of strategic alliances has changed the way in which formally independent corporate entities interact. Alliances are generally thought to limit direct competition while generating efficiency gains, but evidence of this is not firmly established. There has also been a wave of privatizations that has attracted considerable foreign direct investment (mainly in developing and emerging countries), and this, too, could have important effects on competition.
Empirical studies suggest that the effect of cross-border M&A on host-country concentration is, if anything, stronger in developing countries than in more mature economies. This could raise the concern that TNCs entry into less-developed countries can be anti-competitive. Moreover, while ample evidence shows TNCs entry raising productivity levels among host-country incumbents in developed countries, the evidence from developing countries is weaker87. Where such spillovers are found, the magnitude and dispersion of their effects are linked positively to prevailing levels of competition.
However, the direct impact of rising concentration on competition, if any, appears to vary by sector and host country. There are relatively few industries where global concentration has reached levels causing real concern for competition, especially if relevant markets are global in scope88. In addition, high levels of concentration in properly defined markets may not result in reduced competition if barriers to entry and exit are low or buyers are in a good position to protect themselves from higher prices.
While it is economically desirable that strongly performing foreign competitors be allowed to replace less productive domestic enterprises, policies to safeguard a healthy degree of competition must be in place89. Arguably the best way of achieving this is by expanding the “relevant market” by increasing the host economy’s openness to international trade90. In addition, efficiency-enhancing national competition laws and enforcement agencies are advisable to minimize the anti-competitive effects of weaker firms exiting the market. When mergers are being reviewed and when possible abuses of dominance cases are being assessed, the accent should be on protecting competition rather than competitors. Modern competition policy focuses on efficiency and protecting consumers; any other approach may lead to competition policy being reduced to an industrial policy that may fail to deliver long-term benefits to consumers.
§2.2.1.5 Influence on State-owned Enterprises-Most Important Part of National Economy
In China, state-owned enterprises consist of enormous part of economy. Because of some historical and systematic problems, a lot of such enterprises run in an inefficient way. Cross-border M&A will be able to improve Corporate Governance91 Structure and advance management level of state-owned enterprises.
There are many problems in Corporate Governance Structure of China’s enterprises, the main of which is that government interferes too much92. According to Statistic Bureau, in a survey to 4, 371 important enterprises of China, there are 41.6% of them in which general managers are directly nominated by or engendered in control of different levels of government, and in more than 30.1% of them no General Assembly of Shareholder Representatives was established according to Company Law of China93. After mergered by foreign investors, these domestic enterprises, for its own interest, will absolutely make full use of their control power and influence to introduce better governance system and more excellent company culture, which will overcomes dead circulation within the enterprise itself and push forward innovation of enterprise system of China.
Simultaneously, as the Corporation Governance Structure is improved, the soft resources such as advanced management idea, administration skills and distribution policies will be injected into enterprises, subsequently, management and administration capability will be promoted and modern company system will be established and sanity94. Some Chinese scholars noted that, cross-border M&A will be propitious to accelerate stock rights of state-owned enterprises to be pluralistic and recompose national economic strategic, which will be favorable for resolving problems of lag of national technology, market shortage and ill management95. For example, Shanghai Beiling is the first Joint Venture in micro-electronics industry in China. After its corporation with foreign investors, it has made a great progress on the Corporate Governance. It has come into the stock market, detained independent director and established financial audit and Committee of Investment Decision-making, which have exerted an active effect to hasten the company’s normative operation. State-own enterprises are the most important part of China’s economy, improvement of management level of which will directly influence China’s holistic economic security.
§2.2.2 Perceived Risks to National Security from Cross-border M&A
Cross-border M&A is a good opportunity for economy and enterprises of developing countries to become strong, but they are also facing a great challenge. National security issue was brought forward with cross-border M&A. How does cross-border M&A negatively influence national security? In this section, influence of cross-border M&A to national security will be comprehensively analyzed from national industrial security, financial security, technical security, state-owned enterprises’ development and free competition policies.
§2.2.2.1 Influence on National Strategic Industrial Security
Industrial security means national enterprises are capable of keeping comparative advantage in industries related with the national economy and the people's livelihood and national security on condition of external openness and international competition, keeping independent in areas of capital, technology and market and achieving the maximum interest. Every now and then, national and regional governmental bodies are faced with big firms getting into deep crises. Sometimes, the endangered firms are so big that the existence of an entire industry is under threat96.
Facilitating effect TNCs bring to host countries is on the basis that host countries possess relative perfect market system and equivalent economic foundation97. After all, stratagem and investment motivation of TNCs will be just to obey market system but not to cooperate with developing stratagem of host countries98. When host countries are developing countries, whose economic foundations are not so developed and market systems are not so perfect, entrance of foreign investment and enhancement of the status of foreign enterprises will bring threats and obstacles to industrial development of host countries.
In China, since 1990s, proportion of companies owned by foreign capital in different forms of FDI has been increasing quickly, from 54% in 2000 to more than 78% in 200799.
In addition, many evidences show that foreign investors have begun to control markets of some skeleton enterprises and key economic area, especially in new-birth industries; they have taken up absolutely predominance100. Targets of cross-border M&A concentrate on those preponderant enterprises with high profits and great market potential. Preponderant enterprises possess resources such as productive capability, distribution network, famous brands and management fitful China’s situation, which are indispensible for TNCs’ investment and management in China. Such enterprises are usually related with vitals of national economy, thereby, once they are controlled by foreign investors, it is hard to say they will not influence economic sovereignty of China101. From long views, macroeconomic control capability of host country will decrease; subsequently there will be malfunction in market control and economic turbulence102. If there is no restriction, cross-border M&A will impact national industrial system and form threat to national industrial security and economic security. Present Brazil is a good example. Its automobile industry, mechanism manufacture, information, telecom, food and medicine industries are controlled by foreign investors. More than half of top 100 big companies of Brazil have been held by foreign investment. Even though there has been a short period of economic development, international monopoly capital, which mostly are from developed countries like the U.S. and EU, predominating economic vitals, takes a mass of profits back to home country. The so-called “phenomena of economic increasing but no development” takes place in this situation. The practical reality has stroked the alarm bell.
Asymmetric distributing is another problem of cross-border M&A103, most of which concentrate in east part of China, but only few in the middle and west. This unreasonable distributing will result in imbalance of economic development, arose renewably configuration of resource in different regions and increase cost of harmonization of regional economic development104.
National industrial security is principal part of national economic security, especially of which those important, core and underpinning industries related with the national economy and the people's livelihood stand at fundamental and nuclear status105. In the Eleventh Five years’ Plan to Use Foreign Investment constituted in 2006, the National Development and Reform Commission of China noted that: Presently foreign investors’ M&A to part of chief enterprises in some industries has increased, and in special area monopoly has appeared, which will maybe cause threat to national economic security especially industrial security106.
§2.2.2.2 Influence on National Financial Security
§2.2.2.2.1 Capital Out-flow Results in Trade Deficit
As we know, TNCs’ objective is to obtain profit, so they will remit capital after a period of devotion, which will bring on capital out flow of host country107. In the report Transnational Corporations in China in 2005, the Economy and Trade Research Institute of MOFCOM mentioned that there is about $100 billion flowing abroad every year. Since 1993, trade deficit continuously existed in income item out of regular items. Especially after 1995, balance of income item even reached 30%-50% of FDI absorbed because of profit remit of foreign investors.
§2.2.2.2.2 Financial Risk and Crisis May Be Induced
According to Double Gap Theory of the U.S. economist Chenery and Strauss, foreign investment maybe make up shortage of capital inside host country, but it is a two-side sword. On one side, it will mitigate problem of capital shortage, bring in technical improvement and enhance capital operation efficiency. On the other side, there will be huge financial risk, which maybe results in foreign-investment-dependent financial crisis. When substantive capital flows in and result in burden of capital out-flow, the burden will bring on dependency to much more substantive capital’s inflow108. In this chain, if there is no more substantive capital flows in, the crisis of international income and expenses takes place naturally; if there is no more substantive capital flows in and simultaneously foreign investment evacuates away, there will be not just crisis of international income and expenses, but more serious and destructive economic and financial crisis will happen109. Southeast Asian Finance Crisis in 1997 was exactly a kind of foreign-investment-dependent financial crisis, which indicates that short-term foreign investment will increase financial risk to host country and bring negative influence to its economic development.
§2.2.2.3 Influence on NATIONAL Technical Security
In the impetuous international competition, technology is core power to decide enterprises’ competitiveness. Cross-border M&A maybe brings technology transferring and save technical innovation cost for host country, but it also maybe result in dependency to technology of foreign enterprises, which will compose threat to technical security of China.
Simply dependent on technology transfer from TNCs, national economy entities will reduce and even lose competitiveness advantage in a short period in international competition. Furthermore, from another angle, one of the motives for investing abroad for a firm is to source foreign technology, whereby the foreign investor acquires a local firm specifically for its technological capabilities. Because such know-how is often embodied in the firm itself and not just in patents and trademarks, this kind of trade in technology must be accompanied by control through a change of ownership of the local firm. Technology sourcing can involve either M&A or Greenfield investment. AlAzzawi110 finds that for firms from developed countries, “investing in one of the three leading world innovators111 seems to be the single most important source of knowledge flows for these investing countries.” Infiltration into high and new technology industries by TNCs will result in China’s technical dependency to foreign investment companies, and research and technical innovation capability of domestic enterprises will be further weakened.
Presently competition of economic strength among different countries in the world is focusing on technical competition, therefore, over dependency on technology of foreign enterprises and relatively defective self-research capability will not be good for information and technical security of China.
§2.2.2.4 Cross-border M&A Supplant National Economy, Result in Erosion of State-owned Asset
§2.2.2.4.1 Supplant Effect of Cross-border M&A
Foreign takeovers can cause a popular backlash against the sale of state-owned assets to foreigners in the case of privatization or more generally against foreign control of the local economy. Particularly in the case of hostile takeovers, the foreign investor is sometimes criticized for being insensitive to implicit social contracts and ignorant of the local way of doing things. Supplant Effect is a usual phenomena in cross-border M&A.
Firstly, cross-border supplants market of domestic enterprises. On condition of limit market and resource, China’s domestic enterprises are weaker than TNCs, no matter in technology, management or capital. When they contest such limit market opportunity, productive elements and market space, superiority will be certainly incline to enterprises of foreign investors, which will result in that productive cost of China’s enterprises will increase but efficiency of them will not be improved. Finally, their profit space will be cut down and they will be squeezed out of market. Development of cross-border M&A will absolutely prick up this point, as the form of M&A will expand ownership advantage of TNCs comparatively. On the premise of efficient conformity, competitiveness of TNCs in host country will be increased.
Secondly, cross-border M&A will supplant domestic brands. Almost every TNC has its own famous brand, which has been hammer-hardened in the market for a long time, such as Microsoft, General Electric, Coca-Cola, McDonald’s, and Kodak etc. Compared with international brands, China’s domestic brands lag behind no matter in market famous degree or market operation. The TNCs, according to M&A, will promote their own brands; in this way, original brands will possibly disappear and be squeezed out thoroughly.
§2.2.2.4.2 Losing of State-owned Assets
State-owned assets stripping112 is another disadvantage brought by cross-border M&A. Assets stripping caused cross-border M&A embodies in several forms.
The first is state-owned assets stripping arose by speculation behaviors by foreign investment. For example, some foreign investors, by transferring price-making, not only invade and occupy state-owned assets, but also achieve the objective of evading tax. Such behaviors indicate that, foreign investors’ short-term conduct damages interest of China’s business operators, and begets state-owned assets stripping.
The second is caused by informative asset evaluation. In the process of M&A by foreign investors, a lot of mergered enterprises of China were not checked and evaluated normatively. Even though some of them have been evaluated by relevant organizations, but because of faultiness of evaluation system and unscientific evaluation methods, state-owned assets were always under-evaluated, but asset of TNCs were over-evaluated. This imbalance resulted in state-owned assets stripping.
The third is caused by impropriate governmental behaviors. Remising property right of state-owned enterprises is a shortcut for them to go through rattrap, but practically, things were changed. The motivation of transactions was just to obtain capital to help them to deal with an emergency, or to throw off cloth-wrappers like company deficit, workers’ idleness and heavy debt, or to increase the amount of absorbed investment as their own political achievement. Under such monvitation, it is not strange that state-owned assets are stripping.
State-owned enterprises are most important part of national economy. State-owned assets stripping will directly influence economic security of China. According to statistics, in the past cross-border M&A, assets stripping existed in 90% of them. Since 1990s, accumulative total of state-owned assets stripping has been up to $ 600 billion, $50 billion every year in average, which consists of 19.5% of Financial Income.
§2.2.2.5 Potential Threat to Free Competition in Host Country
§2.2.2.5.1 The Diplex Role Played by Cross-border M&A: Motivate of Economic Development and Imperil to Free Market
Like domestic M&A, restrictive cross-border M&A will reduce competitors in special market, and finally result in that market shares are concentrated in some big companies, subsequently, market monopoly takes place113. Concretely analyzing cross-border M&A will bring the following monopolistic results.
Cross-border M&A may bring on monopoly of domestic market114. The TNCs will abuse their ascendancy to damage consumers’ interest. As expanding of TNCs, the few dominant enterprises will be controlled by some super TNCs, and regional economy and enterprises will be dependent on TNC, which will restrict development of local enterprises115. Cross-border M&A aggrandize uncertain elements of market openness to developing countries. The further open market to TNCs, the weaker of their resistibility to monopoly and the more risk they are facing.
Cross-border M&A will bring on oligarch monopoly in international market, which makes it difficult for developing countries with weak competitiveness to explore offshore market and share interest of international market integration116. Subsequently, interest between host country and country of TNC will lose balance, which may intensify contradiction in between.
In terms of the monopoly problem, the implication on host country of cross-border M&A goes further from domestic M&A within host country. Reasons are that: on one hand, domestic enterprises cannot catch up with the great M&A scale and the wide areas and industries of foreign investment, on the other hand, the TNCs participating in cross-border M&A set their target to chase after global market, and if there is opportunity for them to obtain maximum interest, they will not care about interest of host country. Therefore, the gap is obvious between cross-border M&A and development objective of host country’s economy.
The possible monopoly caused by cross-border M&A involves in a wide area, have a huge monopolistic degree, bring dicky influence to free competition of market and even threaten economic vitals of host country. Thus, when host country opens to foreign investment, it should consider the potential threat to their economy.
§2.2.2.5.2 Monopoly Threats Caused by Cross-border M&A in China
Problems caused by cross-border M&A to China’s enterprises are more and more obvious, in which the core one is that foreign investors may get monopoly status and threat national security117. The TNCs’ control to strategic industries of China will be more and more drastic and form market monopoly, which will make China lose the domain power of strategic industries’ development and there is possibility to result in survival crisis of national industries118. Analyzing from situation in recent years, monopolistic inclination in cross-border M&A takes on the following characteristics.
On one hand, foreign investors enhance the degree of share-holding M&A, in which the intention to buck for control right of domestic enterprises has been more and more visible. Before 1998, Joint Venture was mainly used by the TNCs to cooperate with China’s enterprises. But presently, the TNCs tend to explore China’s market with capital of themselves, and even in joint ventures, the proportion of share-holding of foreign investors increases fast119. In transferring of share rights in joint venture between China and foreign investors, their proportion has changed from 75:25 to 60:40 and then to 50:50, but now it basically changes to 20:80or 10:90. In recent cross-border M&A, in more than one half of them the TNCs obtain absolute of relative share-control rights120. For example, share-holdings of Lebaishi and Wahaha by Danone increase separately to 92% and 51%; Mikilin Incorporation of France, the biggest tyre producing company in the world, control 70% shares of Shanghai Tyre Group; Phillip’s share in Sufei Company increases from 51% to 80%121. This kind of share-control M&A is a strategic selection of TNCs after investigating investment risk, resource devotion, technical secrecy, company control and investment efficiency, which to certain extend establish the foundation for monopolizing China’s market.
On the other hand, foreign investors adopt systematic and great-scale M&A, seeking to obtain control power of more industries. Systematic M&A means that TNCs invest in not only in separate company, but in relating products and companies in above, middle and below phases of one industry, or vertically invest in all processes of production, circulation, distribution and service after selling. Many TNCs don’t care to use huge sum of capital to carry out such systematic M&A. according to statistics, in recent 5 years, more than half cross-border M&A involve over $100 million122. Such as, the Miqilin case above mentioned was up to $320 million; Dutch Royal Shell Group invested $430 million to buy shares of Sino-pec. By means of systematic M&A, TNCs controlled some industries of China and even brought on monopoly. Accounting by income of distribution, presently, foreign investments in electronic and telecom equipment production and clothing production have extended 50 %; accounting by profit index, in spin industry, gas production and supply industry, mechanism production industry and apparatus production industry, foreign investments took up more than 50%; accounting by market share, vidicon and electrograph produced by foreign investors took up 99% and 98%, mobile phone 80%, all types of computer 75%, car 70% and machine tool 63%123.
It is proved practically that monopoly will slow down market efficiency, distort market structure and decrease social welfare. However, the mature of TNCs’ is to pursue monopolistic status, seek monopolistic privilege. To achieve these targets, they enhance the monopolistic power to China’s market and also go in for destroying its competition opponents.
§2.2.3 Case Analysis
§2.2.3.1 Carlyle (US) Purchases Xugong (China)
In October 2005, the Carlyle Group124tossed U.S.$375 million into purchasing 85% share of Chinese construction machinery manufacturer Xugong Group Construction Machinery125 (Short for Xugong hereinafter)126. The merger agreement made arrangement that Carlyle pays Xugong $250 million to purchase 82.11% of its stock.
The deal was submitted to the Ministry of Commerce for approval in December in 2005 but was turned down amid rising concerns that foreign control over key Chinese firms might threat the country's economic security.127
A new deal was signed on October 16, 2006, Carlyle Group agreed to reduce its stake in Xugong Group, from 85% to 50%. The transaction was changed to be a joint venture. The remaining 50 percent stake will be held by Xugong. The new deal was not approved by Chinese authorities128 either.
Recently, Carlyle Group has again agreed to cut its offer, reducing its stake from 50% to 45 % in its second major concession129. Under the new agreement, Xugong would have five seats on the board of the new entity, while Carlyle would have four130.
The case of Carlyle’s acquisition of Xugong resulted in a lot of arguments, one of which was national security issue. Xugong is the biggest enterprise of development, manufacturing and exports of Construction Machinery. Its affiliated company Xugong Mechanical not only was the biggest company in Xugong Group, but also concentrated the most excellent assets. It is said that if Carlyle successfully acquired Xu Gong, more than half machine manufacture industry would be controlled by this American company, which would bring in a potential influence that cannot be overlooked131. Equipment manufacturing industry is a national strategic industry, and also basis to build a powerful military-industry. Views to Accelerate the Revitalization of Equipment Manufacturing Industry of State Council states that in the major technologies and equipment manufacturing which are playing a key role in equipment manufacturing backbone enterprises, it is necessary to ensure national control and dominance on the basis of its support for cross-sectoral and inter-regional, cross-ownership reconstruction132. Even though general Construction Machinery doesn’t belong to “supported and instructed key area” listed in the document and Industrial Catalog for Foreign Investment also takes Xugong Mechanical as encouraged item, but as the leading company in the industry, absolute control of Xugong Mechanical by foreign capital will threaten industrial security of mechanical manufacture industry of China.
The final result of Carlyle’s acquisition of Xugong was considered by foreign media as a touchstone that Chinese government treats cross-border M&A involved with national security. Because present foreign investment law of China just regulates base line for foreign investment133 but there is no upper limit, this opens a convenient door for foreign capital to merger, acquire and share-control Chinese companies. In theory, as long as it does not touch upon restrictive industries regulated in Industrial Catalog for Foreign Investment, not relate to anti-monopoly review, foreign capital can control all domestic industries. The case Carlyle’s acquisition of Xugong is a hard nut to crack for Chinese government. In terms of non-prohibitory industries like mechanical manufacture, if the transaction itself does not reach standard of anti-monopoly review or does not exist monopoly problem but it takes a significant effect to the whole mechanical manufacture industry even the whole national security, in such situation, what measures can China’s government take to protect national brands, maintain industrial and national security? Of course, China’s government can suspend process of transaction with review and ratification right, require investors change transaction content or stop M&A transaction for other reasons134, but it is suitable for original intention of Rule by Law of China, and it is easily to be put on a hat of nationalism or protectionism. In this arguable case, American media said that China’s government was setting bureaucratic obstacle for foreign investment, and nationalism inimical emotion would endanger China’s further reform progress135.
§2.2.3.2 Sony’s Acquisition of Sobey
China’s lack of national security review system allowed those cross-border M&As which maybe damage and threaten national security to be approved. Sony’s acquisition of Sobey Digital Technical Limited Company (short for Sobey) in 2003 was a typical case.
In December 2002, Sony planned to acquire 67% stock share of Sobey with 18 million USD. In June 2003, MOFCOM approved this acquisition. The approval raised a serious reflection in that industry because the acquisition maybe influences national information security of China.
Because it is alternative relationship between Non-linear Editing of Sobey and professional VCR of Sony, once Sony acquires Sobey, it is possible to influence further development of Non-linear Editing of Sobey, subsequently, market share of professional VCR of Sony will be enlarged and Sony will utilize advantage of capital and technology to press the last manufacturer in this industry, Dayang Technology Development Inc. (short for Dayang). Even if Sony abandons its advantage of professional VCR products, using Sobey to go on developing in Non-linear Editing of Sobey, by right of its capital and technology, Sony will be easy to bear down the one and only competitor: Dayang. Once Dayang is frustrated, the area of radio and TV industry equipment of China will be plunged into a situation to be dependent on foreign productions. As radio and TV industry equipments are related with national information security, dependency upon foreign investors will bring hidden trouble to healthy development of China’s radio and TV industry and national security136.
When MOFCOM approved this transaction, it is possible that they did not consider such risk137, which is directly related with that there is no completed national security review system in China. In fact, China turns on green light to many important industries and technologies to cross-border M&A, the results of which are that more and more domestic companies failed or bankrupted and pivotal technologies are controlled in foreigners. For example, in core patent of information industry, China is basically controlled by others: the core technology of some the domestic IC enterprises rely deeply on foreign manufacturers ; Some key technologies related with national security, especially major equipment manufacturing industry of strategic significance, such as aviation equipment, precision instruments, medical equipment, engineering machinery, and other high-tech and high value-added products, have closely dependent on products of foreign manufacturers138. This worsening situation of dependence on external technology and products poses a potential threat to China's national security.
§2.2.3.3 Arcelor and Mittal’s Acquisition of Laiwu Steel Corporation
On February 24, 2006, Arcelor and Laiwu Steel Corporation signed an agreement in Jinan: Arcelor purchased 38.41% stock share of Laiwu Steel Corporation (600102.SH) with 2086 million RMB. The transaction proposal was approved by State-owned Assets Supervision and Management Committee of Shandong Province139.
However, on January 27, Mittal, the biggest iron and steel producer in the world, announced to purchase its main competitor Arcelor. The plan came true on June 25 and Mittal became the Big Mac in international iron and steel industry140. The purpose of this acquisition was obvious to increase share in iron and steel market in China. From a long run, Mittal’s entrance into Laiwu Steel Corporation will bury many hidden dangers141.
In March 2006, National Development and Reform Commission of China preliminarily rejected the initial of Arcelor Mittal's acquisition of Laiwu Steel. It is said that in the approval letter from the State Development and Reform Commission, two objections were raised. First, price for entrance of the Arcelor Mittal-owned stake into Laiwu Steel is not satisfied. It is considered that the value of Laiwu Steel was underestimated. Second, National Development and Reform Commission hopes that Arcelor Mittal brings not only expand production capacity but also core technology142.
In my opinion, even though National Development and Reform Commission did not write obviously but there is an important reason of national security consideration. Entrance of foreign investment into China's steel industry has been a very sensitive topic. Up to today, the only steel industry integrated by foreign investment enterprises: Hunan Valin Iron and Steel Group. 143 The question whether Arcelor Mittal's acquisition of Laiwu Steel will pose a significant threat to iron and steel industry of China, which should be considered seriously by China’s government.
§2.2.4 Summary and Analysis.
The above are three typical cases of cross-border M&A threatening national security of China. In fact, with deepened reform of state-owned assets, Xiamen Engineering Group, Liugong Group, Hang Tooth Group, Shenyang Blower Group, and other leading enterprises are facing the threat to be mergered or purchased144. With the acceleration of the pace of foreign acquisitions, many Chinese state-owned enterprises and national brands are encountered by impact from foreign investment, industrial security gradually turns on the red light, and it is deeply concerned by the Chinese government.
What degree of negative influence of cross-border M&A develops will imply national security? In my opinion, only when major economic interests related with the country, people's survival and development and even the rise and decline of the whole country are invaded and destroyed by cross-border M&A, the judgment that foreign acquisitions has been a threat to national security can be made. Therefore, what should be referred to the country's economic security level to understand and protected by the Government taking tough measures can just be the economic interests can only be major national economic interests which are to be summarized as follows: 1) relatively quick sustainable and continuous development of economy; 2) Safe and equitable participation of the world economic system; 3) Integrated and advanced scientific and technological innovation system; 4) Stable and reliable energy resources supply; 5) sustainable use of the ecological environment; 6) financial security, trade security, industrial security and information security get protected. 145

Chapter III: Measures to Balance National Security and Cross-border M&A
§3.1 Normal Balance and Defense Means and Their Shortages
Cross-border M&A will result in damage to national interests, so all countries establish legal and policy instruments against cross-border M&A or applicable to cross-border M&A to balance the protection of national interests. Such balance and defense means are used in high-frequency, which is most common in all countries, known as the conventional means of defense.
§3.1.1 Industrial Policy
Every country has its own industrial policy, in form of law or administrative regulation, decision, prohibiting or restricting foreign investor entering some special industries. However, industrial policies are not enough to protect national security.
1) The process of investment liberalization is to reduce industries or areas restricting or prohibiting foreign investors to enter, so effect of industrial policy will be weaker and weaker;
2) Industrial policy lacks flexibility. Generally speaking, the national industrial policies are the same for all countries, difficult to deal with country-specific national security issue ; industrial policy is pre-defined, so it cannot provide a reasonable solution to provisional cross-border M&A endangering the national security.
3) Scope of application of industrial policy is limited, not applicable to ban on export or trade of technology involving cross-border M&A;
4) In addition, the industrial policy of its own lack of defensive means, limited to audit before cross-border M&A, powerless to damage of the national interests after cross-border M&A.
§3.1.2 Competition Legal System
If cross-border M&A leads domestic market concentration of the host country and involves in the "foreign control", it will be regulated by investment legal system of the host country, but competition law is concerned only with competition in the market of the host country, protecting one aspect of "public interest" of the state, not other content of the national interests.
§3.1.3 Direct Restriction to “Foreign Control”
Providing the highest proportion of foreign holding can directly limit "foreign control", but this provision also lacks of flexibility, not all "foreign control" would lead to the issue of national security, restrictions on all "foreign control", will also limit the effectiveness cross-border M&A bringing to the host country’s economy.
§3.2 National Security Review System
§3.2.1 Rising Means to Protect National Interest
To comprehensively and flexibly protect national interests and make up for inadequate of conventional means of defense and balance, some developed countries provides for special measures to protect the national interests through legislation.
For example, in 1988, the United States passed the Exon-Florio Act: in any M&A ongoing or to be carried out that takes target of entities engaging international commercial activities within the U.S., as long as it is initiated by foreigners or foreign participants, and this control of foreigners composes threat to U.S. national security, the President, after investigation, can take appropriate measures to prohibit or delay the acquisition or merger when he considers appropriate. In 2005, Minister of Industry of Canada proposed C-59 to the House of Representatives, whose goal is to revise the Investment Act of Canada, in order to enable the Government of Canada to review foreign investment of regardless size on the basis of national security, in response to changes of foreign capital and world security situation in energy field of Canada after September 11 Attack. Industry Act 1975 of the U.K. regulates: when the control of important manufacturing enterprises of the U.K. is transferred to "non-British residents, thus cause conflict with the interests of the United Kingdom, the British Government has power to intervene, issue a prohibition order to prohibit the transaction, or authorize a minister to administer the enterprise's assets or equity. In 2004, the French Parliament reformed the legal system on foreign investment, re-established 11 categories of strategic industries, and provided that foreign investors who obtain physical control of strategic industries in France through cross-border mergers and acquisitions must undergo mandatory review in order to prevent French public functions, public order and public safety from damage. In Germany, Foreign Trade and Payments Act applies to cross-border mergers and acquisitions, of which Article 6 states: Transaction or payment which is ongoing or has occurred in "foreign economic territory" but has an adverse impact on the economy of Germany in German economic territory, or transaction or payment which is in the foreign economic territory but not in harmony with Germany's liberal order and constitutional order may be restricted. In 2004 the German government promulgated new amended Regulations for Foreign Trade and Payments Act, amending article 52 to require foreign takeovers to report to government approval when mergering or purchasing more than 25 percent of the shares of German companies in specific industries. Foreign Exchange and Foreign Trade Law of Japan applies to cross-border mergers and acquisitions: certain types of investments, including cross-border mergers and acquisitions and control of the business in Japan, if it is possible to damage national security, disturbing public order and protection of public safety and hindering normal economic management in Japan with significant adverse effects, is foreign direct investment on national security. In addition, Russia, Australia, Ireland, India, Israel, Korea, Lithuania, Mexico, Spain, Turkey and other countries146 have also set up a similar system.
The above measures of different States are in order to make up for the inadequate protection of the conventional balance and defense means to national interests when there is a cross-border control, to prevent or restrict cross-border M&A. Although the wording varied, the system is to protect the national interests in the highest level related to national security, and whether to make a decision to prohibit or restrict cross-border M&A must to go through the review process, so such cross-border M&A system can be called national security review system. There are more and more countries trying to build national security review system, and OECD even held a round-table meeting to discuss this issue147.
§3.2.2 Make Full Use of the Principle of National Sovereignty
National sovereignty means the supreme power of every nation independently to handle all its internal and external affairs, specific embodied on two aspects of the highest internal power and external independent power148. Domestic jurisdiction derived from the national sovereignty of a country includes the legislative, judicial and administrative jurisdictions in the area. Article 2 of Charter of Economic Rights and Duties of States of United Nations in 1974 clear provided the control power of a state to regulate foreign investment and multinational companies: Each State has the right: (a) To regulate and exercise authority over foreign investment within its national jurisdiction in accordance with its laws and regulations and in conformity with its national objectives and priorities. No State shall be compelled to grant preferential treatment to foreign investment; (b) to regulate and supervise the activities of transnational corporations within its national jurisdiction and take measures to ensure that such activities comply with its laws, rules and regulations and conform to its economic and social policies149.
Clearly, the national control of foreign investment is legitimate act in line with the principle of national sovereignty. Sovereign state has absolute power to restrict or prohibit foreign investment entering its territory or establishing a permanent commercial presence under the jurisdiction of the principle of territoriality countries. Various countries all generally acknowledged that, the host country may decide independently whether to allow the foreign capital to enter as well as enter by what kind of condition, and it is an undeniable question that the host country exercise the jurisdiction to direct investment from foreign country based on the national sovereignty.
On the other hand, the national security review, as one specific measures of one country to exercise the sovereignty, also is the basic authority acknowledged in agreement among countries in international organizations; the related national security question often retains national sovereignty content in international legal document of every country, thus does not involve the question of national treatment. Article 223 of Roman Treaty stipulates: The European country takes essential measures to protect national security interests of production and the sales related with the weapon, the munitions and the war commodity. Every country is allowed to suspend restraint of the European Union free trade and competition rules, based on the national security reason. Article 21 of GATT 1947150 states: Nothing in this Agreement shall be construed (a) to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests (c) to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security. OECD Code of Liberalization of Capital Movements151 permits the member nation to adopt measures not favor the capital liberalization based on the security interests or other basic interests, such as forgiveness to Germany’s limit to foreign direct investment from US in reason of national security in Treaty of Friendship, Commerce and Consular Rights between the United States and Germany in 1956.
Therefore, impeding transnational merger and acquisition in reason of national security may avoid conflicting with the international duty the country undertakes, and it makes the country as for not to fall into the diplomatic passive aspect.
§3.2.3 Protect National Interest Comprehensively and Nimbly
The national security relates directly with the national interest at the most highest level. Benefit itself is independent, and various countries do not have the general benefit definition, national interest was often explained according to national need, thus caused this concept nearly to cover complete content of national interest, in this way, the national security review mechanism has accordingly become the effective tool to protect the national interest besides the conventional balance and defense measure.
Because the national security is involved in the highest level interests of countries, the national security review system possesses strong flexibility, which can be understood from the following: The host country recognizes the nature of investment in accordance with the actual situation, regardless of the surface property of transactions, such as imposing sanctions to transaction which has been completed, investigating M&As which could have completed, investigating by unconventional means, disclosing reasons for refusing or banning merger and adopting "performance requirements" for individual M &A, which were all prohibited by relevant international legal documents under normal circumstances.

Chapter IV: A Comparative Study of Legal Restrictions on Cross-border M&A in Concern with Threat to National Security
§4.1 A Restriction Tide in International Community Led by Some Important Developed Countries
At present, many developed countries have regulated cross-border M&A involved in the issue of national security through domestic legislation, which will be introduced as follows.
§4.1.1 The U.S.
In the U.S., laws influencing cross-border M&A contains: Control Law of Arms Export and Import, Law of Defense Industrial Security, Exon-Florio Act, Defense Production Law (1950) and Defense Authorization Law. The U.S. was a benefiter of free trade traditionally, as the biggest trade and investment country in the world, in which, a number of TNCs obtained huge profit by means of trade and investment liberalization. Until 1988, as a leap of investment from Japan and the tide of M&A to corporations in the U.S., the Congress promulgated Exon-Florio Act and began to legislate for protecting national security from influenced by cross-border M&A.
Exon-Florio was amendment for article 721 of Defense Production Law (1950). After enacting, it had become the basic law of the U.S. to regulate cross-border M&A and protect national security. The Amendment was made as article 5021 of the Omnibus Trade & Competitiveness Act, so it was always called Exon-Florio National Security Amendment.152 It gives the President authority to review certain mergers, ac?quisitions, and takeovers.153 There is also a provision pro?hibiting the purchase of a United States defense contractor by an entity controlled by a foreign government154.
In November 1991, the Treasury enacted the final regulation to carry out Exon-Florio, establishing Voluntary Notice System of M&A parties. A party or parties to an acquisition may submit a volun?tary notice to the Committee of the proposed or completed acquisition155. The decision to voluntarily notify the Com?mittee is in the parties' own best interest.
In 1992, the U.S. Congress passed article 837 of the Bill of Defense Modernization 1993, which was the famous Byrd Amendment, amending the Defense Protection Law. The Byrd Amendment required the President to investigate cases where an acquisition is controlled by a foreign government and where a person engaged in interstate commerce in the United States could affect U.S. national security156. At the same time, Executive Order 12860 expanded CFTUS membership to include the director of the Office of Science and Technology Policy, the assistant to the president for national security affairs, and the assistant to the president for economic policy.
Ten years later, the Department of Homeland Security also was included in the CFIUS157. The president, in ceding authority to CFTUS, received reports and recommendations submitted by CFIUS concerning foreign mergers or acquisitions that may be deemed suspect or contrary to Exon-Florio Act.
On July 26, 2007, Bush signed the Foreign Investment and National Security Act of 2007 (“FINSA”). FINSA was to revise the Exon-Florio Act (1988), and it was directly originated from the case of Congress preventing Dubai Ports World’s acquisition of American ports158. This brought a signal to the world that the U.S. would change a great deal its traditional open policy of foreign investment, so the new Act was taken into attention by investors from the Europe, Asia and Middle East and was considered by governments of many countries as the vane of business’ politicalization. FINSA ended an argument lasting two years, which are the degree and pattern of regulation and control to foreign investment in the U.S. on the basis of national security. It tried to solve problems as follows: how to reform the administration system of foreign investments but not influence them coming to the U.S., not result in atrophy of employment and economy of the U.S., not draw down retorsion from other countries to undertakings invested by the U.S. and avoid the Economic Patriotism arising investment protectionism in the world.
§4.1.2 The EU
The EU established special institutions to supervise M&A between enterprises, taking in charge of scrutiny to industrial damage and economic security caused by M&A. These institutions possess considerable forcible capability of decision-making and enforcement. According to regulations of the EU, to every kind of M&A, the EU has power to investigate if two requirements are fulfilled: one is that income summation of distribution of the two companies exceeds 5 billion Euros; another is that year income of the two companies exceeds 250 million Euros.
§4.1.3 Canada
Canada attached importance to and depended upon development of foreign investment after its establishment159. Because of influence from trade and economy, its policy and legislation of foreign investment experienced total openness to gradual restriction. At present, Canada absorbs the most foreign investment in western countries. Benefit of abundant natural resource and unique geographic position, Canada possesses the most excellent investment environment, which makes it to be the fruit contested by the U.S. and the U.K. Canada got benefit from foreign investment, but also paid out a huge expense. Capital from the U.S. infiltrated into Canada unrestrictedly, subsequently, a lot of important economic departments were controlled by the U.S., which resulted in maladjustment of industrial structure and imbalance of economic development, enhanced fragility, instability and freaky development of Canada’s economy and threatened development of its national economy.
Canada adopted policy and measures to restrict capital from the U.S. from 1970s. Federal Congress enacted Foreign Investment Review Act (“FIRA”) in 1973 and established Foreign Investment Review Bureau in November 1973, whose main task is to be responsible for reviewing foreign investment in Canada, analyzing whether there benefit for Canada and providing suggestion to charging department. Detailed Rules of foreign investment review was published in 1974 extending review objects from original enterprises to new established ones. From then on, Canada established comprehensive administration and review system, including orientation of foreign investment, review standards, review objects, review institutions and procedures, judicial review, relief and punishment.
In 1985, Canada put Investment Canada Act (“ICA”) in practice, and established Canadian Investment Department in place of Foreign Investment Review Bureau. New law changed in jurisprudence, focusing on economic development but not investment controlling160. Difference between Canadian investment law and investment review law is that, the former is applicable for not only foreign investors but also investment of Canadian. It increased review sum from 250 thousand Canadian Dollars to 5 million and encouraged foreigners investing in Canada to develop economy and increase job opportunity.
Act C-59 which was published in 2005 to revise Investment Canada Act established national security review system to cross-border M&A. According to C-59, if the Minister has reasonable grounds to believe that investment activities of non-Canadians would undermine national security, jointly with Director, he will review such investment activities and can take any measures favorable to maintain national security.
§4.1.4 Australia
Australia encourages entrance of foreign investment but keeps foreign investment review system. According to Foreign Acquisitions and Takeovers Act 1975 of Australia, if foreign companies’ acquisition of domestic enterprises leads consequences contrary to national interest, Federal Minister of Finance has the power to prohibit the deal161. On such deals, parties to mergers and acquisitions have mandatory obligation to notify the Minister of Finance162. Core standard of review system is national interest of Australia. Some sensitive industries and investment items of great capital sum should be declared and preliminarily reviewed. For example, if charge department considers applied foreign investment items damaging national interest, it has power to refuse to ratify this item. Investment from foreign government and institution, no matter big or small, should declare. Besides, according to the Foreign Acquisitions and Takeovers Act, investment in sensitive industries like estate, finance, insurance, aviation, media, telecom and airport should be declared.
Australia is a developed country but it is also a relative big country of capital import, so it adopts relatively strict foreign investment review system.
§4.1.5 Germany
German foreign trade law stipulates that the German government has the right to take measures of restrictions on foreign direct investment, based on considerations of national security, public order, foreign policy and trade balance163. Foreign investment mergers and acquisitions involving enterprises related with areas of national security of German will receive antitrust review; at the same time of the antitrust review negative impact of national security will also be inspected164.
Germany government is drafting new bill to strictly examine M&A by foreign investment entities controlled by foreign government. Angela Merkel, Chancellor of Germany, showed worry to merger of sensitive industries by sovereign wealth fund from Asia and Middle East, noting that they would bring threat to national security165. Even though there has not been such transaction, non-transparency of such funds drew attention of Germany government.
§4.1.6 The U.K.
According to Enterprise Act 2002 of the U.K., Competition Commission is responsible for reviewing M&A activities influencing competition. However, Secretary of State has power to make decision on transactions involved with public interest. According to the law, national security is the only factor considered with public interest166. If the deal was identified as to have a negative impact on national security, foreign minister can ban or suspend transactions, mandatorily add trading conditions or other measures to safeguard national security167.
§4.1.7 France
On December 30, 2005, the French government issued a decree authorizing the Ministry of Economy, Finance and Industry of France to supervise and restrict foreign investment activities in 11 industries, including dual-use technologies, classified information, cryptology goods and services, and enterprises engaged in weapons research, development and marketing. According to the law, foreign investors should inform the Ministry of Economy, Finance and Industry and get license before investing in these designated areas. Ministry of Economy, Finance and Industry would review the transaction within two months, and make decisions to approve or prohibit the transaction, add conditions or change content of the transaction168.
§4.1.8 Japan
Japan controls M&A by foreign investors most strictly. Cross-border M&A should be regulated by relevant domestic law like Anti-monopoly Law and other foreign investment regulations.
According to Anti-monopoly law, Japan established a special Committee, Equitable Transaction Committee, conferring the power to release Emergent Stop Order on courts. When courts consider necessary, they can, on basis of requirement from the Equitable Transaction Committee, require suspicious enterprises suspend M&A behaviors or make a judgment of canceling or changing their M&A decision169.
According to Foreign Exchange and Foreign Trade Control Law of Japan, the Finance Minister and the Minister in charge will review FDI activities causing damage to national security, public order and public safety. In terms of inward FDI which may harm the national security, the Finance Minister and the Minister in charge can advice or order foreign investors to suspend investment or change the content of investment170.
§4.1.9 Russia
Russia protects strategic industries in form of Protection List. In August of 2004, the President signed a President Order about “List of State-owned Strategic Enterprise and Strategic Stock Companies”, listing more than 1,000 companies, regulating that without President’s special approval nobody has right to sell them or privatize.
From the practice of States, there are two main legislation modes of national security review system for cross-border M&A. The first type is to make regulation of national security review to cross-border M&A through special legislation of the authority of the state, such as the United States and Canada. the national security review system established in this way is fairly complete, generally making special provisions of object of the review, the review standards, the review bodies and the review process and other issues, which has strong operability. In the second type, there is no special legislation pointing to national security review system, but provisions relating decentralized in foreign law, the anti-monopoly law and other related laws, such as Japan, Australia, Germany, Britain and France. Some of these countries take national security factors into account in the application of anti-monopoly law, such as Germany; Some take national security factors into account in the industry access of foreign capital, such as France. Generally speaking, national security review system established in this way is not concrete and sound as the first type, leaving a larger space to the Government to implement the system. In comparison, national security review system of the United States, Canada and Japan are relatively completed, therefore to be detailed below.
§4.2 Comparative Study of National Security Review Systems of the U.S., Canada and Japan
In the below, national security review systems of the U.S., Canada and Japan will be detailed in aspects of review object, review standard and review procedures.
§4.2.1 Review Object
Object of National security review is cross-border M&A, which includes two aspects: bodies and behaviors of M&A. That is, which bodies and what kind of behaviors of such bodies can be object of cross-border M&A.
§4.2.1.1 Provisions of Review Object in U.S. Law
Exon-Florio Act provides the main forms of organization of M&A bodies very detailed: its bodies are foreign person and US person. Person refers to any natural person or entity, and the entities include "any branch, partnership, joint Group, association, property, trusts, corporations, departments of companies, business enterprises, or any other organization (whether or not established in accordance with the laws of any state) and any government (including foreign governments, the U.S. government, state or local government and any agencies, companies, financial institutions or other entities or facilities, including government-funded institutions)171.
Exon-Florio Act adopted different definition standard to foreigners and U.S. persons. As foreigners including foreign individuals and foreign entities, definition of foreign natural persons is based on nationality criteria, but for foreign entities, Exon-Florio Act used control standard, that is, "any entity that foreign interests172 can implement or control173".
For what is control, Exon-Florio provides that control is the power to confirm, to command or to decide the affairs of an entity. Exercise of the power includes but is not limited to the followings: 1) all or part of the main assets of entities are sold, leased, mortgaged, pledged or alienated; 2) dissolution of entities; 3) facilities of production or R&D of entities are closed and/or relocated, 3) termination or non-performance entities’ contracts; 5) articles of incorporation or constituent agreement amended according to the above four items174.
Different from the fore-cited definition of foreigner, when defines the U.S. person, the Exon-Florio Act has neither used establishment criteria, nor used the control standard, but judged it according to commercial activities in the U.S. inter-state trade175.
Looking from this recognized standard, these foreign entities carrying on the trade activity through the branch office within the boundaries of US also have been integrated U.S. person, which, without doubt, will make M&A activities influencing the US national security be limited to scope of the national supervision and management, suitable for requirement of maintaining national security.
M&A behaviors reviewed in the Exon-Florio are merger and acquisition, including purchasing voting securities, transferring voting securities which can be transformed, purchasing voting securities which can be used to obtain the domination rights and other means to purchase U.S. person. The acquired enterprise includes production or research and development facilities previously operating as part of enterprise (if the production or research and development facilities will be large-scale used in technology or employees of the enterprise). In addition, M&A activity also includes the consolidation176.
§4.2.1.2 Provisions of Review Object in Canadian Law
Scope of national security review in Canada includes following investment acts of non-Canadian: (1) establishment of a new Canadian companies, (2) in control of Canadian enterprises (3) an acquisition of all entities or in part doing all or part of the business activities in Canada, or the establishment of the above entity and the entity possesses (a) place of business in Canada, (b) employment or self-employed individuals in Canada with business-related, or (c) the assets of business in Canada177. This shows that the merger of review is non-Canadian, but the mergered are companies or entities in Canada.
According to Article 3 of Investment Canada Act, to non-Canadian individuals, Canada uses the nationality criteria. In accordance with article 26 of this Law, control standard is adopted to define concept of entity178. It must be pointed out that the Minister in Canada owns greater discretion on the issue whether an entity is classified as non-Canadian entity. If a entity should be identified as the Canadian according to control standards established by Article 26 of Investment Canada Act, according to information and evidence submitted by the entity, the Minister can still identify it as non-Canadian entity179.
In terms of mergered party, Article 3 of Investment Canada Act stipulates that Canadian companies means enterprises doing business in Canada and they must meet the following three conditions: 1) place of business in Canada; 2) Individual or self-employed individuals with business-related employment in Canada; 3) and assets of business in Canada. According to article 25(1) of the Investment Canada Act, if non-Canadian mergered or purchased an entity of Canada and the entity will be simply meet one of the three conditions: business establishments, employment and assets180.
M&A behaviors under Canadian national security review system include getting control right of Canadian enterprises and the acquisition of entities engaged in business activities in Canada. Non-Canadians can obtain control over enterprises in Canada through the following channels: 1) by acquiring voting shares of company established in Canada and operating Canadian companies; 2) by acquiring voting interests of Canadian entities when the company does not acquire control right; 3) or obtain all or substantially all the assets of enterprises operating in Canada181. On that issue to obtain control, the minister has the final say. The Minister may identify whether to obtain control of the entity after entities submitted information and evidence182.
§4.2.1.3 Provisions of Review Object in Japanese Law
Foreign Exchange and Foreign Trade Control Law regulates the merger in detail, but it does not provide for the mergered.
The mergering party means foreign investors, including 1) individuals as a non-resident; 2) legal person and other groups established according to foreign laws or owning main work place in other countries183. In addition, the 1984 Amendment added identification to foreign investors: the person other than foreign investor (including legal person and other organization), which engaged in business behaviors equivalent to inward FDI for the interests of but not n the name of foreign investors, is regarded as foreign investors184.
Looking from identification of mergering party in Japanese Law, it comprehensively use the standard of place of registration and control standard, but control standard is limited to observe from the equity ratio, the voting right etc.
Provisions related to M&A behaviors are relatively simple, only providing behaviors like shares or holding shares of acquired company, transferring shares or holding shares of companies except listed companies, acquisition of a securities trading company's shares, and agreeing with Substantive changes of companies’ undertaking purpose. There is no requirement for the nature of the shares (whether or not voting shares). In terms of proportion of the acquired company's total shares, there are the following provisions: 1) shares of Securities and Exchange company should not be less than 10% of what has been issued; 2) agreed with substantive changes of the companies’ undertaking purpose, and the company must have more than 1 / 3 shares or capital contributions of a total number of issued shares or total investment185.
§4.2.1.4 Comparative Analysis of Review Object
Mergering party in cross-border M&A contains natural person and entities. In terms of foreign natural persons, the United States, Canada and Japan, without exception, adopted the nationality criteria. As to the definition of a foreign entity, the United States, Canada and Japan adopted control standards of varying degrees. But for the definition of control, Canada and Japan focus on the equity structure of the company, while the United States focus on the actual operation level of entities186. Clearly, there is more flexibility in definition of control in the United States. On the other hand, we can see, Minister of Canada has the final decision power on the issue of non-Canadian entities, which expands expanded operation room of the review.
In addition, the United States and Canada included foreign government or entities it controlled in the scope of the review. In 1992, U.S. Congress passed the amendment requiring review to M&A actions of entities controlled by foreign government or on behalf of a foreign government. From the practice, there are indeed many cross-border M&A with foreign government’s background. Such as the 1989 China Aviation Technology Import and Export Corporation’s acquisition to the MAMCO of United States was filed national security review, one of reasons is the problem of identity, because it is a Chinese state-owned enterprises. What the U.S. Government is worried about is that the Chinese Government is in control of it. From the perspective of national security, foreign government or its controlled entities have been the focus concerning of every country, therefore categorizing such mergers and acquisitions into the scope of the review is fully consistent with the nature and purpose of national security review.
Provisions of the merger and acquisition activity of the United States, Canada and Japan reflect to be normative and flexible. Identifications of cross-border M&A activities of the U.S. and Canada reflect the control standard; even though there is no specific requirement for review object in Law of Japan, the provision “agreed with substantive changes of the companies’ undertaking purpose, and the company must have more than 1 / 3 shares or capital contributions of a total number of issued shares or total investment” reflects a certain degree of control standards. As to flexibility, based on realistic considerations, the three countries expanded the interpretation of M&A behaviors at various degrees.
It is clearly reflected in national security review system of Canada: First, the Minister has the final decision making power on the issue of identifying control right, which is to expand the scope of M&A; Second, whether or not to get control, non-Canadians would be possibly reviewed as long as they are engaged in merger or acquisition of Canadian entities. Also in the United States, as mentioned earlier, Exon-Florio Act stipulates that the exercise of the right of control is not confined to the holding of absolute majority or relative majority voting securities of holders. In Japan, M&A object does not mentioned whether to be the voting shares.
§4.2.2 Standard of National Security Review of Cross-border M&A
§4.2.2.1 General Introduction
Standard of National security review of cross-border M&A is national security, which is core and most complex and controversy problem of national security review system. The definition and areas of national security is in huge controversy itself, at the same time, different countries understand in different ways. In the legislation and practice of national security review, it is difficult for international community to give a completed conclusion on what kind of behaviors damaging national security.
Therefore, Canada and Japan avoided this question in legislation, giving no explanation of national security. The U.S. didn’t provide positive definition of national security but explained laterally according to list factors that should be considered in review, which will be analyzed in the following.
§4.2.2.2 Analysis of the U.S. Review Standard
The Exon-Florio Act had never defined national security; it only provided a list of factors that could be considered by CFIUS and the President187. The original factors included: (a) domestic production needed for projected national defense requirements; (b) the capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials and other supplies and services; (c) control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the US to meet the requirements of national security; (d) potential effects of the transaction on sales of military goods, equipment or technology to any country identified by the Secretary of State as a country that either supports terrorism, or is a country of concern regarding missile, chemical or biological weapons proliferation; and (e) potential effects of the transaction on US technological leadership in areas affecting national security. Although the prior list was never considered exhaustive, the new legislation makes consideration of the factors mandatory and enumerates and provides some definition to a number of factors that were thought to be considered in practice, but were not explicitly identified, including: the potential for national security-related effects from the acquisition of US critical technologies and/or infrastructure, including energy; Whether the transaction involves a foreign government controlled entity, and, if so, the foreign country’s adherence to non-proliferation policies, counter-terrorism co-operation, and export control record; and the potential effects of the transaction on sales of military goods, equipment, or technology to a country that poses a potential regional military threat to the interests of the US.
The above factors reflect features of national security review system of cross-border M&A:
1) Defense power is the final factor to be considered in national security review system.
According to items (a), (b) and (d), factors considered in the U.S. national security review of cross-border M&A include national defense industry or facilities with a direct impact on national security. Such as cases that France's Thomson planed to buy LTV's missile production facilities, the French MATRA SA plans to buy the three spacecraft hardware and software sectors of Fairchild Industries, have experienced a national security review, as these is a direct relationship between the two transactions and national defense security.
Not only that, transaction will be reviewed if the object of it is indirectly involved to national defense industries or facilities. Such as Aviation Technology Import and Export Corporation of China’s acquisition of the United States MAMCO and Tokuyama Soda of Japan's acquisition of General Ceramics were reviewed because of the near or far relationship between acquired products and national defense.
Evidently, the U.S. national security review of foreign mergers and acquisitions considers not only the most direct the defense industry, but also any other industry that may affect the national security. The ultimate goal to Consider these industries is to ensure that U.S. defense capabilities in order to maintain military strength of the U.S. and ensure that the U.S. defense industry develop healthily.
2) Technical leading status in area of national security is emphasized
Looking from the subject of cross-border M&A, besides products and facilities, national security review of foreign acquisitions in the U.S. also very concerned about the technology possibly involved in M&A, and the technology leadership in the area affecting national security of the U.S. what is reflected in the foregoing paragraph (e) of the consideration, and the practice of United States’ review has proven this point.
Japan's Nikon had planned to purchase Perkin-Elmer, a semiconductor equipment manufacturing plant, but was opposed in the United States. Even though Nikon was forced to take the initiative to cancel the deal before the declaration, but what is certain is that even declared it will also reviewed by the National Security. The reason why the US is so concerned with this deal is that it worried that the US would have to be dependent on foreign technology if Semiconductor Equipment Factory was acquired, which is a destructive attack to the strength and status of the United States in the international computer chip market of electronic products188. In 2005, one of the reasons that transaction between China's Lenovo Group and IBM's about personal computer sector was encountered the national security review was also out of consideration of computer technology factor of the United States. The U.S. was worried that China's Lenovo may be leaking of confidential personal computer technology in the United States, thus affecting the United States’ competitiveness in the field189.
Clearly, the United States is very concerned about technology leadership in the areas which may affect national security, and this became one of the factors considered by the U.S. national security review.
3) Economic security is paid a lot attention in the review system
Compared with the military, defense and other areas of traditional national security, economic security has become component of national security which should not be overlooked. Consideration factors of the U.S. national security review to cross-border M&A reflect the importance of economic security.
The above item (c) highlighted the impact caused by "national security needs", extending the review to whether cross-border M&A will affect the normal operation of the U.S. economy and the daily life of residents in the United States; in item (e), concerning of the technology leadership as also risen to the level of economic security to a large extent, from the provision itself.
Therefore, any industry, facilities and technology can be incorporated into the scope of the review as long as it is likely to affect national security, which in effect will expand areas of the industry involved in national security, because almost any industry is likely to have an impact on national security. Including economic security into factors considered in the review, to some extent, also played a role of safety valve on the U.S. economy.
§4.2.3 Review Procedure
§4.2.3.1 Review Procedure of the US
§4.2.3.1.1 Procedure of Notification and Notice
Procedure of national security review of the US may be started by two ways: notification to the CFIUS of transaction parties of cross-border M&A or member agency of the CFIUS proposes Agency Notice to the CFIUS.
National security review of cross-border M&A is not compulsory. Transaction parties can choose whether to deliver an official notification to the CFIUS before the transaction is completed or during the period of the transaction190.
If CFIUS member agencies, according to the available facts, have reason to believe that the acquisition is within the adjustment range of Exon-Florio provisions and could have a negative impact on national security, they can propose Notice to the Chairman of the bodies of CFIUS members.
In addition, there is Notification Withdrawal System in the national security review system. After notifying to the CFIUS, transaction parties can request to withdraw the notification in written form to the president of CFIUS members at any time before the President announces his decision. Under normal circumstances, the withdrawal will be approved191. Notification Withdrawal System is mainly applicable circumstances when transaction parties decided to cancel or change the deal out of commercial considerations, political pressure, and other reasons.
§4.2.3.1.2 Preliminary Review Procedure
After procedure of Notification or Notice, national security review would enter into Preliminary Review Procedure. In this process, the CFIUS will notify all member agencies, collect suggestions and make a decision whether to take further review within 30 days.
If all member agencies think it will have no negative impact on national security, the CFIUS will decide not to raise Investigation to the transaction, which means the national security review procedure will stop here192.
However, if there is one or several agencies consider it to damage national security and need to be reviewed further, the CFIUS will call in Senior Officials of all agencies to discuss whether the reason is acceptable. Once three or more than three of the above agencies agree, it should immediately notify the President and all transaction parties and begin a investigation procedure of 45 days.
§4.2.3.1.3 Investigation Procedure
If the Investigation Procedure is activated, M&A transactions will be reviewed further and an Investigation Report will be submitted to the President within 45 days and suggest the President what kind of measures should be taken.
If CFIUS member agencies could not reach consensus of damage which may be created by the transactions, CFIUS Chairman will detail in a variety of viewpoints to the President in the report submitted to the President, in order that the President makes the final decision193.
§4.2.3.1.4 Decision-making Procedure of the President
This is the final review of national security procedures. After receiving the report from the CFIUS, the President must be made decision whether to approve the transaction within 15 days whether. If there is credible evidence that the implementation of the control of foreign interests have threat to damage national security, and it is difficult to safeguard national security adequately and appropriately under other legal provisions, the President has the power to suspend or ban the M&A transaction which belongs to the adjustment scope of Art 271 and within proposals of the CFIUS and the power to direct the Minister of Justice at the District Court to take appropriate relief measures, to carry out the Art. 271194.
§4.2.3.2 Review Procedure of Canada
§4.2.3.2.1 Notice of Minister
National security review procedure of Canada is launched by Minister in form of Notice. If the Minister has reasonable reason to believe that investment behavior of non-Canadian will damage national security, he can send notice to non-Canadian and tell that the Director maybe send Review Order. Once receiving Notice of the Minister, non-Canadian shall have to suspend all investment activities and wait for further notice of order195.
According to suggestion of the Minister, the Director will make review order if he thinks the M&A transaction damages national security196.
In this process, if the Director doesn’t make Review Order, it means that the review procedure is over.
§4.2.3.2.2 Investigation of Minister
Once the Director made Review Order, the procedure will enter to the stage of Investigation of Minister. The Minister should notify non-Canadian and transaction parties the Order without hesitate, telling them the rights they have to state in front of the Minister. In respond to non-Canadians and merger-related party's request, the Minister should provide a reasonable opportunity for them to present their statement. The Minister can require non-Canadians and merger-related parties to provide any kind of regulatory information or other information that the Minister thinks to be necessary for review, at regulatory time and in regulatory form.
If the Minister is convinced that investment would undermine national security, or it is difficult to determine whether the investment would damage national security on the basis of the information provided, he should submit facts mastered by the Minister and report of recommendations within the required time, in order that the Director can make the final decision. If the Minister is convinced that investment will not harm national security, it should notify non-Canadian within the stipulated time that he will not take further measures, 197 which also means that the review process is now over.
§4.2.3.2.3 Decision-Making of Director
Director shall adopt any measures benefit for maintaining national security by order in required period: (a) order non-Canadians not to do business related with investment; (b) confer on them to do other investment business conditionally; and (c) require non-Canadians abandon control power to Canadian enterprises or investment to entities. The Minister shall immediately hand out copy of the order to non-Canadians and other relevant people after the Order is made. Non-Canadians and other relevant people should obey the Order198.
§4.2.3.3 Review Procedure of Japan
As content of national security review related with cross-border M&A is provided in the chapter of inward FDI in Foreign Exchange and Foreign Trade Control Law in Japan, so it does not create a separate national security review process for cross-border M&A. Its national security review process and review process of inward direct investment is the same.
§4.2.3.3.1 Notification
As Japan law does not take examination and approval system to inward FDI, only requires foreign investors to notify to the Finance Minister and the Minister in charge of enterprises, so there is a period, usually 30 days, of Inward FDI Prohibition from the day the Finance Minister and the Minister in charge of enterprises accept the notification, after that, foreign investors can carry out investment activities. If the applications are considered to have no other issue, the period can also be shortened199. However, if the Finance Minister and the Minister in charge of enterprise take the view that it is necessary to review the investment and see it would damage national security, then the period under review can be extended to four months200.
§4.2.3.3.2 Statement of Exchange Investigation Committee
Exchange Investigation Committee should state comments to the possibility to damage national security of the investment activity within four months. In terms of complex investment activity, if the Exchange Investigation Committee feels difficult to state comments within four months, the period can be extended one month201.
§4.2.3.3.3 Advice or Orders of the Finance Minister and Minister in Charge of Career
After listening to comments of Exchange Investigation Committee, if the Finance Minister and the Minister in charge of enterprises think the investment activity harm national security, they can advise foreign investors to suspend investment or change relevant content of that FDI202.
Within 10 days after receiving advice, people advised must notify the Finance Minister and the Minister in charge of enterprises whether or not to accept advice. If accept, they can begin investment activities immediately following the contents of advice, if not accept, the Finance Minister and the Minister in charge of enterprise can order the foreign investors to suspend investment or change the content of inward FDI203.
It should be noted that, the period to advice or order the suspension of foreign investors on the investment or content change of inward FDI is limited to the period under review. If the period of review expiries but the Finance Minister and the Minister in charge of enterprise have not made decision, it will lose this power. In addition, the Finance Minister and the Minister in charge of enterprise may cancel all or part of the advice or order on basis of economic situation change or other matters204.
§4.2.3.4 Comparison and Analysis of Review Procedure
General speaking, provisions of review procedure in the US are the most detailed, containing almost every link in the process from establishment of review institution and carrying out of review procedure. Comparatively, review procedures of the Japan and Canada are much simpler.
§4.2.3.4.1 Interaction Mechanism between Review Institution and Transaction Parties
Interaction mechanism between review institution and transaction parties are stipulated in laws of the three countries, which is more obviously reflected in review procedure of the US. In practice, the CFIUS has negotiated with transaction parties many times, requiring transaction parties to make guarantee or promise some conditions in order to discourage national security concerns member agencies. Such as the Netherlands ASML Holding N. V had planned to purchase Silicon Valley Group Inc. Subsidiary of the latter, Tinseley Laboratories, provide optical technology to the U.S. Government. During the investigation, the CFIUS request ASML promise in good faith to sell Tinseley Laboratories to a U.S. company in the near future. ASML made the commitment and at last obtained the approval of the CFIUS205.
In review procedure of Canada, non-Canadians can made a conditional promise to the Queen so that to carry out investment activities. In Japan, foreign investors can accept the advice of the Finance Minister and the Minister in charge of enterprises and carry out investment activities within the scope of the advice. From all of these provisions, it can be considered that there is a interaction mechanism between review bodies and parties to deals, rather than remaining in the approach of "approval" or "not approval". By way of such an interaction mechanism, transaction parties have opportunity to balance the business interest and transaction losses after entering the review process, so as to reduce losses as much as possible suffered when the transaction has not been approved.
§4.2.3.4.2 Cautious, Fast Review
Looking from review bodies, all the three countries confer on review competence to more than two bodies, accomplishing review task by cooperation and coordination among different bodies. What’s more, every review body has power to make decision. There is a mutual restriction among different authorities, which assure cautiousness and fastness of the review decision made.
Such as the United States, CFIUS plays the most important role in the whole review process. It can decide that M&A activity will not harm national security and terminate the review process at the investigation stage. But if it thinks that there is damage to national security, then the final decision will be left to the President. Also, Canada, the Minister can make a decision that M&A activity will not damage the national security in the period under review, but if the minister is convinced that investment would undermine national security, or cannot be determined whether the investment would damage national security on the basis of the information provided, then the Director owns the final right to decide.
Thus, in the review process, when the United States and Canada make a positive conclusion like "Damaging National Security", the two bodies’ cooperation is needed; this fully reflects cautious nature of the review. On the other hand, it only needs a body to decide when the review body makes negative conclusion; this is for the need of protection of faster commercial transactions, which reflects the fastness of the review process.
§4.2.3.4.3 Comprehensive Review Bodies and Efficient Operational Mechanism
Review bodies are composed of various government departments or authorities, concerning implications of cross-border M&A on national security from different perspectives206, so as to ensure a comprehensive and integrated review system.
Such as the CFIUS of the United States was composed of 12 authorities: Minister of Finance, Minister of Defense, Commerce Minister, Secretary of State, U.S. Trade Representative, Chairman of the Council of Economic Advisers, the Minister of Justice, Bureau of the Budget and Management Secretary, Department of Homeland Security, Director of the Office of Science and Technology Policy, the president's national security Assistant and economic policy Assistant. In Japan, the Exchange Investigation Committee was under the Ministry of Finance, composed of less than 15 members. Committee Members were appointed by the Finance Minister from those with learned knowledge and rich experience for a term of 2 years and may be reappointed207.
Looking from the period of the review, except that Canada does not determine the specific period, the United States and Japan clearly defined the period under review. U.S. review process will be no more than 90 days208, and the Japanese for five months. Such regulation is necessary for the review bodies; to a certain extent, the review mechanism ensures the high efficiency.

Chapter V: National Security Review System of China
Considering perceived risks that might caused by cross-border M&A, China has adjusted its legal instruments to give investment restriction and enhanced the competition law.
5
§5.1 Development of Regulatory System on Cross-border M&A in China
Since the late 1990s, China’s economic reforms and robust growth have fueled foreign investors’ increased interest in M&A activities209. Furthermore, China’s accession to the WTO and the ongoing work of restructuring its state-owned assets have opened more previously closed industry sectors to foreign investment. One can discern that M&A transactions offering immediate market access are becoming an increasingly attractive alternative to foreign investors210, which is sure to bring a rising trend of M&A activities involving foreign investment in the coming years.
Presently, there are almost 70 effective laws and regulations regulating cross-border M&A in China, from basic laws such as Company Law to special laws and regulations, such as Interim Regulations for Restructuring of State-Owned Enterprises Using Foreign Capital, and specific legal systems related with access of foreign capital, industrial policy and examination and approval. Macroscopically speaking, the Industrial Catalog for Foreign Investment restricts investment area to foreign investment in access of market; microscopically speaking, from original negotiation to the final registration of share rights or capital transaction, there are different legal regulations applicable for different important procedures of cross-border M&A. This legal framework will be analyzed in the following paragraph.
§5.1.1 General Laws and Regulations
Company Law of China regulates that the merger of a company may be achieved by way of absorption or consolidation. In the case of absorption, a company absorbs any other company and the absorbed company is dissolved; in the case of consolidation, two or more companies combine together for the incorporation of a new one, and the existing ones are dissolved, and also regulate some general problems like investment increasing and reduction, debts assumption and registration for change etc. Company Law belongs to law, which is constituted by NPC, so it is applicable to all merger behaviors between any two companies211. According to Provisional Regulations on M&A of Domestic Enterprises by Foreign Investors, mergers and acquisitions of a domestic enterprise by foreign investors shall mean that foreign investors, by agreement, purchase equity interest from shareholders of domestic enterprise with no foreign investment or subscribe to the increase in the registered capital of the Domestic Company with the result that such Domestic Company changes into a foreign investment enterprise; or the foreign investors establish a foreign investment enterprise and then, through such enterprise, purchase the assets of a domestic enterprise by agreement and operate such assets, or the foreign investors purchase the assets of a domestic enterprise by agreement and use such assets as investment to establish a foreign investment enterprise to operate such assets212. This regulation also specifies that legal effectiveness of M&A is to establish enterprise invested by foreign investors.
Furthermore, after several amendments, Regulations for Guiding the Direction of Foreign Investment taking effect from April 1, 2002 and Industrial Catalog for Foreign Investment newly amended on October 31 of 2007 adjust regions of prohibition, restriction and encouragement to foreign investment from the angle of industrial policy. Omnibearing Openness has been basically come true but in some situations, there are still restrictions and prohibition, such as Projects that endanger the safety of the State or damage social and public interests; Projects that pollute environment, destroy natural resources or impair the health of human beings; Projects that occupy large amounts of arable land, unfavorable to protection and development of land resources; Projects that endanger the safety of military facility and its performance; Projects that adopt the unique craftsmanship or technology of our country to make products; and other cases that are regulated by laws and administrative regulations of the State213. Those areas forbidden to foreign investment, such as telecom, and gas etc, have been listed as opening industrial area214.
§5.1.2 Special Legal Regulations Concerning Cross-border M&A of Listed Companies
Securities Law of China is basic regulation concerning foreign investors’ M&A of listed companies, which concretely regulates M&A forms, specific procedures, information release and other basic problems215. Management Practices of Strategic Investment by Foreign Investors to listed Companies and Acquisition Management Practices of Listed Companies were published to specify that foreign investors can M&A state-owned enterprises and hold stock share of them, and provide legal basis and workable procedure to cross-border M&A. subsequently China Securities Regulatory Commission published relevant No. 15 and No.19 Format Guidelines And Content of Disclosed Information, regulating liability of disclosing information for shareholders in the process of M&A.
Besides the above basic regulations, legal regulations are complex concerning specific problems about cross-border M&A, which are mainly involved with access of foreign investment, management of state-owned share, asset valuation, attorn price fixing, management of foreign exchange, tax, protection of creditor and protection of employee’s right. These regulations will be discussed in the following aspects.
Firstly, in the aspect of transferring examination of state-owned enterprises’ industrial rights, Interim Procedures for Management of Transferring Property Rights of State-owned Enterprises regulates that transferring of grant state-owned asset should be reported for ratification to state-owned assets supervising and administration commission216. In the Notice of Problems on Transferring Foreign State-Owned Shares and Legal Person Shares of Listed Companies, State-owned Assets Supervising and Administration Commission of the State Council and Ministry of Commerce of PRC were confirmed as departments for examination and ratification in the process of transferring state-owned shares of listed companies. National Development and Reform Commission published the Interim Management Approach for Approval of Items of Foreign Investment, in which Article 2 states that the approach shall be applicable to ratifications to all kinds of foreign invested items from Sino-foreign joint ventures, Sino-foreign cooperation, foreign investors-owned, and cross-border M&A to domestic enterprises etc, confirming that department of Development and Reform at different level will be responsible for these items’ examination and ratification217.
Secondly, in aspect of asset assessment, M&A Regulation adopted legislation model of compulsory assessment, requiring that cross-border M&A should be assessed218. Management of Assessment of the state-owned Assets specifically regulates state-owned assets’ assessment approaches, including five methods219. Assessment result should be confirmed by state-owned asset supervision and management departments or other organs before used to be price-making basis220.
Thirdly, in aspect of payment deadline, Art. 16 of M&A Regulation established completed payment deadline system for cross-border M&A, regulating different payment deadlines for foreign investors in different situations.
§5.1.3 Special Legal Regulations Concerning Cross-border M&A of Non-listed Companies
Interim Provisions Concerning Drawing Foreign Capital into State-owned Enterprises Restructuring, which was published by State Economy and Trade Commission, Ministry of Finance, State Administration of Industry and Commerce and State Administration of Foreign Exchange jointly on November 8, 2002, is applicable for behavior of establishing foreign-owned enterprises in form of company by means of reforming state-owned enterprises and company enterprises containing state-owned shares using foreign investment. It is legal basis for M&A of non-financial and non-listed enterprises by foreign investment.
Interim Management Approaches on Transferring State-owned Shares in Enterprises, which was published by State-owned Assent Supervision and Administration Commission and Ministry of Finance on December 31 of 2004, is applicable for behaviors that departments of state-owned asset supervision and administration and enterprises holding state-owned capital transfer their state-owned shares to legal persons, natural persons or other organizations in abroad.
§5.1.4 New Constituted Anti-monopoly Law of China Pays Special Attention to Merger Control to Cross-border M&A
On 30 August 2007, after more than a decade of legislative efforts, the Standing Committee of the National People’s Congress (NPC), China’s top legislature, completed its third official reading of the draft Anti-monopoly Law (AML) and formally adopted it as the country’s first comprehensive competition law. The AML will become effective on 1 August 2008.
The AML establishes basic legal framework for anti-monopoly and provides the legal basis for preventing cross-border M&A from excluding and restricting competition on the basis of three legal systems: prohibition of monopoly agreement, prohibition of abusing dominant status of market and control of concentration of business operators. The adoption of the AML is an important milestone for China in its journey as a market in transition. Like many other Chinese laws, the AML establishes the general legal framework as well as the policy and principles behind the law. Implementation Regulations are expected to be released soon. These typically will provide more granular detail and guidance on the implementation and enforcement of the law by the relevant competition authority and should prove invaluable for foreign companies in navigating their business pursuits in this new era in China.
According to the AML, where a foreign investor participates in the concentration of business operators by merging or acquiring a domestic enterprise or by any other means, and national security is involved, besides the examination on the concentration of business operators in accordance with this Law, the examination on national security shall also be conducted according to the relevant provisions of the State.
The AML regulates Examination on National Security again, which shows that China has began to attach enough importance to national security problem in cross-border M&A. However, in the AML, there are still no definition of national security, no specific departments responsible for Examination on National Security and no standards and procedures of Examination on National Security. Whether the system of Examination on National Security can take effect is dependent on the enforcement and legislation henceforth.
§5.2 Establishment Process of the Principle “Maintaining National Security”
From the national policy level, the report of 16th National Party Congress of the Communist Party of China noted: In the process to widen Openness to the outside world, national economic security should be paid great attention to safeguard" and "safeguarding national economic security" was the first time written into the literature of the party Congress. Based on the CPC's ruling status, this initiative could be regarded as China's the first official announcement of "national economic security".
Since then, in July 2004 the State Council issued the "State Council's Decision on Investment System Reform"221, identifying reform points of examination and approval system, which refers to economic security. Annex to the same decision, "Directory of Investment Projects Approved by the Government (2004)" set out the attribution of approval rights of foreign investment projects. 2004 National Development and Reform Commission issued the "Interim Management Approach of Foreign Investment Projects Approval"222, establishing foreign investment projects approved by the State Development and Reform Commission223, clarifying that this regulation is applicable to the cross-border M&A, and writing in the factors which should be considered during the approval process, which triggered puzzle of the foreign investors.
On August 8, 2006, Interim Regulations 2006 was issued by six ministries jointly, of which Article 12 provides that behaviors of cross-border M&A which may cause the country's economic security factors should be notified to the Ministry of Commerce, and Department of Commerce can take measures to who does not notify with the relevant departments. As it is difficult to operate and lack of transparency and uniformity, this provision triggered comments from a number of countries and international organizations.
In November 2006, the State Development and Reform Commission issued the of Use of Foreign Capital" ", listing safeguard of national economic security as one of the eight policy measures in the period of 11th Five-Year Plan, which advanced a step forward at the national level. On December 18, 2006, the Office of the State Council transmitted the Guidance On Promoting Adjustment Of The State Capital And Reorganization Of State-Owned Enterprises, clearly specifying that the state-owned economy must be in a position of control in seven categories of industry, including those industries , major infrastructure, important mineral resources, industries providing essential public goods and services, key enterprises in pillar industries and high-tech industries involving national security. On January 26, 2007, the SASAC issued a Notice in Matters Relating to Transfer of Property Rights of State-Owned Enterprises, which required that in case of transferring state-owned property rights in agreements; the behavior of the transferee shall not be in violation restriction or prohibition provisions of national economic security.
§5.3 National Security Review of Cross-border M&A in China
§5.3.1 Review Object
§5.3.1.1 Mergering Party
As mentioned above, there are two kinds of standards: Registration criteria and the capital control standards.
M&A Regulations 2006 defined mergering party as foreign investors, but no further explanation. Currently, provisions related with definition of foreign capital are contained in various laws and regulations, and do not form a unified standards with authority.
China take the Registration criteria to determine nationality of foreign legal persons, and Article 184 of The Views Of A Number Of Issues On The Implementation Of People's Republic of China General Principles of Civil Law (Trial) by the Supreme People's Court, regulates that national law of foreign legal persons is laws of the State it registered in. In addition, Article 41, paragraph 2, of China's "General Principles of Civil Law" stipulates China's Sino-foreign joint ventures, Chinese-foreign cooperative enterprises and foreign-funded enterprises established in the area of China can obtain China's legal personality by legal registration, which proves that China takes Registration criteria to confirm nationality of legal persons and whether it is a foreign legal person.
China also uses capital control standards within some scope, such as considering foreign-invested companies’ establishment of foreign-funded enterprises in the territory of China as a kind of foreign investment, and M&A Regulation 2006 clearly states that it is applicable to the situation of mergers and acquisitions of domestic enterprises by foreign investors224.
§5.3.1.2 Mergered Party
M&A Regulation 2006 defines mergered party as domestic enterprises. Looking from other relevant provisions, China takes Registration Criteria to define domestic enterprises. Such as the "PRC Company Law" defined companies as limited liability companies and corporation limited set up in China, while the law defines foreign companies as the company set up in China in accordance with the foreign law, which also confirmed Registration criteria from the side.
§5.3.1.3 M&A Activities
M&A Regulation 2006 provides a specific concept Real Control225, but there is no further explanation for what is Real Control.
In terms of principle of obtaining control, the United States and Canada provided a very detailed explanation: obtaining control is mainly embodied in obtaining a majority vote and all or substantially all the assets of object enterprises. China interpreted obtaining control as: (1) obtaining most of voting right of Chinese companies, enterprises or other organizations; (2) obtaining more than 50 per cent stake of Chinese companies, enterprises or other organizations , or (3) obtaining all or essentially all of the assets a Chinese company , Enterprises or other organizations. In addition, in accordance with admissible evidence and information of the relevant transactions, if the foreign investment joint review Commission has reason to believe that foreign investors will get the right of control of Chinese companies, enterprises or other organizations, that could be considered as actual control .
Comprehensively, object of national security review of cross-border M&A can be summarized as follows: control rights acquired by foreign investors according to mergers and acquisitions of Chinese enterprises.
§5.3.2 Review Standard
National security is core content of national security review system of cross-border M&A, deciding the value orientation of the review. How to define national security in cross-border M&A is a difficult problem. If the definition is too broad, it will be very easy to create national protectionist tendencies in investment, resulting in uncertainty of foreign investment policy, and increasing political risk of cross-border M&A, thus impeding the pace of further attracting foreign investment. On the other hand, the broad scope of national security is also easy to result in that review points will to be vague and discretion of review authorities will be too great, which will impact the review results.
Conversely, if the definition is too narrow, there will be a situation unfavorable for the protection of national security. Therefore, the definition of national security is like springs; both too tight and too loose standards will adversely affect the implementation to the review system.
According to recommendations of the State Development and Reform Commission, "industries relevant to lifeline of the national economy and key fields include military defense technology, electrical power grids, oil, petrochemical, telecommunications, coal, civil aviation, shipping, financial, cultural industries and major equipment manufacturing, Automobile, electronic information, construction, steel, nonferrous metals, chemicals, survey and design, scientific and technological area. Key enterprises in the area and the vanguard of these industries can be listed and protected specially226.
§5.3.3 Procedure Rules of National Security Review of China
National Development and Reform Commission proposed in a report to set up Foreign Investment Joint Review Committee which is led by the National Development and Reform Commission and the relevant ministries participating in, to review cross-border M&A involved in national industrial safety227. This joint review mechanism is obviously a reference to the United States CFIUS practice. The establishment of a joint review mechanism is in line with the national conditions of China. Objectively speaking, national security review of foreign mergers and acquisitions involves numerous industries and sectors; therefore only by establishing a unified comprehensive review it is possible to eliminate negative impact of cross-border M&A on national security. National Development and Reform Commission has responsibilities macro- control and related resources and experience, and it has established a approval mechanism of foreign investment projects from a macro point of view, so that it is suitable to be the leadership agency of Foreign Investment Joint Review Committee leading national security review work.
§5.4 Problems in Present Legal System of China
It is obvious that present national security review system of China is not completed. China intended to create such a strategic weapon of national security review but as to limit of technical level, this weapon does not work so well. There are many problems in present legal system, which will be analyzed in following paragraphs.
§5.4.1 Conflicts between Different Legal Documents
Investigation power of Development and Reform Commission regulated in Interim Approach of Approval and Management for Foreign Investment Projects and Investigation power of Ministry of Commerce regulated in M&A Regulations 2006 have conflicts. The former stipulates that relevant procedures can only be dealt with according to approval documents of the State Development and Reform Commission; while the latter also states that relevant procedures should use approval certificate of the Ministry of Commerce. At the same time, reviewed matters of the SDRC and the Ministry of Commerce also have most coincidence, such as both are involved in the review of the monopoly issues, industrial policy and economic security.
Secondly, there are conflicts between Law of the Three Foreign Investment Related Enterprises and the State Council's Decision on Investment System Reform. Ministry of Commerce has been enjoying the right to review foreign direct investment, which comes from authorization of Law of Foreign-Invested Enterprises of PRC (revised 2000), Sino-Foreign Joint Ventures Law of PRC (revised 2001) and China-foreign cooperation Enterprises Law (revised 2000). Cross-border M&A is bound to lead to involvement of foreign investment, so there is the issue of approval of cross-border M&A, in this way, the Commerce Department must have the approval authority; at the same time, Investment Projects Directory Approved by Government (2004), as an annex of State Council's Decision on Investment System Reform, confers the power of review on the Development and Reform Commission. At last, the Development and Reform Commission extended the power to cross-border M&A.
Thirdly, there are conflicts among Management Approach of Strategic Investment in Listed Companies by Foreign Investors, M&A Regulation 2006 and Interim Approach of Approval and Management for Foreign Investment Projects. Management Approach of Strategic Investment in Listed Companies by Foreign Investors provided the Ministry of Commerce to be in charge, but Interim Approach of Approval and Management for Foreign Investment Projects set as State Development and Reform Commission. Management Approach of Strategic Investment in Listed Companies by Foreign Investors requires foreign strategic investors notify to the Chinese Ministry of Commerce for approval in the acquisition of listed companies, but there is no explanation of the relation between reviews the Ministry of Commerce pursuant to M&A Regulation 2006, which consists of a negative conflict.
§5.4.2 Unreasonable Allocation of Right and Power
There is no restrictive power allocated to review power, which is unreasonable. There is no doubt that the power to review under existing provisions is a kind of the administrative power. According to national organizations principle and the principle of executive power, constraint power against administrative power is necessary, such as the executive power to exercise oversight by the National People's Congress, or judicial review by the court to administrative decisions. From cross-border M&A review system of the above typical countries in the world it is known that all countries have restricted the power intervening review process, such as the supervision of the United States Congress, the court review of Canada and administrative court of France. There is not any trace of intervention of constraint power in China's existing provisions; such power configuration is very unreasonable and inconsistent with the requirement of ruling by law.
Power allocation among different departments is not reasonable. The power to review is unreasonably divided into a number of units under existing provisions, leading to expansion of departmental interests, which is outstandingly reflected between the Ministry of Commerce and the State Development and Reform Commission. Ministry of Commerce is the traditional review bodies of foreign direct investment, but the State Development and Reform Commission got the authority by the State Council's Decision on Investment System Reform.
Macroeconomic Research Institute under the State Development and Reform Commission dished out the Cross-border Mergers and Acquisitions and Industry Safety Research on February 2, 2007, which noted that inter-ministerial joint review mechanisms should be established under the leading of the State Development and Reform Commission. There is no mistake of establishment of the joint inter-ministerial review mechanism looking from the above comparison, which shows that such countries are operating like this; some of them explicitly provide to establish the Inter-Ministerial Review Committee, such as the CFIUS of the United States; some of them stipulated that, if necessary, competent authority, can use facilities and services of other departments and organizations, such as Canada. But in circumstances of the presence of a power struggle between similar departments, the review mechanism will impossibly play a good role.
No allocation for investors of the relief rights is extremely unreasonable. Both single review of transnational mergers and acquisitions, or the comprehensive review of foreign direct investment, the right of foreign direct investment and right to facilitate relief are generally given to the foreign deal parties: resorting to the courts, applying for reconsideration, making representations or excuse note, or allowing investors to withdraw voluntarily declare again in the future (such as the United States), or taking modest means of administrative guidance (such as Japan), or even creating an informal consultation channels for protecting interests of investors (Japan, the United States). These provided a good psychological expectation for foreign investors. By contrast, China's existing regulations never achieve this. If it is impossible to solve the problem through the normal channels, in drive of the interests, foreign investors will choose public relations means to resolve-to bribe government officials, which will seriously undermine the integrity of the officials of the Chinese government, thus jeopardizing the national interest.
§5.4.3 Lack of Defined Review Reasons
How to define National Economic Security is not clear. As noted above, national economic security was repeatedly referred to in the relevant legal documents, but there has not yet been a single document making a definition. Although most of the typical states deliberately give no clear definition of national security and are just dependent on the interpretation of cases, such as the United States228, aim of which is to retain a larger room for maneuver, so as to make the process suitable for any type of deal, but almost all of these countries will give a description of summing up "national security" or "national economic security" as "significant" and "fundamental" and "national interests" and "national economic interest" or "national security interests." At the same time, reference factors will be given during the review to explain these abstract concepts.
How to define Key Industries is not clear. It is true that no one country give a complete list of key industries in law, but some key industries will be listed, while a provision of a matter of principle will be provided, if cross-border M&A involves national security or national economic security, relevant executive bodies will make an interpretation. In practice, such countries will publish a industry list; some key industries will be restricted to invest, such as Maritime transport, telecommunications. There are industrial policies in China and a series of legal documents have been formulated, such as Regulations to Guide the Direction of Foreign Investment229 and Foreign-invested Enterprises industrial Catalog230. However, there is no definition of Key Industry in M&A Regulation 2006, and there are no other documents to refer to or any authoritative organs to confirm the concept.
How to define Chinese ancient and famous brand is also not clear. Although in 2006 the Ministry of Commerce initiated the project revitalizing the Chinese ancient and famous brand, giving definition of appraisal conditions in the work programme of revitalizing Chinese ancient and famous brand and its Annex, and Ratification Regulation of Chinese Ancient and Famous Brand (Trial); but M&A Regulation 2006 has not authorized this document to provide such definition and does not clearly refer to the provisions of this document.
How to define Famous Trademark is not clear. The phrase Famous Trademark was first put forward in Paris Convention for the Protection of Industrial Property and then gradually accepted by the other international conventions, but there is no definition of Famous Trademark in numerous international treaties.
China's Trademark Law and Implementation of the Trademark Law also failed to make the definition of Famous Trademark (Article 14 of Trademark Law provided standard that should be referred to identify Famous Trademark; only Article 2 of Recognition and Protection Provisions of Famous Trademark provided a definition: The Famous Trademarks in China is related to the trademark widely known to the public and enjoy a relatively high reputation. In such circumstances, although it is difficult to require M&A Regulation 2006 providing a definition, but pointing out the law it should refer to is necessary.
§5.4.4 Unclear Relationship between Review Processes
M&A Regulation 2006 stipulated three procedures of national security review, industrial policy review and anti-monopoly review, but the positioning of relationship among the three procedures is unclear. What the three procedures focus on is different from each other; according to the above analysis, the functions realized by them are different. Provisions of the antitrust review process are complete, but industry review and national security review are not clear, whether to carry out simultaneously with the anti-monopoly Procedures by the same agencies or if there are other arrangements are unknown.

Chapter VI: Complete national security review system of China
5
§6.1 Theoretical Basis
Any of the systems must have their theoretical basis; the lack of theoretical basis will make legal system loss of the clear positioning of development, lack of the driving force to continue deepening development. Therefore, the core problem of construction of national economic security review system is to solve the problem of theoretical basis. In my opinion, the following aspects should be considered to solve the problem of how to build theoretical foundation of national security review system of China.
§6.1.1 Principle of Economic Sovereignty
Principle of Sovereignty is a fundamental principle in international law, which is also applicable to international economic communication. Sovereign states’ exclusive jurisdiction of economic affairs reflects the economic sovereignty231. Therefore, the national security review system reflects the country's economic sovereignty, which has the irrefutable basis of international law and is not subject to any external interference, pressure and threats; this is internal affairs of one sovereign country will be free from interference. As a fundamental principle of international economic law, establishment of the principle of national economic sovereignty should become the fundamental principles and guidelines in the course of the construction of China's national economic security review.
§6.1.2 Principle of Economic Development
Economic development is proper meaning of the country's development; accordingly no development is the greatest insecurity. The State is obliged to provide basic security to economic development, because the State is a tool232 established to achieve certain objectives in obtaining common interests, pursuing Interests of every country233. The security review system for cross-border M&A of U.S. is established out of needs to protect the country's economic development and national political, economic, military security. For instance, the United States and the European Union would like to add the labor standards in trade, which is, from superficially, the protection of labors’ interests, in fact, it rise export price of labor-intensive products, thus weakening comparative advantages of developing countries in international trade and, to achieve the purpose to protect interests of the workers and industries of developed countries234.
Therefore, the establishment of national security review system of cross-border M&A must be based on protection of domestic industries, and promoting national economic development.
§6.1.3 Principle of State Moderate Intervention
The development of market economy shows that self-regulating market was born with the risk and blindness which cannot be eliminated, so it is necessary to correct the market deviation by means of forces of the State. The state intervention which is now talked about has been different from non-legal, comprehensive and direct intervention under the centralized system, but appropriate and indirect interventions conducted on basis of law235. National security review system for cross-border M&A reflects the appropriate intervention of a country in the economy, achieving the intervention of the economic operation through specific interventions into cross-border M&A at the micro-level deal, protecting national security from threatened.
§6.2 Specific Suggestions to Complete National Security Review System of China
§6.2.1 Clean up Legal System of International Investment and Develop Separate Investment Review Law
§6.2.1.1 Clean up Legal System of International Investment
As China's economic development and the deepening use of foreign capital, patterns of use of foreign investment are gradually changing, which is typically reflecting on the unification of foreign-funded enterprises income tax236 and the independent innovation strategy proposed. In such circumstances, it is necessary to comprehensively consider the overall situation of foreign investment law to establish a national security review system. A suggestion is to clean up international investment law, abolishing the three foreign capital related enterprises laws, splitting their contents: including relevant content of enterprises organization into the Company Law and other laws and all of the remaining contents should be unified to international direct investment law.
§6.2.1.2 Establish a Unified International Direct Investment Law
China needs a relatively completed foreign investment law to deal with new situations and new circumstances to further promote China's economic internationalization and modernization. The law should include contents of national security review, to regulate safety issues in area of the state's fundamental economic interests, including the adjustment of cross-border M&A in areas of the economic characteristics, the area of strategic resources, basic industries and manufacturing fields, hi-tech field, the field of finance, international economic and trade fields, and the ecological environment. Main contents of the law should include regulatory principles, regulatory bodies, and regulatory review process and so on. This would avoid the law positive and negative conflicts, and achieve increased efficiency by combining certain procedures.
According to inspection of all foreign investment legislation styles, it is easy to find that in most developed countries there are two kinds of legislation patterns: separate legislation, or uniform legislation. Such as the United States has no special foreign investment law, while Canada adopt a unified foreign investment law model. Investment Canada Act can be considered as an example of all foreign investment legislations, which serves as food reference for foreign investment legislation of China. The Act provides restrictions review on foreign investment access, supervision and management incentives. There is no clear national safety standard or national economic security standard in Canada, but it established a Net Benefit standard, only the M&A which brings a net benefit to Canada can be approved. Canada did not establish clear principle of national security review, however, it provides four sensitive industries; cross-border M&A related with such four industries will be strictly limited or prohibited. The failure of acquisition of Canada Noranda company by China’s Minmetals Corporation reflects the trend of the future the of Canadian legislation: Canada Government extended the goal of Investment Canada Act to protecting national security, providing national security system to foreign investment which could undermine national security237.
§6.2.1.3 Upgrade Legislation Levels
A unified investment law should be formulated by the National People's Congress or its Standing Committee. The reasons are: existing legislations on the national security review is only at level of administrative regulation, so that conflict of powers of different departments easily results in conflict of legal documents. If the National People's Congress or its Standing Committee takes its power of legislation, authority will be enhanced, at the same time, solving the problem of conflicts between legal documents.
The summit's final decision making power must be set by the National People's Congress or its Standing Committee. National security or economic security and other issues are significantly important matters, and criminal responsibility is the effective means to ensure the implementation of legal documents, so only the National People's Congress and its Standing Committee has power to establish criminal liability provisions.
§6.2.1.4 Pay Attention to the Coherence with Other Legislation
Formulating a unified foreign investment law, or at least the establishing cross-border M&A's national security review system involves a wide range, therefore, attention must be paid to relation between it and other laws and regulations, such as Company Law, the anti-monopoly law, and even then the coordination of international treaties. In addition, this legislation may also involve bilateral investment protection agreements or other international treaties, which should be considered in the legislation.
§6.2.2 Improve the Legal Framework of Supervision of Cross-border M&A
The establishment of national security review system can play a more crucial role only if it is in the regulatory framework of the background of cross-border M&A’s supervision, therefore it is necessary to solve the problem how to further improve China's overall regulatory legal system of cross-border M&A before improving the national security review system.
§6.2.2.1 Establish Radial Foreign regulatory Legal System
On September 9, 2006, Ministry of Commerce specially organized experts to discuss whether to include foreign mergers and acquisitions law and the relevant regulations in the agenda of the legislature as soon as possible, in order to make up for constraints of the M&A Regulation 2006238. The main starting point of such a view is to develop a law with the highest force order to guide the entire legal system of cross-border M&A, making basic rules to regulate various issues involved in cross-border M&A, and then providing detailed requirements for different areas or targets such as state-owned enterprises and listed companies by other laws or regulations related to, forming a radial system of law rules. The benefits are that provisions are clear and there is no conflict between laws and regulations, in favor of establishing a tight network of legal supervision, while the disadvantage is that it is very difficult to provide all the basic issues of foreign capital acquisition with a foreign investment law, which is easy to leave legislative loopholes, leaving laws issues for the implementation.
China is currently in the process of economy institutional reform, with an endless stream of new phenomenon; therefore it is impossible to develop a stable system of laws and regulations, which requires legal system of cross-border M&A to find a suitable point of balance between change and stability. A relatively stable foreign investment law and a radial legal system composed of laws and regulations with strong adaptability will meet the requirements.
§6.2.2.2 Establish Cooperation Inter-department on Basis of Institutional Reform
Because the national security review can be applied to all industries and may involve information of many aspects, so cooperation is conducted by a number of government departments in the national security review system of all countries. There is no doubt that China is also necessary to establish the inter-ministerial joint work mechanism in charge of Executive Summit or even follow the example of the United States to set up a institution formed by different Ministers. Convener of this body should be the Ministry of Commerce, but institutional reforms should first be conducted to give broader powers to the Ministry of Commerce.
Ministry of Commerce was established during institutional reform in 2003. The facts show that the, the establishment decision of the Ministry of Commerce is correct, while the failure is related to functions of the Ministry of Commerce. As mentioned above, the Ministry of Commerce and the State Development and Reform Commission share the power to approve foreign-invested enterprises: the Ministry of Commerce is responsible the approval of major change of the contract or the charter, while the State Development and Reform Commission are responsible for approving the project. Such sharing directly result in the struggle for power between the SDRC and the MOFCOM. The most feasible way is to take a new institutional reform, classifying all the power of approval related with foreign-invested enterprises to the Ministry of Commerce. Trade and investment already have close and indivisible relationship, so this division is logical.
What can go even further is completely to separate Development and Reform Commission, assigning its functions to the Ministry of Commerce, the Ministry of Finance, Administration for Industry and Commerce, Bureau of Statistics, and other relevant ministries. Because according to facts, the State Development and Reform Commission almost become a "small State Council", such power conflicts take place in the relationship with other ministries, which is a problem of the system itself.
§6.2.3 Establishment of a Permanent National Security Review Body
The establishment of a permanent national security review body aimed at ensuring automated implementation of the national security review system; once cross-border M&A endangers national security or is possible to endanger, the review body should be initiated and take review measures in accordance with their own responsibilities. The following conditions should be required to establish permanent national security review body:
1) Because it is related with national security, the body must be established at the central level, the permanent establishment to assist the Government's Prime Minister to deal with national security review affairs of cross-border M&A. This will ensure that the review is from the perspective of the whole country, avoiding interference from local or industry;
2) to guarantee the foreign capital, which is passed by approval procedure in form of M&A, in line with national security law, it requires the national security review to be organized under leadership of the approving authority of foreign investment, the Ministry of Commerce, that is to say, executive or Secretary agency of the permanent national security review body should be located in the of the Ministry of Commerce;
3) Member agencies of the permanent national security review body should include national defense security, industry, science and technology, information, culture, finance, agriculture, trade, environmental protection and other departments of the State Council, ensuring that the review can achieve the balance of all parties’ interests to the maximum extent and protecting national security.
§6.2.4 Clarify the National Security Review Procedure
Quality of review procedures is directly related to the success or failure of the national security system: a good system can achieve objectives to regulate cross-border M&A and eliminate questions caused by the results of the review at mergering party or in relevant countries. National security review procedures should meet the following points:
1) Avoiding the first trial to get final result. It is necessary to establish two or three separate review processes, reflecting level of investigation and guaranteeing the best balance of views of all sides on the final review result, which will assure the maximum fair result;
2) Setting up mechanism for handling complaints. As a law proverb says: no relief, no right. When regulating foreign investors, investment law should also protect their procedural rights within the legal framework, in particular the right to obtain the right to relief, therefore there is a need to establish a relief mechanism. The right to appeal should be only spent onetime, if the merger will not harm national security or there is no such risk, the mergering party can appeal to the government within required time.
Concretely speaking, by fully referring to reasonable places of the related systems of the United States, Canada and Japan, combining with China's basic national conditions, China's national security review systems for cross-border M&A can be composed of the following procedures.
§6.2.4.1 Notification and Notice
The review procedure can be activated in two ways: first, notification of transaction parties, that is, M&A transaction parties take the initiative to notify to the review bodies, such as Japan; and second, notice of the review bodies, that is, the review bodies initiatively notice the transaction parties to notify, such as Canada. The United States Comprehensively used the two ways.
In my opinion, China can start at the same time the two ways: the transaction parties can notify to the foreign investment joint review Committee of cross-border M&A which possibly harms national security; member agencies of the foreign investment joint review Committee can also release review notice to the mergering party through the Committee.
Contents of Notification should include: basic information of mergering party, basic information of merged party (including all kinds of share-control relationship, any contract, Technology, arrangement, confidential information, etc. which is related with the national security), specific content of transactions, any production, technology, personnel arrangements and related information of the mergering party which could affect the national security.
At the same time, referring to the U.S. practice, the M&A transaction parties can withdraw notification before the review result is published after notifying to the Committee.
§6.2.4.2 Preliminary Review
After the notice or notification procedure, it will enter the preliminary review procedure. The secretariat of Foreign-invested joint review Committee should send all the materials to member agencies. All member agencies should propose preliminary views according to the review standards on basis of a comprehensive analysis and evaluation, and then aggregated opinions to Secretariat. If all member agencies think that the transaction does not endanger national security, the Committee will make the decision to terminate the review. If more than one member agency takes views that the deal maybe endangers national security, the Chairman of the Committee should call in a meeting to decide whether to conduct further investigation.
§6.2.4.3 Investigation
Investigation should be carried out by the special investigation group appointed by the Committee, who will start the survey according to the review standards.
In my opinion, the preliminary review and investigation can refer to review bodies and interaction mechanism of transaction parties of United States, Canada and Japan, encouraging transaction parties respond to issues concerned by the Committee. If cross-border M&A involves sensitive industries or national brands, foreign investors can make certain commitments or change the deal content to eliminate the national security implications. This mechanism is very important, which will try to avoid or reduce investment risk and losses of the foreign investors, thereby creating a stable investment environment.
§6.2.4.4 Decision
After the investigation, the special investigation group should submit report to the Committee for a final review. If the Committee thinks that the transaction damages national security, they should make a decision to prohibit the M&A transaction. Conversely, if the Committee thinks that deal will not harm national security, or foreign investors change the investment programme or make a certain commitment in accordance with the requirements of the Committee, they should make a decision to approve the M&A transaction.
§6.2.5 Review Standard
Review standard is core of national security review system for cross-border M&A. It will directly determine the value of the national security review system. It is the U.S. who directly uses national security. Although the use of national security is not the result of rational design from the legislative history of the United States, but only a chance, however, in practice, compared with other concepts, this concept explained according to the interpretation of cases has more meaningfulness, because it may include economic security, cultural traditions, national defense industry and other review reasons. To make the extension of the national security concept much clearer, concepts such as vital interests, major security interests, public interest and stable management of economy can be used to describe national security.
In my opinion, according to China's national conditions, the following aspects should be considered when establish review standards of China:
1) Review standards should be balance of restriction and loose. It is impossible express all of national security’s external performance through a clear standard; therefore, standards should not be set according to some special situation, but according to a list of several standards from qualitative points of view. Second, the country security review often has political or security considerations, accordingly, the state must have enough discretionary power. Therefore, the review standards should be developed in principle. But on the other hand, it should not be too strict; otherwise it will affect the applicability of laws and regulations. It would also be restricted appropriately and clearly, achieving a good balance.
2) Review standards must be consistent with the development of China's economic situation. They cannot be blindly referred to standards of other countries, especially the developed countries. Standards should reflect the special requirements of economy of China, in particular should reflect China's protection of infant industries and the need to promote industrial advantage of China.
3) There should be a high degree of vigilance on M&A of China’s domestic enterprises and sensitive industries by foreign investors with the background of government. Therefore, the review standards should make special provision to this problem, that is to say, all those mergers and acquisitions by entities which are controlled by foreign government or represent foreign government should be reviewed.
§6.3 Investment Liberalization Should Continue to be Encouraged
As deepened development of economic globalization and tend of integration of international market, the requirement of establishing global market system and breaking through market obstacle between different states and nations becomes increasing. Under this background, legislation in international economic area, in international trade, finance and investment etc, has been developing swiftly, and liberalization plays as the main rhythm. Since 1980s, general tendency of international investment law has been to reduce restriction to foreign investment to facilitate development of FDI.
Major idea of investment liberalization is to eliminate discriminatory foreign investment policy, restrict and eliminate market tort behavior and clean off all kinds of obstacles for transnational free circulation of international investment. In effect of economic globalization, international investment law will surely go forward following the road of identicalness and liberalization and powers of legislation and administration of host countries will be diminished, which will play a significant role in development of international investment .
§6.3.1 Correct Positioning of National Security Review System
Restricting cross-border M&A in reason of protecting national interests and national security can effectively make up for the shortness of other defense means. But national security is the highest national interest, involving the country's external relations, such as: too frequent use of this means maybe result in that of foreign investors lack of confidence to the investment environment of host country, thus affecting its national economy; diplomatic relations between countries may be influenced by using the means; the country's international obligations will also likely to be affected. Therefore, there are limited opportunities to use this tool.
Preventing cross-border M&A with weapon of national security is like intercontinental ballistic missiles and nuclear warheads: powerful, flourishing in a crucial time and essential for the country, but there are not many opportunities to use, so it is a strategic weapon. Therefore, national security review of cross-border M&A can only be targeted as the strategic balance means of defense and can only be defined as the lowest priority of the balance defensive measures (legislation of the United States clearly pointed out this location).
§6.3.2 Essential Principles to Avoid Investment Protectionism
To protect national security of host countries and at the same time eliminate the negative influence to investment liberalization, some principles should be followed. In this part, principles of National Treatment, Legal Proportionality, Transparency and Reciprocity will be discussed.
§6.3.2.1 Principle of National Treatment
National Treatment means host country gives foreign citizens and enterprises within its border the same civil rights as its nationals239. Principle of National Treatment is a complementarity for principle of Most Favored Nation (MFN). As a principle for anti-discrimination, National Treatment has been put forward for a long time and it is an objective which international community and investors are trying hard to achieve.
However, requirement of National Treatment in developing countries is just a target of foreign investment legislation240. Because level of economic development of developing countries lags behind developed countries, subsequently, national economic administration capability and competitiveness of internal investors cannot be compared to that of developed countries241. Cross-border M&A brings relatively more serious direct influence to developing countries, which cannot endure impact on national economy from investors of developed countries. When principal part of national market of developing countries is in worse status, according to competition rules, they will be washed out fast from market and market monopoly will be formed by foreign investors. To provide an equal environment to both domestic and foreign investors, developing countries may have more restrictions on market access242. In other words, if foreign and domestic capitals enjoy the same treatment, in fact, it is not fair for domestic investors. But as increasing of domestic competitive power, protection on domestic investment of developing countries should be reduced gradually, until National Treatment is put into practice.
Since “Reform and Opening”, China has been adopting a combination policy of encouraging and restricting foreign investment, forming a phenomenon of coexistence of Super-National Treatment and Low-National Treatment243. Enterprises of foreign investment enjoy a great deal of Super-National Treatment. For example, tax rate of domestic enterprises is 33%, equal to that of foreign investors on the surface, but according to Tax Law of Undertakings of Foreign Investors and Foreign Enterprise, tax rate of Foreign Invested Undertakings may be reduced to 24% or 15% according to difference of establishment area, company features and affiliated industries. Foreign invested undertakings are provided with much more self-operate administration power than domestic enterprises244. In this way, it can be considered as a kind of discrimination to domestic investors.
Principle of National Treatment is just to restrict host countries to bestow discrimination treatment to foreign investment, not to endow them with absolutely the same treatment. In practice, it does not exclude host countries giving favorable treatment to foreign investment and it allows host countries to adopt some restrictions at some respects in special situation.
§6.3.2.2 Principle of Legal Proportionality
The principle of proportionality is a political maxim which states that no layer of government should take any action that exceeds that which is necessary to achieve the objective of government (Regardless of intent of objective)245. It was initially developed in the German legal system. It is a fundamental principle of European Union law. According to this principle, the EU may only act to exactly the extent that is needed to achieve its objectives, and no further. This principle has underpinned the European Communities since their inception in 1957. In the presently applicable primary law, the principle of proportionality is clearly formulated in the third paragraph of Article 5 of the Treaty establishing the European Community as follows: Any action by the Community shall not go beyond what is necessary to achieve the objectives of this Treaty.
This principle has also practical value in investment law to balance different rights. In review legal system of industrial security of the U.S. and Canada, principle of Proportionality is used for establishing the negotiation mechanism between supervision party and transaction parties. The CFIUS, as the main body of review, negotiates with transaction parties in the process of review and requires them to make the pledge. This mechanism is seldom in M&A review system all over the world, but it is very effective from angle of economics.
The principle of proportionality has been applied in the case of Tecmed v. Mexico,246 an arbitration conducted under the auspices of the International Center for Settlement of Investment Disputes.
Analysis indicates that its application will be expanded further. The principle of proportionality demands more than the non-discrimination treatment principle and is even regarded as an important principle included in the fair and equitable treatment principle.
While most of new bilateral investment treaties that China has entered into include the fair and equitable treatment principle, the right of examination case by case has been gradually abandoned by China as the host country on the whole and international law is receiving more and more applications, the initiatory application of the principle of proportionality in arbitrations concerning international investment and expropriation should arouse attention.
§6.3.2.3 Principle of Transparency
“Without exception, a country's lack of transparency is associated with lower exposure of emerging market funds.” Whenever economic performance falters in emerging markets, analysts are frequently heard lamenting what they call a “lack of transparency.” What they mean is that some countries-and the corporations that operate there-may contribute to their woes by failing to fully disclose information about financial and economic conditions while also being less than clear about the laws and regulations that govern their markets. For example, governments might be viewed as withholding information on (or being vague about) debt levels, fiscal policies, and regulatory requirements247.
In Transparency and International Investment Behavior, coauthors R. Gaston Gelos and Shang-Jin Wei find that, at least when it comes to attracting much needed foreign capital, a lack of transparency indeed may affect economic performance by repelling international investors248. “There is relatively clear evidence,” they state, “that low transparency...tends to depress the level of international investment.”249 Transparent economic policies are vital for foreign investors, and the reasons are several.
The first reason is that non-transparency imposes additional costs on businesses. These additional costs arise as firms have to tackle the lack of information that should have been provided by the appropriate government department in the implementation of its policies and in the activities of government institutions. For example, firms bidding for a state asset expect to receive full information from the government about the company to be privatized. Any set of information that falls short of the expectation of the bidders will have to be supplemented – at extra costs, and the latter are typically incurred by the bidders. Additional costs are also incurred because of corruption-another element of non-transparency identified above. In many countries, bribery is illegal.250
The second reason why transparent economic policies are important for FDI is because they facilitate cross-border mergers and acquisitions. When firms decide to acquire companies abroad, they will often have to have their acquisitions approved by the Monopoly Commission or its equivalent in the host (i.e. foreign investment receiving) country. However, the practices of this competition commission often vary from country to country and from region to region. For example, Neven, Papandroupulos and Seabright argue in their study of the European competition policy that the Competition Commission of the European Union enjoys high level of discretion with very little transparency251. It is perhaps, therefore, not surprising that we have so far witnessed little of cross-border mergers and acquisitions within the European Union.
The third reason is closely related to the competition policies. Foreign investors require transparent protection of property rights. Investors generally require that their property be protected and that the protection be transparent. What holds for investors in general holds, of course, it holds for foreign investors in particular. This conclusion is intuitive but it also has a strong backing from business attitude surveys and from empirical literature.
After entrance into the WTO, China has introduced principle of Transparency. In the past, there were a lot of “Internal stipulates”, which were open and transparent to state-owned enterprises but keep non-transparency to foreign invested ones. What ironical to fair play in international market is that under condition of market economy, there are both laws and internal stipulates regulation investment market. Presently, State Council of China has cleaned up over 2,100 documents, abolished more than 850 and amended 300 of them. Internal stipulates have been left in history, which has significant meaningfulness.
§6.3.2.4 Principle of Reciprocity
What exactly is this principle that is so critical to our eternal well-being? Our word “reciprocity” comes from the Latin word “reciprocus,” which simply means “a returning.”252 It refers to something done or given in return; “corresponding, but reversed.” In other words, it is the universal belief that what you give will eventually come back to you in similar fashion or form253. Thus, the Principle of Reciprocity can be stated simply as: “You get what you give.”
A corollary of the fire sale argument concerns the potential for unfair competition based on a lack of reciprocal access to firms in the investing country254. Firms which are invulnerable to foreign takeover might enjoy a competitive advantage over local firms, an argument reminiscent of strategic trade theory. This lack of reciprocity might stem from corporate practices which inhibit foreign takeovers in that market, from the fact that the investor is a state-owned entity at home or, as in the case of Volkswagen in Germany, from a legal limit on foreign shareholding of a strategic national company.
Thus, as with trade policy where market access is often conditional on reciprocal access abroad, policy makers might be tempted to restrict foreign takeovers in the case of a lack of reciprocity255. Although strategic trade theory might provide a theoretical underpinning to the reciprocity argument based on unfair oligopolistic competition, none of the benefits from FDI listed earlier depend on the notion of reciprocal access. A host country can benefit from inward FDI even if it has no outward investment by local firms.
In the past few years, China’s overseas M&A has been encountered great trouble, such as the failure of WuKuang Group’s merger to Noranda of Canada in 2004, Haier’s abandonment of acquisition of Maytag on July 20 of 2005, CNOOC’s frustrate merger failure to Unocal because political interfere from the U.S. government, and the lucky Lenovo’s merger to IBM’s PC operation after a rough road. Accordingly, some scholars exclaimed that international investment environment was changing to be deteriorated when China began investing outside. Actually, many countries and regions have established review mechanism of foreign investment, which are not discrimination aiming at China’s enterprises. What China lacks is to establish the principle of reciprocity, in order to avoid unnecessary conflicts concerning jurisdiction.

Chapter VII: Conclusion and expectation
The thesis began with controversy of threat caused by cross-border M&A to national security, introduced development of cross-border M&A in recent years, analyzed advantages and disadvantages of cross-border M&A, discussed regulatory system of China by studying typical cases that influenced national security, compared different measures to balance national security protection and cross-border facilitation, analyzed national security review systems the U.S., Canada, Japan and other countries, summarized development of legal system regulation cross-border M&A in China and assessed the national security review system of China. Accordingly, conclusion of this thesis can be summarized as follows:
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§7.1 Make a Rational Evaluation for Implications of Cross-border M&A to National Security
In recent years, FDI has been increasing result from rapid development of transportation and information, prosperity of transnational transactions and reduction of restriction to foreign investors. Cross-border M&A is a big part of the corporate finance world, which supports the current rise in global FDI. After the entrance of China into the WTO, as economy of China continues involving into world economy, M&A has become the most important way of FDI in China. With expansion of power of foreign investment, in a number of countries, concerns about international investment and, in particular, foreign takeovers of national enterprises are on the rise. Governments have reassessed their priorities in response to a changing international environment for national security. In addition, several countries have tightened their regulation and administrative practices in recent years. New restrictions on foreign ownership or measures, which were the most common in extractive industries and in industries deemed to be of “strategic” importance, to secure a greater government share in revenues were observed in some countries.
National security was just a concept related with politics and military. However, with international economy development, national security expanded to comprehensive security including economy, polity, military affairs, culture, science and technology, information, which are so-called non-traditional security, of which economic security turns into the most significant concerning. In present economic globalization, national economic security means that essential economic interest would not be encountered suddenly fateful damage. National economic security can be understood as composition of two aspects, security of holistic operation of national economy, and that every department of national economy keeps favorable circulation. Concretely speaking, national economic security contains financial market security, domestic industrial security, trade security, security of economic information network, energy security, and environment security.
Cross-border M&A facilitates world economy going on to inosculate, enhance economic globalization, enlarge area for enterprises’ activities and reduce concentration of market, but also may bring negative influence to national security of host countries.
Positive influence to national security of China by cross-border M&A includes that
1) Cross-border M&A will impulse optimization and upgrade of China’s industrial structure and advance industrial security of China;
2) Cross-border M&A will enhance technical improvement, which will bring benefit to technical security of China;
3) cross-border M&A may also have a positive influence on human capital enhancement;
4) Enhance competition; and
5) Influence on state-owned enterprises which are most important part of National Economy.
Perceived risks to national security from cross-border M&A are as follows:
1) Influence on National strategic Industrial Security. National and regional governmental bodies are faced with big firms getting into deep crises. Sometimes, the endangered firms are so big that the existence of an entire industry is under threat;
2) Influence on national financial security: Capital out-flow results in trade deficit, and Financial risk and crisis may be induced;
3) Cross-border M&A maybe result in dependency to technology of foreign enterprises, which will compose threat to technical security of China.
4) Cross-border M&A supplant national economy and result in erosion of state-owned assets;
5) Potential threaten free competition in host country. Cross-border M&A plays a diplex role: motivate of economic development and imperil to free market. Foreign investors may get monopoly status and threat national security.
In this way, we should take a rational view on effects which cross-border M&A will bring to national security. Cross-border M&A is not purely meaning benefit, but at the same time, it should also not be conferred on a name of risk. It is a sword with two sides, or we can say it is just a kind of tool with which a country can make benefits and can be also taken advantage.
§7.2 Take reasonable Measures to Avoid National Security Risk Caused by Cross-border M&A
In development of China's market economy, foreign investments play an indispensable role. Unconsciously, foreign investment has penetrated into every corner of China's economy and all levels. China's economy is injected into the blood of adequate capital by foreign investment and led to be better integrated into the world economy tide. Introduction of foreign capital into China's is one of the important results of Opening Up. When China enjoys all the advantages, "strong" position of foreign investments in China's also triggered the concerns that the initiative of Opening Up may gradually be lost.
According to analysis of the above paragraph, the reasonable views on cross-border M&A should not be too indulgent and also not consider it as flood and beast. Protection of the strategic industry should not be generalized, and it needs not lightly raise some cases up to the national strategic level. At the same time, the protection should also have a "degree" and strategies and methods should be emphasized, in particular, e efficiency of economic development should not be damaged in name of protection. In general, we should insist on principles of autonomy, mutual benefit, keep a positive attitude to cross-border M&A, in order to create an economic and social environment with equal competition, and efficient development to domestic and foreign enterprises.
In this article, some balance and defense means, which are used in high-frequency, most common in different countries, known as the conventional means of defense are discussed. Concretely speaking, these means are industrial policy, competition legal system and direct restriction of foreign investment.
Industrial policy, in form of law or administrative regulation, decision, prohibits or restricts foreign investor entering some special industries. However, as effect of industrial policy will become weak because the process of investment liberalization is to reduce industries or areas restricting or prohibiting foreign investors to enter, and that it lacks flexibility defensive means and its scope of application is limited, industrial policies are not enough to protect national security. Competition law is concerned only with competition in the market of the host country, protecting one aspect of "public interest" of the state, not other content of the national interests. So it is also not enough to play a good role in balancing conflicts between national security protection and absorption of foreign investment. Direct restriction of foreign investment also lacks of flexibility, and not all "foreign control" would lead to the issue of national security, restrictions on all "foreign control", will also limit the effectiveness cross-border M&A bringing to the host country’s economy.
Compared with the above conventional means, national security review system is the most favorable one.
§7.3 Objectives, Legality, Reasonability and Necessity of National Security Review
Objectives of national security review are: 1) to protect national interest from influenced by external elements and facilitate stable development of national economy by prohibiting or restricting control power of foreign investors in special areas. Core contents of national security review are control power of operation of macro-economy and economic organizations, universal control of national sovereignty, control on national economy and control in special industries and areas; 2) to balance foreign investment absorption and restriction. By means of review, host country makes a value evaluation to access of foreign investment about whether it will influence essential interest of national development. National security review itself provides legal relief, taking restrictive measures to prevent access of foreign investment. What’s more, the evaluation is predictable, so it takes effect of model and powerfully adjusts degree and area of foreign investment access.
National security review is a concrete manifestation of national sovereignty. Foreign investment limitation of the host country is legitimate acts in line with the principle of national territorial sovereignty. Sovereign state has an absolute right to control or prohibit foreign investment entering the country or territory or establishing a permanent Business Presence based on national principles of territorial jurisdiction. States have common recognition that the host country can independently decide whether and in what conditions to allow foreign investment to enter the country. At the same time, national security review is also the fundamental right recognized in agreements between countries and international organizations.
In the process of economic globalization, with increasingly close economic relations, national sovereignty is facing a great challenge. In order to safeguard national sovereignty and economic interests and promote foreign investment to be in line with objective requirement of the country's economic development objectives, almost all the host countries establish appropriate and reasonable restrictions on the activities of foreign investors when actively introducing foreign capital, in accordance with investment law. Both developed and developing countries provide differential treatments to foreign investment in order to ensure that national economic interests, national security interests would not be harassed and threatened.
The inevitable result of cross-border M&A is direct reduction of competitors, increasing of market concentration, and coming of monopoly power, which could hinder other competitors entering the market, or even eliminate and restrict effective competition. The absolute size of great share of global market of most companies involved in M&A inevitably cause worries of the Governments about continuously enhanced international monopoly of these enterprises. To safeguard fair competition in the market order and social public interests, to achieve the effective allocation of social resources, and promote the competitiveness vitality and healthy development of enterprises, regulations on the cross-border M&A are necessary.
§7.4 Enhance and Complete National Security Review System of China
By comparing national security review systems of the U.S., Canada and Japan, reviewing historical development of China’s foreign investment legal system and analyzing situations of present national security review system of China, we can find out some essential problems in China’s legal system related with cross-border M&A and conclude that to complete the system of China, some important measures should be taken.
§7.4.1 Unreasonable Legal Framework and Institutional Obstacles
At present, there are many conflicts between different legal documents. National security review was set in Anti-monopoly Law of China which came into force in August 1, 2008, but there is only one article and no any other relevant legal provisions. Accordingly, it is considered that there is no specific foreign investment law or national security review law in China, so the M&A Regulations 2006 is considered as the fundamental legal document, which provides in details regulation about review to cross-border M&A. As we know, legal effectiveness of regulations in China is weaker than law, so the M&A Regulations 2006 is easy to meet conflicts with other regulations. Such as investigation power of Development and Reform Commission regulated in Interim Approach of Approval and Management for Foreign Investment Projects and Investigation power of Ministry of Commerce regulated in M&A Regulations 2006 have conflicts. There are also conflicts between Law of the Three Foreign Investment Related Enterprises and the State Council's Decision on Investment System Reform and conflicts among Management Approach of Strategic Investment in Listed Companies by Foreign Investors, M&A Regulation 2006 and Interim Approach of Approval and Management for Foreign Investment Projects. The unreasonable legal framework makes it difficult to find appropriately applicable law or regulation to follow.
Institutional obstacles reflect on the unreasonable distribution of enforcement and administrative powers. Concretely speaking, power allocation among different administrative departments is not reasonable. The power to review is unreasonably divided into a number of units under existing provisions, leading to expansion of departmental interests, which is outstandingly reflected between the Ministry of Commerce and the State Development and Reform Commission. There is no restrictive power allocated to review bodies.
China adopts the general administrative examination and approval system to access of foreign investment. From the perspective of foreign investors, the existing foreign investment approval procedures are relatively cumbersome and complex, which negates the role of potential investors, having a negative impact upon attract foreign capital. From the perspective of the market operation process, intervention in the market from the executive powers can be divided into three components: the pre-intervention, the process intervention and results intervention. China emphasizes pre-intervention on foreign access, but law regulation is relatively weak in the operational phase of the foreign investment. What’s more, according to national organizations principle and the principle of executive power, constraint power against administrative power is necessary, such as the executive power to exercise oversight by the National People's Congress, or judicial review by the court to administrative decisions. It is known that most countries have restricted the power intervening review process, such as the supervision of the United States Congress, the court review of Canada and administrative court of France. There is not any trace of intervention of constraint power in China's existing provisions.
§7.4.2 Important Principles to be Followed
Theoretical basis is the core problem of construction of national economic security review system. Principle of Economic Sovereignty, Economic Development and State moderate intervention should be considered to solve the problem of how to build theoretical foundation of national security review system of China. The national security review system reflects the country's economic sovereignty, which has the irrefutable basis of international law and is not subject to any external interference, pressure and threats. Establishment of the principle of national economic sovereignty is the fundamental principle and guideline in the course of the construction of China's national economic security review. Principle of Economic development means that the State is obliged to provide basic security to economic development, because the State is a tool established to achieve certain objectives in obtaining common interests, pursuing Interests of every country. The establishment of national security review system of cross-border M&A must be based on protection of domestic industries, and promoting national economic development. Self-regulating market was born with the risk and blindness which cannot be eliminated, so that it is necessary to correct the market deviation by means of forces of the State. The state interventions here are appropriate and indirect interventions conducted on basis of law. National security review system for cross-border M&A reflects the appropriate intervention of a country in the economy, achieving the intervention of the economic operation through specific interventions into cross-border M&A at the micro-level deal, protecting national security from threatened.
§7.4.3 Improvement of Foreign Investment Legal Framework
To improve legal framework of foreign investment law related with regulation of cross-border M&A, considering overall situation of foreign investment law, China needs to clean up international investment law, abolishing the three foreign capital related enterprises laws in order to establish a national security review system. Establishment of a unified International direct investment law is also needed to deal with new situations and new circumstances to further promote China's economic internationalization and modernization. The law should include contents of national security review, to regulate safety issues in area of the state's fundamental economic interests, including the adjustment of cross-border M&A in areas of the economic characteristics, the area of strategic resources, basic industries and manufacturing fields, hi-tech field, the field of finance, international economic and trade fields, and the ecological environment. Formulating a unified foreign investment law, or at least the establishing cross-border M&A's national security review system involves a wide range, therefore, attention must be paid to relation between it and other laws and regulations, such as Company Law, the anti-monopoly law, and even then the coordination of international treaties. In addition, this legislation may also involve bilateral investment protection agreements or other international treaties, which should be considered in the legislation.
§7.4.4 Institutional Adjustment: Establishing a Permanent National Security Review Body
An effective and reasonable institutional framework is essential important to make laws and regulations appropriately exert their function. At present, it is necessary to establish the inter-ministerial joint work mechanism or even follow the example of the United States to set up an institution formed by different Ministers. Convener of this body should be the Ministry of Commerce, but institutional reforms should first be conducted to give broader powers to the Ministry of Commerce.
Some clarification was provided by the recent statement of its work plans issued by the NDRC on August 21, 2008. In Section 5(4) of this document under Other Duties, the NDRC states:
The NDRC and the Ministry of Commerce (MOFCOM) will jointly establish an inter-agency committee to examine the national security issues arising from merger or acquisition of domestic enterprises by foreign investors. MOFCOM will have primary responsibility for processing and responding to applications from foreign investors for merger or acquisition of domestic enterprises. Where such applications raise national security concerns, such issues will be considered by the interagency review committee; for projects that concern new investment in infrastructure, such matters will be dealt with in accordance with the relevant national regulations on infrastructure investment; where there are major national security concerns, these matters will be considered by a ministry level interagency committee.
The work plan gives us a positive signal to form an interagency committee to review the national security impacts of foreign acquisitions of Chinese companies. But there is still much work to do. The final solution is to establish a permanent national security review body; once cross-border M&A endangers national security or is possible to endanger, the review body should be initiated and take review measures in accordance with their own responsibilities.
§7.4.5 Clarify Review Procedures and Review Standard
According to comparison of review procedures in the U.S., Canada and Japan, we conclude that a set of completed procedures determined high quality of the national security review system. On basis of condition of China, such procedures can be composed of the following procedures:
Notification and Notice==> preliminary review==> Investigation==> decision making.
Notification requires M&A transaction parties to take the initiative to notify to the review bodies and Notice requires the review bodies initiatively notice the transaction parties to notify. China can start at the same time the two ways: the transaction parties can notify to the foreign investment joint review Committee of cross-border M&A which possibly harms national security; member agencies of the foreign investment joint review Committee can also release review notice to the mergering party through the Committee. Preliminary review procedure requires review bodies to send all the materials to member agencies that will propose preliminary views according to the review standards on basis of a comprehensive analysis and evaluation, and then aggregated opinions to Secretariat of review bodies. Investigation should be carried out by the special investigation group appointed by the Committee, who will start the survey according to the review standards. After the investigation, the special investigation group should submit report to the Committee for a final review. They should make a decision whether to approve or deny the M&A transaction.
Review standard directly determines the value of the national security review system. The core and most difficult point is how to define the concept of national security. Even though according to analysis above, we got that national security is not confined in political and military areas any more, but it is not enough. The concept is so vague that different countries have different explanation. If defining national security too broadly, national security review will be criticized by international organizations and other countries and the focus of the review is not conspicuous. Content of national security should reflect major issues. If the definition of national security is too narrow, the scope of protection of national security will be too smaller, which will not be conducive to the protection of national security.
China is on the road of Reform and Development, so objectively speaking, there are potential dangers national economic development, politics, military, information security, and other aspects of national security. Principles that should be followed when establishing the concept of national security are as follows: First, understanding national security from the broad way; Second, at the present stage, review of cross-border M&A should focus on national economic security; and the third is that outstanding issues of China's current national security should be taken fully into account and national security situation in the future period should be scientifically forecasted.
§7.5 Prevent Investment Protectionism under the Background of Trade and Investment Liberalization
After World War II, under push of economic globalization, liberalization of international investment legislation has been an unreversable tide, which exerts an effect to economy, society, culture and law of every country. It developed at level of national legislation and international legislation. At international level, liberalization tendency of investment legal legislation is composed of BITs and MITs. Most of the world embraced open investment policies, producing investment flows that grew at nearly twice the pace of global trade.
A restriction tide in international community led by some important has developed countries since two decade years ago. The United States is one of the countries which attract a great deal of foreign investment for many years and grants most foreign investors National Treatment. However, since 1980s, the US began to emphasize the protection of national security from damaged by foreign investors. It passed the Exon-Florio provision and established the CFIUS to seek to serve U.S. investment policy through thorough reviews that protect national security; in respect of industrial policies, it requires foreign takeovers to accept double scrutiny; and concerning antitrust law, it established a completed application and examination system. The FINSA specified standards and elements of examination, definitely requiring national security examination to M&A of important fundamental establishment and M&A from foreign state-owned enterprises, which brought a signal to the world that the US would change a great deal its traditional open policy of foreign investment. In the US, a completed antitrust legal system restricts cross-border M&A was established. One of the special features is that it has abroad effectiveness. Anti-monopoly control to cross-border M&A is related jurisdiction, substantive law and procedural law. Jurisdiction is usually embodied in mass of judgments of courts; substantive law contains mainly the Clayton Antitrust Act, which will influence possibility of transaction and the range of capital peel-off or other remedy measures for completing M&A transaction; procedural law is composed of Hart-Scott-Rodino Antitrust Improvements Act of 1976 ( “HSR”) and relevant detailed rules, which will influence time of examination and the possibility of executive department to investigate and propose objection.
The EU established special institutions to supervise M&A between enterprises, taking in charge of scrutiny to industrial damage and economic security caused by M&A. Germany government is drafting new bill to strictly examine M&A by foreign investment entities controlled by foreign government. Japan controls M&A by foreign investors most strictly. Cross-border M&A should be regulated by relevant domestic law like Anti-monopoly Law and other foreign investment regulations, and Industrial Association has great power, which can represent its members to negotiate with government and goods suppliers. Canada attached importance to and depended upon development of foreign investment after its establishment. Because of influence from trade and economy, its policy and legislation of foreign investment experienced total openness to gradual restriction. Investment restriction regulations were taken by most countries. In terms of anti-monopoly legal systems, western developed countries have accumulated abundant of experience. In respects of control standard, relevant market for recognizing enterprise M&A of monopoly and concentration degree, procedural review system and enforcement institution, all countries tend to be coincident.
Widespread pockets of anti-globalization sentiment, furthered by alleged national security concerns and a perceived need to protect “strategic” sectors have led to a resurgence of protectionism. Even in countries that have long promoted and benefited from global markets, politically-motivated barriers are being resurrected. These winds have temporarily chilled economic progress. Emerging protectionism in the area of cross-border M&A has the potential to limit the smooth functioning of globalization and the benefits it can bring to countries and their people. Protectionist policy thinking and action can slow down international investment and through this seriously harm our economies.
Investment protectionism should be opposed by international community. As a developing country, China has developed fast since adopting policy of “Reform and Opening”. Development of China is benefited from Investment liberalization. Investment legal system of China is to facilitate foreign investors investing into market of China.
However, as a balance measure to the negative impact of foreign investment, national security review to cross-border M&A is established by host countries in the face of strong pressure from foreign investors. The system is linked to protectionism and criticized because of political and strategic features of this system. These criticisms have a reasonable component, but it should not be forgotten that conservatism and liberalism get benefits because of the presence of each other. In the world where the nation-states are still the world's largest interest distribution bodies, every country has the certain right to protect their own national interests. What the world need is a kind of balance, so that only a legal system with balance function can be called a good system.
§7.6 Seek Settlement in Bilateral, Multilateral and International Approaches under Economic Globalization
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Under economic globalization, it is difficult to solve conflicts economic entities of different countries just by national legislation. In terms of International adjustment of investment law, on one side, BITs have become the main sources of international investment law in place of　the arguable customary international law, and it is necessary to comment on the fundamental changes from the form to the content. On the other side, complement of international investment legal system will be significantly dependent on whether international community can find a multilateral legislation venue.
Since the end of the World War II, international community has not stopped establishing a global comprehensive multilateral investment system. OECD and WTO have attempted to establish multilateral investment regulations but both achieved dissatisfactory results. Compared with OECD and World Bank, WTO has obvious priority in international harmonization in area of international investment. WTO was endowed with legal personality at the beginning, and it owns separate effective dispute settlement system, getting rid of diplomatic measures and focusing on legal measures. To establish a multilateral investment system under framework of the WTO, the following principles should not be overviewed: interests of developed and developing countries should be given the same attention; balance economic sovereignty of host countries and interest of investors; and seek common development by international cooperation.
As the biggest capital import country and important new member of the WTO, China should positively participate in the design of global resolution of international investment system and international harmonization of anti-monopoly law.
General speaking, China is still a developing country, which decides that in many respects it is coherent with collective economic interest of developing countries. However, China is also a country in process of transition and a country of market economy, so it has special interest. In multilateral investment negotiations, China should take a pragmatic attitude, on basis of maintaining common interest of developing countries, seeking maximum of its national interest and playing a role of bridge between South and North. Simultaneously, China should actively join negotiations related with policy making and exert its importance to influence conclusion of investment law making, advancing development of international multilateral investment system.
China should include such cross-border M&A in the scope of regulation by means of effectiveness of extraterritorial application of merger control rules. It is an inevitable requirement of an effective regulatory system for cross-border M&A and an important means to maintain China’s economic interest in the absence of cross-border M&A anti-monopoly regulation of international coordination mechanism.
China should actively participate in international coordination of cross-border M&A. This participation should be achieved by the followings: 1. Actively carry out bilateral dialogue and cooperation, especially between the United States and Europe, and to strive to reach some agreements on bilateral cooperation; 2. Pay close attention to exchanges and cooperation of the international community at multilateral level, and actively participate in the multilateral coordination to promote multilateral cooperation achieving constructive results.

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58. Qi Tong, “Principle of Positive Comity in Anti-monopoly International Cooperation”, Journal of The East China University of Politics and Law, No.5, 2005, pp.60-66.
59. Randall Schuler & Susan Jackson, “HR Issues and Activities in M&A”, European Management Journal, Vo1.19, No.3, 2001, pp.35
60. Rohatyn, Felix, "America's Economic Dependence", Foreign Affairs, Vol.68, No. 1, 1989, pp. 53-65.
61. Salacuse, J. W. & Sullivan, N.P., “Do BITs Really Work? An evaluation of Bilateral Investment Treaties and their Grand Bargain”, Harvard International Law Journal, Vol.46, 2005, pp.67.
62. Shao Chunli & Xie Bing, “Ensure Environmental Safety and Construct the Harmonious Society”, Jiangsu Environmental Science and Technology, No.11, 2007, pp.23
63. Shen Yiping, “Anti-monopoly Regulating to Cross-border M&A”, Journal of Hang Zhou Business College, No.6, 2002, pp.36 [沈益平:外資並購的反壟斷規制, 杭州商學院學報2002年第6期, pp.36].
64. Shi Zhongliang, “National Economic Security must be Ensured in Participating Economic Globalization”, Economic Survey, No.1, 2002, p22-24.
65. Si Xiaobin & Liu Jie, “R&D of Transnational Corporation: Research on China’s Policy in Globalization”, Industrial Technology & Economy, No.12, 2007, pp.127-130.
66. Song Yajie & Mai Fu, “Host Developing Countries' Competition on Employing FDI Policy & Its Lessons for China”, Journal of Shiyan Technical Institute, 2004, Vol.17, No.3, pp.28-30
67. Sun Jiewan, “National Security: Cognition and Explanation”, World Economics and Politics, No.4, 2008, pp.60-65.
68. Sun Qing & Xu Yuanyuan, “Investigating Influence of FDI on International Income and Expense of China”, Qinghai Finance, No.11, 2004, pp.28-29 [孫慶, 徐園園:從投資收益持續逆差看外商直接投資對我國國際收支的影響, 青海金融, 2004(11)第28-29頁].
69. Sun Shukun, “Environment Security is the Fundament of National Security and Decelopment”, Environment, No.2, 2003, pp.33 [孫淑坤, 環境安全是國家安全與發展的基礎, 環境, 2003年 02期, pp.33].
70. Tan Anping, “How State-owned Enterprises Complete Corporate Governance Structure”, Enterprise Economy, No.5, 2005, pp.24.
71. Tang Changli & Meng Haili, “Holistic Reflection on Economic Reform in China”, Theory Journal, No.6, 2007, pp.36-41
72. Tang Xiaobo & Hu Chen, “Research on Protection Strategy of National Information Security”, Science and Technology Development, No.6, 2004, pp.124 [唐曉波, 胡琛, 國家資訊安全保障戰略研究, 科技進步與對策, 2004 (06), pp.124].
73. Tao Jian, “How Does the US Deal with Issue of National Economic Security?” International Economy, No.1, 2001, pp.21-23 [陶堅, 美國怎樣看待和處理國家經濟安全問題, 世界經濟, 2002(1)]
74. Tian Zuhai & Mao Chuanyang, “Foreign Investors' Merging and Acquisition, Asymmetric Government Regulation and Market Competition”, China Soft Science, No.2, 2005, p44-46
75. Tong Zhijun, “Utilization of Foreign Investment and National Industrial Security”, Chinese Soft Science, No.2, 1997, pp.13 [童志軍,利用外資和國家產業安全, 中國軟科學, 1997年第2期, pp.13]
76. Wang Haoyong & Kong Xian, “Influence on Industrial Security of FDI”, Enterprise Economy, No.1, 2003, pp.35-36 [汪浩泳, 孔嫻:外商直接投資對中國產業安全的影響, 企業經濟, 2003(l)第35-36頁].
77. Wang Hongli, “Research on Enterprise M&A and Adjustment of Industrial Structure”, Tax and Economy, No.4, 2004, pp.39 [王宏利:企業並購與產業結構調整研究, 稅務與經濟, 2004年第4期, pp.39].
78. Wang Jing & Cai Yongmin, “Influence of Cross-border M&a to Industrial Security of China and Countermeasure Investigation”, Jianghai Academic Journal, No.6, 2007, pp.217-220
79. Wang Qun, “Making Anti-monopoly Law of China Following Requirement of the WTO”, World Trade Organization Focus, No.11, 2004, pp.8-12
80. Wang Xiaoye, “Comment On Operator's Concentration In The Antimonopoly Law Of People's Republic Of China”, Law Science Magazine, No.1, 2008, pp.6-11
81. Wang Xiaoye, “Challenge to Antitrust Law from Giant Multinational M&A”, Law Research, No.5, 1999, pp.37 [王曉嘩, 巨型跨國合併對反壟斷法的挑戰, 法學研究, 1999 ( 5 ), pp.37].
82. Wang Xiaoye, “Issues Surrounding the Drafting of China's Anti-monopoly Law”, Wash. University. Global student. Law Review. No.285, 2004, pp. 112.
83. Wang Xiaoye, “the Prospect of Anti-Monopoly Legislation in China”, WASH. University. Global Stud. L. Rev. Vol.225, 2002, pp. 225-226.
84. Wang Yanzhi, “Changes of International Investment Law and Strategy Option”, Legal System and Social Development, No.2, 1999, pp.34 [王彥志, 國際投資的法律變遷與我國的因應之策, 法制與社會發展, 1999(2), pp.34].
85. Wang Yuanjing, “Investment and Merge in Key Industries by Foreign Capital: Effects on Industry Security”, Economic Theory and Business Management, No.4, 2007, pp.5-12

86. Wang Zhonghua & Gu Zheng, “Construction of Coordinating System of International Anti-monopoly”, Research On Financial and Economic Issues, No.8, 2004, pp.95-98.

87. Wang Zhongmei, “Antitrust Controls on Transnational Mergers in China”, World Economy Study, No.8, 2007, pp.11-16

88. Wei Hao & Ma Yeqing, “Influence of FDI to National Economic Security of China”, Journal of Central Financial university, No.3, 2005, pp.34 [魏浩, 馬野青, 外商直接投資對我國經濟安全的影響, 中央財經大學學報, 2005 (3),pp.34].

89. Wei Houkai, “Influence of FDI on Regional Economy of China”, Economy Research, No.4, 2002, pp.41[魏後凱, 外商直接投資對我國區域經濟增長的影響, 經濟研究, 2002(4), pp.41]

90. Wen Yaoqing & Chen Taifeng, “Foerign Investment and National Economic Security”, International Trade Issue, No.2, 2001, pp.35-37 [溫耀慶, 陳泰峰, 論引進外資與國家經濟安全, 國際貿易問題, 2001(2), p35-37].

91. Wu Fan, “National Treatment in the Field of International Investment”, Journal of Hebei Polytechnic University (Social Science Edition), No.3, 2007, pp.18-22

92. Wu Jian, “Regional Distributing and its Economic Increasing Effect of Foreign Direct Investment”, Economy Research, No.4, 2002, pp.8 [武劍, 外國直接投資的區域分佈及其經濟增長效應, 經濟研究, 2002(4), pp.8].

93. Wu Qingrong, “An Analysis on the Concept of State Safety in Law”, China Legal Science, No.4, 2006, pp.64-70

94. Wu Rong, “Transfer of Global Value Chain and Developmeng of FDI”, Money China, No.11, 2006, pp.107-108 [吳蓉, 全球價值鏈轉移與FDI的發展, 財經界(下半月), 2006年 11期, pp.107-108].

95. Wu Yumin, “Value Orientation Of China’s Anti-monopoly Law under WTO Background”, Journal of Xinjiang Finance & Economy Institute, No.4, 2004, pp.64-66

96. Xia Xingguo & Wang Ying, “National Trade Security under Economic Globalization”, Economic Review, No.6, 2001, pp.118-120 [夏興園, 王瑛, 論經濟全球化下的國家貿易安全, 經濟觀察, 2001年 06期, pp.118-120].

97. Xie Peihong, “Relationship between Industrial Security and Cooperation of Foreign Investment”, Modern Occupational Safety, No.2, 2008, pp.74-75

98. Xie Zunwu & Luo Zhigang, “On the International Cooperation Against Monopoly”, Journal of Changsha University of Science & Technology (Social Science), No.1, 2008, pp.72-75.

99. Xing Houyuan, “National Security and Cross-border M&A”, Foreign Investment in China, No.9, 2007, pp.52

100. Xiong Guangkai, “Energy Security and International Cooperation”, Green Leaf, No.5, 2007, pp.46-49

101. Xiong Wenzhao, “Anti-monopoly Law and Cross-border M&A”, Outlook Weekly, September 17, 2007, pp.12

102. Xu Chongli, “Multilateral Investment Agreements and Basic Strategic Analysis”, Legal Science, No.4, 2004, pp.120-122 [徐崇利, W TO多邊協定投資議題與中國的基本策略分析, 法律科學, 2004年第4期, 第120－122頁].

103. Xu Quan, “Access of Foreign Investment and Investment Liberalization”, Modern Law, No.2, Vol.25, 2003. pp.147-150 [徐泉, 略論外資准入與投資自由化, 現代法學, 2003(4), 第25卷第2期, pp.147-150].

104. Xu Shihui, “Research on Legal Protection System of Industrial Security in Cross-border M&A”, Inner Mongolia Social Sciences, No.2, 2007, pp.35

105. Yang Chunping & Liu Zeyuan, “Technology security: Important factor of national security”, Journal of Dalian University of Technology (Social Sciences), No.4, 2005, pp.35.

106. Yang Jun, “Analysis of External Legal Binding of Anti-monopoly Law”, International Law Review, No.4, 2003, pp.29 [楊軍, 反壟斷法域外適用機制之剖析, 國際法論壇, 2003 (4), pp.29].

107. Yang Lei & Pan Yue, “Abstracts of Some Papers in English Competitive Effects and Regulations of Cross-border M&A”, Finance & Trade Economics, No.12, 2003, pp.5-10.

108. Yin Xicheng, “Relationship between Technical Security and other Elements of National Security”, International Technical Economy Research, No.3, 1999, pp.28-34 [尹希成, 科技安全與國家安全其他要素的關係, 國際技術經濟研究, 1999, (3), pp.28-34].

109. Yu Jinsong, “Recent Development of International Investment Law”, Law Review, No.6, 1997, pp.1 [餘勁松, 論國際投資法的晚近發展, 法學評論, 1997, (6): 1].

110. Zeng Guoan & Lan Rongrong, “Developmeng Features of Antitrust Policies of the US”, Economic Management, No.21, 2006, pp.91-94 [曾國安, 蘭榮蓉, 美國反國際壟斷政策的演進特點及其啟示, 經濟管理, 2006年 21期 pp.91-94].

111. Zhan Xiaoning & Ge Shunqi, “Multilateral Investment Framework: Trendancy and Evaluation”, International Economic Cooperation, No.6, 2002, pp.4 [詹曉甯, 葛順奇, 多邊投資框架: 趨勢與評價, 國際經濟合作, 2002年第6期, 第4頁].

112. Zhan Xiaoning & Teng Weizao, “Entrance Model of Transnational Corporation in period of Finance Crisis of Southeast Asia”, Naikai Economic Research, No.4, 2001, pp.12 [東南亞金融危機期間跨國公司的進人模式, 南開經濟研究2001年第4期, pp.12].

113. Zhang Changyu & Shen Zhibin, “Absorption of Foreign Investment and National Economic Security”, Management Modernization, No.3, 1999, pp.33-37 [章昌裕, 沈志斌, 引進外資與國家經濟安全, 管理現代化, 1999(3), p33-37].

114. Zhang Jinsong, “Legal Control on International M&A”, International Trade Issues, No.1, 2001, pp.45 [張勁松, 試論對國際性並購的法律管制, 國際貿易問題, 2001(1), pp.45]

115. Zhang Li, “Analysis of Change of International Investment Law under the WTO”, Journal of Huaqiao University, No.4, 2001, pp.29 [張莉, WTO體制下國際投資法的嬗變之分析, 華僑大學學報:人文社會科學版, 2001(4), pp.29].

116. Zhang Mingming, “Theory of Non-traditional Security”, Journal of the Party School of the Central Committee of the C.P.C., Vol.9, No.4, 2005, pp.111-113

117. Zhang Qing, “Capital Structure, Protection of Investors and Corporation Governance of State-owned Enterprise”, Journal of International Trade, No.2, 2007, pp.107-111

118. Zhang Yuke & Ma Xiuwen, “Theoretical Basis of International Economic Policy Coordination”, Journal of He Bei University, No.1, 2001, pp.76 [張玉柯, 馬文秀, 論國際經濟政策協調的理論基礎, 河北大學學報, 2001, (1): 76]

119. Zhang Zhen & Yang Jianzheng, “Super National Treatment and Minus Effect of FDI”, China Reform, No.2, 2005, pp.20 [張震, 楊堅爭, 超國民待遇與外資負效應, 中國改革, 2005(2), pp.20].

120. Zhao Ming, “Take Caution to Monopoly by Foreign Investment”, Society Obererve, No.2, 2005, pp.45 [趙明, 警惕外資壟斷, 社會觀察, 2005 (2), pp.45].

121. Zheng Feilong & Pang Jin, “Global Operation of MNCs' R&D: Theory and Empirical Latest”, Journal of Jiangxi Institute of Education, No.2, 2008, pp.26-29.

122. Zhong Liguo, “New Development of International Law under background of Economic Globalization”, Judicial Science, No.7, 2003, pp.112 [鐘立國, 經濟全球化背景下國際投資法的新發展, 法學, 2003(7), pp.112].

123. Zhu Feng, “Tendency of Unification of Rules of the WTO and International Anti-monopoly and Strategic of China”, Business Economics and Administration, No.3, 2003, pp52-55.

124. Zhu Jiaxian, “Conditioning of WTO to Multinational Corporations and Improvement of Chinese Antimonopoly Law”, Journal of Jiangsu Administration Institute, No.5, 2006, pp.111-115.

125. Zhu Yongchun, “Amending the Antitrust Mechanism in the WTO: Building a Multilateral Framework of Antitrust Rules”, Journal of Social Science of Hunan Normal University, No.2, 2002, pp.68-71

B.3. Dissertation

* Master Dissertation

1. Cui Dayong, National Security Review System to M&A by Foreign Investment in China, China University of Political Science and Law, 2007 [崔大勇, 論我國外資並購國家經濟安全審查制度[D], 中國政法大學, 2007]

2. Deng Jieyun, Completion of Foreign Investment Review System of China, Normal University of Hunan, 2006 [鄧潔雲, 論我國外資審查制度的完善[D], 湖南師範大學, 2006]

3. Feng Yuanyuan, Analysis to Practices of Cross-border M&A, University of International Business and Economics of China, 2004 [馮媛媛, 跨國公司在華並購行為分析[D], 對外經濟貿易大學, 2004]

4. Fu Yangyi, Cross-border M&A of China’s Enterprises an Basis of Theory of Competitiveness, Shan Dong University, 2006 [傅仰藝, 基於競爭優勢理論的中國企業跨國並購研究[D], 山東大學, 2006]

5. Hu Dan, National Security Review to Cross-border M&A in the U.S., China University of Political Science and Law, 2005 [胡丹, 美國外資並購國家安全審查制度法律問題研究[D], 中國政法大學, 2005]

6. Hu Rui, National Treatment in Cross-border M&A, Shan Xi University, 2007 [胡睿, 論外資並購中的國民待遇問題[D], 山西大學, 2007]

7. Li Yan, Anti-monopoly Legal issues and Regulation in Cross-border M&A, East China University of Political Science and Law, 2004 [李燕, 論跨國並購中的壟斷問題及規制[D], 華東政法學院, 2004]

8. Liu Sheng, Strategy of China to Confront Cross-border M&A, Graduate School of Chinese Academy of Social Sciences, 2003 [劉盛, 淺析我國應對跨國並購方略[D], 中國社會科學院研究生院, 2003]

9. Su Bo, Legal System of M&A of Listed Companies by Foreign Investment, China University of Political Science and Law, 2003 [蘇璠, 淺議外資收購上市公司的法律制度[D], 中國政法大學, 2003]

10. Yan Bing, Issues of Cross-border M&A, Xiamen University, 2001 [嚴兵, 外資並購問題研究[D], 廈門大學, 2001]

11. Yang Xunlei, National Security Review System of the U.S., University of International Business and Economics of China, 2006 [楊迅雷, 論美國外資並購國家安全審查制度[D], 對外經濟貿易大學, 2006]

12. Zhang Weike, Influence and Policy of Cross-border M&A to National Security of China, Dongbei University of Finance and Economics, 2007 [張偉科, 跨國並購對我國經濟安全的影響及其對策[D], 東北財經大學, 2007]

13. Zhou Jian, Legal Issue of Supervision of Listed Companies of China in Cross-border M&A, East China University of Political Science and Law, 2005 [周健, 外資並購中國上市公司監管法律問題研究[D], 華東政法學院, 2005]

* Doctor Dissertation

14. Hu Feng, Research on M&A of TNCs in China, East China Normal University, 2003 [胡峰, 跨國公司在華並購問題研究[D], 華東師範大學, 2003,]

15. Huang Zhongwen, Micro-economic Research of Cross-border M&A, University of International Business and Economics of China, 2001 [黃中文, 跨國並購的宏微觀經濟研究[D], 對外經濟貿易大學, 2001]

16. Luo Zhisong, Research on Risk of Cross-border M&A at Angle of Host Country, Fu Dan University, 2005 [羅志松, 基於東道國視角的外資並購風險研究[D], 復旦大學, 2005]

17. Shang Ming, Research on Abuse of Dominant Market Position in Anti-monopoly Law, University of International Business and Economics of China, 2006 [尚明, 反壟斷法之濫用市場支配地位規則研究[D], 對外經濟貿易大學, 2006]

18. Wang Zhongmei, International Coordination and Uniform of Competition Policy, Xia Men University, 2004 [王中美, 競爭規則的國際協調與統一[D], 廈門大學, 2004]

19. Xu Chensheng, Research on Mode Selection Factors of China's FDI Accession, Jinan University, 2005 [許陳生, 中國外商直接投資進入模式選擇影響因素研究[D], 暨南大學, 2005]

20. Yang Lei, Government Regulation and Cross-border M&A, Graduate School of Chinese Academy of Social Sciences, 2003 [楊鐳, 跨國並購與政府規制[D], 中國社會科學院研究生院, 2003]

21. Ye Jianmu, Theory and Measure of Cross-border M&A, WuHan University of Technology, 2003 [葉建木, 跨國並購的理論與方法研究[D], 武漢理工大學, 2003]

B.4. Report and Work Paper

1. Costa, Ionara, "Notes on R&D and TNCs affiliates in Brazil", paper presented at the UNCTAD Expert Meeting on the Impact of FDI on Development, Geneva, on January 24 2005.

2. ICC: Policy statement: Governments must avoid investment protectionism, Prepared by the Commission on Trade and Investment Policy and the Commission on Financial Services and Insurance. International Chamber of Commerce. Document 103-275 rev1 Final EN, 2 November 2006.

3. ICC: Policy statement: ICC recommendations to safeguard freedom of investment. Prepared by the Commission on Trade and Investment Policy. International Chamber of Commerce. 103-286 rev4 final 12 June, 2008.

4. IMF Working Paper, China: International Trade and WTO Accession, WP/04/36 (Mar. 2004), available at http://www.imf.org/external/pubs/ft/wp/2004/wp0436.pdf.

5. James R. Markusen, “Trade versus Investment Liberalization”, National Bureau of Economic Research Working Paper, No. 6231, October, 1997

6. Kenneth Heyer. A World of Uncertainty: Economics and the Globalization of Antitrust. U.S. Dept. of Justice, EAG working paper 04-11 (Washington, 2004).

7. Michael J Moser, Nathan Bush. The International Comparative Legal Guide to: Merger Control 2007- A practical insight to cross-border merger control issues in China. Global Legal Group.2007. Available on website of www.ICLG.co.uk.

8. NBER Working Paper: R. Gaston Gelos, Shang-Jin Wei. Transparency and International Investor Behavior. Working Paper 9260.Available at http://www.nber.org/papers/w9260. NBER working paper series. National Bureau of Economic Research. October 2002.

9. OECD: Freedom of Investment, National Security and 'Strategic' Industries. Progress Report by the OECD Investment Committee. March 2008.

10. OECD: International Investment Perspectives: Freedom of Investment in a Changing World. 2007 Edition. ISBN 978-92-64-03748-9 – ? OECD 2007.

11. OECD: Recent Developments in China’s Policies Towards Cross-border Mergers and Acquisitions (M&A). Supplement to the 2006 Investment Policy Review of China. December 2006.

12. OECD: Sovereign Wealth Funds and Recipient Country Policies. OECD – Investment Committee Report, 4 April 2008.

13. PA Cambridge Economic Consultants (1995), Assessment of the Wider Effects of Foreign Direct Investment in Manufacturing in the U.K., report prepared on behalf of DTI, the Scottish Office, the Northern Ireland Office and the Cabinet Office.

14. UNCTAD: Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations, 2004-2007. United Nations Publication. 2004

15. UNCTAD: Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations, 2005-2008. United Nations Publication. 2005.

16. UNCTAD: World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development. United Nations. New York and Geneva. United Nations Publication. 2006.

17. UNCTAD: World Investment Report 2007: Transnational Corporations, Extractive Industries and Development. United Nations. New York and Geneva. United Nations Publication. 2007.

18. Wang Zhile, Investment Report of TNC in China between 2004 and 2005. Economy Press of China. 2005 [王志樂, 2004-2005跨國公司在中國投資報告, 中國經濟出版社, 2005年]

19. WTO: Report of the Working Party on the Accession of China. Ministerial Conference.WTO Fourth Session. Doha, 9-13 November 2001.

B.5. Website

1. < http://www.europa.eu >

2. < http://www.fdi.gov.cn >

3. ICC: <http://www.iccwbo.org>

4. Ministry of Commerce of China: <http://www.mofcom.gov.cn>

5. OECD: <http://www.OECD.org>

6. UNCTAD, <http://www.unctad.org/fdi>

7. WTO: < http://www.wto.org >

B.6. Electronic Documents

1. Wang Xiaoye, The Stipulation of Chinese Anti-Monopoly Law is Urgent, LEGAL DAILY, and Apr. 23, 2000. See http:// www.legaldaily.com.cn.

2. Li Changqing & Ma Hongmei, Anti-Monopoly Legislation Should be Delayed. LEGAL Daily, Mar. 6, 2002. See http:// www.legaldaily.com.cn.

3. Christopher Palmeri, Unocal Goes Out With a Bang, Bus. WK. Online, Aug. 11, 2005, at: www.businessweek.com/bwdaily/dnflash/aug2005/nf20050811_8247_db017.htm.

4. Wang Ying, CNOOC Volunteers for Acquisition Review, CHINA DAILY, July 4, 2005, at http://www.chinadaily.com.cn/english/doc/2005-07/04/content_456838.htm.

5. Asia Times Online, CNOOC Bids U.S.$67 Per Share for Unocal, June 24, 2005, http://atimes.com/atimes/China/GF24Ad01.html.

6. William H. Peterson, “Foreign Capital: Friend or Foe?” http://www.theadvocates.org/freeman/8901pete.html.

7. Liu Zheng & Li Xingwen, “China will Enhance Examination on Cross-border M&A to Sensitive Industry and Important Enterprise”, http://news3.xinhuanet.com/fortune/2006-11/09/content_5310631.htm

8. Provisions on the Administration of Foreign-Funded Advertising Enterprises (2004), available at http://www.fdi.gov.cn/pub/FDI_EN/Laws/lnvestmentDirection/GuidanceforSpecificIndustries/ t20O6O620_51378.jsp.

9. Provisions on Administration of Foreign Investment in International Maritime Transportation (2004), available at http://www.fdi.gov.cn/pub/FDI_EN/Laws/GeneralLawsandRegulations/ MinisterialRulings/t20060620_51159.jsp.

10. Provisional Regulations on Investment in Cinemas by Foreign Investors (2004), available at http://219.235.227.226/pub/FDI_EN/Laws/InvestmentDirection/GuidanceforSpecincIndustries/t20060620_ 51375 jsp

11. Christopher Palmeri, Unocal Goes out with a Bang, Bus, WK. ONLINE, Aug. 11, 2005, http://www.businessweek.com/bwdaily/dnflash/aug2005/nf20050811_8247_db017.htm.

12. Asia Times Online, CNOOC Bids US$67 Per Share for Unocal, June 24, 2005, http://atimes.com/atimes/China/GF24Ad01.html.

13. Press Release, CNOOC Ltd., CNOOC Limited Proposes Merger with Unocal Offering US$67 Per Unocal Share in Cash (June 23, 2005), http://www.cnoocltd.com/press/channel/pressl612.asp

14. National Security Dimensions of the Possible Acquisition of Unocal by CNOOC and the Role of CFlUS: Before the House Committee on Armed Services (July 13, 2005) (statement of Hon. C. Richard D'Amato, Chairman, U.S.-China Economic and Security Review Commission), available at http://www.uscc.gov/testimonies_speeches/testimonies/2005/05_07_13_testi_damato.htm.

15. http://www.wenzhouglasses.com/html/news/186677.html

16. From State Administration of Foreign Exchange, http://www.safe.gov.cn/model_safe/index.html

17. James R. Markusen, “Trade versus Investment Liberalization”, National Bureau of Economic Research Working Paper, No. 6231, October, 1997

Appendix (I). Anti-Monopoly Law of People’s Republic of China

The Anti-monopoly Law of the People’s Republic of China, which was adopted at the 29th meeting of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on August 30, 2007, is hereby promulgated, and shall be effective as of August 1, 2008.

President of the People’s Republic of China: Hu Jintao

August 30, 2007

Chapter IV <Concentration of Business Operators>

Article 31 Where a foreign investor participates in the concentration of business operators by merging or acquiring a domestic enterprise or by any other means, and national security is involved, besides the examination on the concentration of business operators in accordance with this Law, the examination on national security shall also be conducted according to the relevant provisions of the State.

1 Wu Rong, “Transfer of Global Value Chain and Developmeng of FDI”, Money China, No.11, 2006, pp.107-108 [吳蓉, 全球價值鏈轉移與FDI的發展, 財經界(下半月), 2006年 11期, pp.107-108].

2 See Song Yajie & Mai Fu, “Host Developing Countries' Competition on Employing FDI Policy & Its Lessons for China”, Journal of Shiyan Technical Institute, 2004, Vol.17, No.3, pp.28-30; Huang Yufeng, “Analysis of FDI and Technical Advancement of Developing Host Countries”, Journal of Southwest University for Nationalities, Vol.25, No.6, 2004, pp.86-88.

3 Source: UNCTAD statistics. “FDI inflows Global and by Group of Economies: 1980-2006”

4 That is World Association of Investment Promotion Agencies.

5 The terms Merger and Acquisition mean slightly different things: when one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded; in the pure sense of the term, a merger happ.ens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

6 In contrast, there is another kind of investment, Greenfield Investment. A Greenfield Investment is the investment in a manufacturing, office, or other physical company-related structure or group of structures in an area where no previous facilities exist. The name comes from the idea of building a facility literally on a "green" field, such as farmland or a forest. Over time the term has become more metaphoric.

7 Source: UNCTAD, Cross-border M&A Database, “Global Cross-border M&A, Value and Growth Rate, 1988-2006”.

8 Source: UNCTAD, Cross-border M&A Database, “Cross-border M&A valued at over $1 billion: 1987-2006”.

9 Sun Jiewan, “National Security: Cognition and Explanation”, World Economics and Politics, No.4, 2008, pp.60-65.

10 Xing Houyuan, “National Security and Cross-border M&A”, Foreign Investment in China, No.9, 2007, pp.52

11 Id.

12 Kang Jun, “Strategic Choice of Investment from Foreigner and National Security”, China National Conditions and Strength, No.11, 2005, pp.30-32

13 See UNCTAD, World Investment Report 2007, “Transnational Corporations, Extractive Industries and Development”, Published by UNCTAD Division on Investment, Technology and Enterprise Development, pp.15.

14 Id.

15 Id.

16 Id.

17 Id.

18 Id.

19 Li Changjiu, “Cross-border M&A and National Security”, Expanding Horizons, No.1, 2008, pp.21-23

20 See OECD, “Foreign Direct Investment for Development Maximizing Benefits, Minimizing Costs”, Main Report, Paris. 2002, pp.2

21 See UNCTAD, “Transnational Corporations, Extractive Industries and Development”, World Investment Report 2007, Published by UNCTAD Division on Investment, Technology and Enterprise Development.

22 Id.

23 Id.

24 See, http://www.unctad.org/sections/dite dir/docs/wir06se_fses_cn_en.pdf

25 Source: Ministry of Commerce (MOFCOM).

26 From Ministry of Commerce statistics: http://www.mofcom.gov.cn.

27 Id.

28 "Permanent Sovereignty over Natural Resources" was adopted by General Assembly resolution 1803 (XVII) of 14 December 1962. Paragraph 2 states: The exploration, development and disposition of such resources, as well as the import of the foreign capital required for these purposes, should be in conformity with the rules and conditions which the peoples and nations freely consider to be necessary or desirable with regard to the authorization, restriction or prohibition of such activities.

29 Xu Quan, “Access of Foreign Investment and Investment Liberalization”, Modern Law, No.2, Vol.25, 2003, pp.147-150 [徐泉, 略論外資准入與投資自由化, 現代法學, 2003(4), 第25卷第2期, pp.147-150].

30 Fu Zhigang, “International Developmeng Trendancy of Legislation of Access of Foreign Investment”, No.4, 2004, pp.97-99 [付志剛, 外資准入立法的國際發展趨勢, 哈爾濱商業大學學報, pp.97-99, 2004(4)].

31 Chen An, “Introduction of International Economic Law”, Peking University Press, 2001, pp.5-8 [陳安, 國際經濟法概論, 北京大學出版社, 2001年].

32 Xu Quan, “Access of Foreign Investment and Investment Liberalization”, Modern Law, No.2, Vol.25, 2003. pp.147-150 [徐泉, 略論外資准入與投資自由化, 現代法學, 2003(4), 第25卷第2期, pp.147-150].

33 Tao Jian, “How Does the US Deal with Issue of National Economic Security?” International Economy, No.1, 2001, pp.21-23 [陶堅, 美國怎樣看待和處理國家經濟安全問題, 世界經濟, 2002(1)]; Bailey D.Harte, G.Sugden, “Corporate Disclosure and the Deregulation of International Investment, Accounting”, Auditing &Accountability Journal, Vol.13, No.2, 2000, pp. 197-218.

34 Zhang Changyu & Shen Zhibin, “Absorption of Foreign Investment and National Economic Security”, Management Modernization, No.3, 1999, pp.33-37 [章昌裕, 沈志斌, 引進外資與國家經濟安全, 管理現代化, 1999(3), p33-37].

35 Wen Yaoqing & Chen Taifeng, “Foerign Investment and National Economic Security”, International Trade Issue, No.2, 2001, pp.35-37 [溫耀慶, 陳泰峰, 論引進外資與國家經濟安全, 國際貿易問題, 2001(2), p35-37].

36 See Desai, Padma, ed., “Going global: transition from plan to market in the world economy, Cambridge”, Mass.: MIT Press, 1997, pp.103; Dicken Peter, “Places and Flows: Situating International Investment”, the Oxford Handbook of Economic Geography, Oxford University Press, 2000, pp.22; and Dunning, John H. & Rajneesh Narula, Foreign direct investment and governments: catalysts for economic restructuring, New York: Routledge, 1998, pp.455.

37 Martin and Susan Tolchin, Buying into America, Times Books, 1988, pp.400

38 William H. Peterson, “Foreign Capital: Friend or Foe?” http://www.theadvocates.org/freeman/8901pete.html.

39 Wei Hao & Ma Yeqing, “Influence of FDI to National Economic Security of China”, Journal of Central Financial university, No.3, 2005, pp.34 [魏浩, 馬野青, 外商直接投資對我國經濟安全的影響, 中央財經大學學報, 2005 (3),pp.34].

40 Zhang Zhen & Yang Jianzheng, “Super National Treatment and Minus Effect of FDI”, China Reform, No.2, 2005, pp.20 [張震, 楊堅爭, 超國民待遇與外資負效應, 中國改革, 2005(2), pp.20].

41 Han Jiyun, “International Hot Money: A Game China Has to Face”, Foreign Economy and Trade, No.5, 2005, pp.38 [韓繼雲, 國際/熱錢:中國-個必須正視的博弈, 對外經濟貿易, 2005 (5), pp.38].

42 Mao Zhonggen & Duan Junshan, “Theory and Experience Analysis of FDI Investment Income Export and Potential Crisis of the International Balance”, International Finance Research, No.3, 2005, pp.39 [毛中根, 段軍山, FDI投資收益匯出與潛在國際收支危機的理論及經驗分析, 國際金融研究, 2005(3), pp.39].

43 Zhao Ming, “Take Caution to Monopoly by Foreign Investment”, Society Obererve, No.2, 2005, pp.45 [趙明, 警惕外資壟斷, 社會觀察, 2005 (2), pp.45].

44 Ma Xiuhong, “Reasonable and Effective Use of FDI Facilitates Development of Investment: A Speech at The Second International Investment Facilitation Forum”, International Economic Cooperation, No.4, 2005, pp.11 [馬秀紅, 合理有效利用外資推動投資促進發展:在第二屆國際投資促進論壇上的演講, 國際經濟合作, 2005(4), pp.11].

45 Gu Kejian, “Function Evaluation and Strategic Option of Practice for China’s Use of Foreign Investment”, Financial Economy, No.3, 2005, pp.50 [穀克鑒, 中國利用外資實踐的功能評價與戰略選擇, 財貿經濟, 2005 (3), pp.50].

46 According to Peter Mangold, a scholar from the UK in the book National Security and International Relationship, modern using of national security was first found in US Foreign Policy: Shield of the Republic, Pockets (New York 1943) by Walter Lippmann from the U.S. After World War II, the concept became a normal one in place of military affairs, foreign policies, and foreign affairs etc in international polity.

47 See Zhao Mingyi, Discussion on Present National Security Legal System, Taiwan Morning Culture Press, 2005, pp.1 [趙明義:當代國家安全法制探討, 臺灣黎明文化出版社2005年4月版, 第1頁].

48 Wu Qingrong, “An Analysis on the Concept of State Safety in Law”, China Legal Science, No.4, 2006, pp.64-70

49 See Hu Jinguang & Wang Kai, “Definition of Public Interest in Constitution of China”, Chinese Jurisprudence, No.1, 2005, pp.34 [胡錦光, 王諧:論我國憲法中“公共利益”的界定,中國法學, 2005年第1期, pp.34]; Liu Yuejin, “Basic Meaning of National security and its Development”, Journal of Huabei Electrical College, No.4, 2001, pp.23 [劉躍進:論國家安全的基本含義及其產生和發展,華北電力學院學報, 2001年第4期, pp.23] and Liu Weidong, “Concept and Characteristics of National Security”, Research of International Geography, No.2, 2002, pp.11 [劉衛東等:論國家安全的概念及其特點,世界地理研究, 2002年第2期, pp.11].

50 See Niu Xianzhong, Strategic Expectation of 21st Century, Taipei Maitian Press, March 1999, pp.272 [鈕先鐘:二十一世紀戰略前瞻, 臺北麥田出版社麼1999年3月版, 第272頁] and Zhao Mingyi, Legal Discussion of Modern National Security, Taiwan Morning Culture Press, April 2005, pp.2 [趙明義:當代國家安全法制探討, 臺灣黎明文化出版社2005年4月版, 第2頁].

51 Chen Zhongwei, Non-traditional Security, Times Press, 2003, pp.84 [陸中偉, 非傳統安全論, 北京:時事出版社, 2003, pp.84].

52 Zhang Mingming, “Theory of Non-traditional Security”, Journal of the Party School of the Central Committee of the C.P.C., Vol.9, No.4, 2005, pp.111-113

53 Lu Linzhi, National Economic Security and Circulation, Audit Press of China, 2001, pp.53 [路淩志, 國家經濟安全與流通, 中國審計出版社, 2001年版, 第53頁].

54 Zhang Mingming, “Theory of Non-traditional Security”, Journal of the Party School of the Central Committee of the C.P.C., Vol.9, No.4, 2005, pp. 113.

55 Hou Shengli, “Evolvement of National Security In globalization”, China Opening Herald, No.1, 2007, pp.85-88 [侯勝利, 全球化條件下國家安全的演變, 開放導報(China Opening Herald) 2007年2月第1期, pp. 85-88].

56 See Ma Weiye, National Security in Globalization, Hubei Education Press, 2004, pp.132 [馬維野:全球化時代的國家安全, 湖北教育出版社, 2004, pp.132].

57 Shi Zhongliang, “National Economic Security must be Ensured in Participating Economic Globalization”, Economic Survey, No.1, 2002, p22-24.

58 Id.

59 Id.

60 Gao Xiaoyan, “New Concept of National Economic Sovereignty and Safety”, Journal of Hebei University (Philosophy and Social Science), Vol.30, No.2, March, 2005, pp.23

61 Pang Hui, “Financial Security in Finance Globalization”, Market Modernization, No.4, 2008, p397-398

62 Zhang Haitao, Finance Globalization: Interest and Risk of Developing Countries, Economic Science Press (Beijing), 2003, pp.243 [張海濤, 金融全球化－發展中國家的利益與風險, 北京, 經濟科學出版社, 2003, pp.243].

63 Id.

64 Tong Zhijun, “Utilization of Foreign Investment and National Industrial Security”, Chinese Soft Science, No.2, 1997, pp.13 [童志軍,利用外資和國家產業安全, 中國軟科學, 1997年第2期, pp.13]; and Xie Ying, Theory and Practice of National Industrial Security, Business Press of China, 2005, pp.135 [謝瑩, 國家產業安全法理論與實踐, 北京:中國商務出版社, 2005, pp.135].

65 Xia Xingguo & Wang Ying, “National Trade Security under Economic Globalization”, Economic Review, No.6, 2001, pp.118-120 [夏興園, 王瑛, 論經濟全球化下的國家貿易安全, 經濟觀察, 2001年 06期, pp.118-120].

66 Id.

67 Tong Jiadong, Trade Liberalization, Trade Protection and Economic Interest, Economic Science Press, 2002, pp.12 [佟家棟, 貿易自由化, 貿易保護與經濟利益, 經濟科學出版社, 2002年, pp.12].

68 Ma Jie, Economic Globalization and National Economic Security, Economic Science Press, 2000, pp.124 [馬傑, 經濟全球化與國家經濟安全, 經濟科學出版社, 2000年, pp.124].

69 Tang Xiaobo & Hu Chen, “Research on Protection Strategy of National Information Security”, Science and Technology Development, No.6, 2004, pp.124 [唐曉波, 胡琛, 國家資訊安全保障戰略研究, 科技進步與對策, 2004 (06), pp.124].

70 Gu Yuanxiang, “Looking at energy security from oil market”, Environmental Economy, pp.13-19 [穀源洋, 從油市風雲看國際能源安全, 環境經濟, 第13-19頁].

71 Fu Chengyu, “Global Feature of Energy Security”, China Petroleum Enterprise, No.5, 2007, pp.17.

72 Xiong Guangkai, “Energy Security and International Cooperation”, Green Leaf, No.5, 2007, pp.46-49

73 Gu Yuanxiang, “Looking at energy security from oil market”, Environmental Economy, pp.15 [穀源洋, 從油市風雲看國際能源安全, 環境經濟, 第13-19頁].

74 Xiong Guangkai, “Energy Security and International Cooperation”, Green Leaf, No.5, 2007, pp.48

75 Sun Shukun, “Environment Security is the Fundament of National Security and Decelopment”, Environment, No.2, 2003, pp.33 [孫淑坤, 環境安全是國家安全與發展的基礎, 環境, 2003年 02期, pp.33].

76 Shao Chunli & Xie Bing, “Ensure Environmental Safety and Construct the Harmonious Society”, Jiangsu Environmental Science and Technology, No.11, 2007, pp.23

77 Xie Peihong, “Relationship between Industrial Security and Cooperation of Foreign Investment”, Modern Occupational Safety, No.2, 2008, pp.74-75

78 Source: Golden Top International Consultants Ltd, Review of M&A in China, Vol.2, Tsing Hua University Press, www.mergers-china.com.

79 Wang Zhile, Investment Report of TNC in China between 2004 and 2005, Economy Press of China, 2005, pp.252 [王志樂, 2004-2005跨國公司在中國投資報告, 中國經濟出版社, 2005年, pp.252].

80 Yang Chunping & Liu Zeyuan, “Technology security: Important factor of national security”, Journal of Dalian University of Technology (Social Sciences), No.4, 2005, pp.35.

81 Liu Zeyuan, Modern Science & Technology and Development, Dalian Technical University Press, 2003, pp.79-84 [劉則淵, 現代科學技術與發展導論, 大連:大連理工大學出版社, 2003, pp.79-84].

82 Zheng Feilong & Pang Jin, “Global Operation of MNCs' R&D: Theory and Empirical Latest”, Journal of Jiangxi Institute of Education, No.2, 2008, pp.26-29.

83 Id.

84 Yin Xicheng, “Relationship between Technical Security and other Elements of National Security”, International Technical Economy Research, No.3, 1999, pp.28-34 [尹希成, 科技安全與國家安全其他要素的關係, 國際技術經濟研究, 1999, (3), pp.28-34].

85 Si Xiaobin & Liu Jie, “R&D of Transnational Corporation: Research on China’s Policy in Globalization”, Industrial Technology & Economy, No.12, 2007, pp.127-130.

86 Gregor Andrade, Mark Mitchell & Erik Stafford, “New Evidence and Perspectives on Mergers”, Journal of Economic Perspectives, Vol.15, No.2, 2001, pp.103～120.

87 Lin Xuejun, “Cross-border M&A and Gobal Competition”, Market Modernization, No.9, 2007, pp.276-278

88 Id.

89 Id.

90 Jin Chaowu, Definition Principle and Method of Relevant Market, Chinese Legal Science, No.4, 2001, pp.186-190

91 Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.

92 Tan Anping, “How State-owned Enterprises Complete Corporate Governance Structure”, Enterprise Economy, No.5, 2005, pp.24.

93 New Company Law of China came into force began January 1, 2006.

94 Meng Cuilan & Zhang Yujian, “Practical Option of Completing Corporate Governance Structure of State-owned Listed Companies”, Reformation & Strategy, No.9, 2006, pp.55-57

95 Zhang Qing, “Capital Structure, Protection of Investors and Corporation Governance of State-owned Enterprise”, Journal of International Trade, No.2, 2007, pp.107-111

96 See, for example, the downfall of the only Dutch aircraft manufacturer, Fokker, in 1995-1996.

97 Wang Jing, Cai Yongmin, Influence of Cross-border M&a to Industrial Security of China and Countermeasure Investigation, Jianghai Academic Journal, No.6, 2007, pp.217-220

98 Id.

99 Source: Foreign Investment Department of MOFCOM, http://www.fdi.gov.cn

100 Wang Haoyong & Kong Xian, “Influence on Industrial Security of FDI”, Enterprise Economy, No.1, 2003, pp.35-36 [汪浩泳, 孔嫻:外商直接投資對中國產業安全的影響, 企業經濟, 2003(l)第35-36頁].

101 Xu Shihui, “Research on Legal Protection System of Industrial Security in Cross-border M&A”, Inner Mongolia Social Sciences, No.2, 2007, pp.35

102 Wang Yuanjing, “Investment and Merge in Key Industries by Foreign Capital: Effects on Industry Security”, Economic Theory and Business Management, No.4, 2007, pp.5-12

103 See Wang Haoyong & Kong Xian, “Influence on Industrial Security of FDI”, Enterprise Economy, No.1, 2003, pp.35-36 [汪浩泳, 孔嫻:外商直接投資對中國產業安全的影響, 企業經濟, 2003(l)第35-36頁].

104 Wei Houkai, “Influence of FDI on Regional Economy of China”, Economy Research, No.4, 2002, pp.41[魏後凱, 外商直接投資對我國區域經濟增長的影響, 經濟研究, 2002(4), pp.41]; and Wu Jian, “Regional Distributing and its Economic Increasing Effect of Foreign Direct Investment”, Economy Research, No.4, 2002, pp.8 [武劍, 外國直接投資的區域分佈及其經濟增長效應, 經濟研究, 2002(4), pp.8].

105 See Xie Ying, Theory and Practice of National Industrial Security, Business Press of China, 2005, pp.36 [謝瑩.國家產業安全法理論與實踐, 北京:中國商務出版社, 2005, pp.36].

106Liu Zheng & Li Xingwen, “China will Enhance Examination on Cross-border M&A to Sensitive Industry and Important Enterprise”, http://news3.xinhuanet.com/fortune/2006-11/09/content_5310631.htm

107 Sun Qing & Xu Yuanyuan, “Investigating Influence of FDI on International Income and Expense of China”, Qinghai Finance, No.11, 2004, pp.28-29 [孫慶, 徐園園:從投資收益持續逆差看外商直接投資對我國國際收支的影響, 青海金融, 2004(11)第28-29頁].

108 See Zhang Haitao, Finance Globalization: Interest and Risk of Developing Countries, Economic Science Press (Beijing), 2003, pp.235 [張海濤, 金融全球化－發展中國家的利益與風險, 北京, 經濟科學出版社, 2003, pp.235].

109 Xue Jingxiao, Financial Globalization and International Finance Crisis, Tian Jin People’s Press, 2001, pp.143 [薛敬孝, 金融全球化與國際金融危機, 天津, 天津人民出版社, 2001, pp.143].

110 AlAzzawi & Shireen, Foreign direct investment and knowledge flows: evidence from patent citations, University of California, Davis-Department of Economics, 8 January, 2004.

111 Such as the US, Japan or Germany

112 Assets stripping means that the acquisition or takeover of a company whose shares are valued below their asset value, and the subsequent sale of the company's most valuable assets.

113 Yang Lei & Pan Yue, “Abstracts of Some Papers in English Competitive Effects and Regulations of Cross-border M&A”, Finance & Trade Economics, No.12, 2003, pp.5-10

114 Wang Hongli, “Research on Enterprise M&A and Adjustment of Industrial Structure”, Tax and Economy, No.4, 2004, pp.39 [王宏利:企業並購與產業結構調整研究, 稅務與經濟, 2004年第4期, pp.39].

115 Zhan Xiaoning & Teng Weizao, “Entrance Model of Transnational Corporation in period of Finance Crisis of Southeast Asia”, Naikai Economic Research, No.4, 2001, pp.12 [東南亞金融危機期間跨國公司的進人模式, 南開經濟研究2001年第4期, pp.12].

116 Tian Zuhai & Mao Chuanyang, “Foreign Investors' Merging and Acquisition, Asymmetric Government Regulation and Market Competition”, China Soft Science, No.2, 2005, p44-46

117 Wang Zhongmei, “Antitrust Controls on Transnational Mergers in China”, World Economy Study, No.8, 2007, pp.11-16

118 Shen Yiping, “Anti-monopoly Regulating to Cross-border M&A”, Journal of Hang Zhou Business College, No.6, 2002, pp.36 [沈益平:外資並購的反壟斷規制, 杭州商學院學報2002年第6期, pp.36].

119 Nie Minghua, “Complete Anti-monopoly Legal System in Cross-border M&A”, Investment Research, No.5, 2004, pp.33-36

120 Lin Jing, “Enhance Anti-monopoly Regulation to Cross-border M&A”, Macroeconomic Management, No.3, 2007, pp.56-58

121 Id.

122 Id.

123 Chen Haiming & Liu Zhiyun, “Expatiate Antitrust to M&A by Foreign Investment”, Journal of Inner Mongolia Finance and Economy College, No.1, 2001, pp.37 [陳海明, 劉志雲:試論對外資並購的反壟斷法律規制, 載內蒙古財經學院報2001年第1期, pp.37].

124 The Carlyle Group is a global private equity investment firm, based in Washington, D.C., with more than $81.1 billion of equity capital under management. The firm operates four fund families, focusing on leveraged buyouts, venture & growth capital, real estate and leveraged finance investments. The firm employs more than 575 investment professionals in 21 countries with several offices in North America, South America, Europe, Asia and Australia; its portfolio companies employ more than 286, 000 people worldwide. Carlyle has over 1200 investors in 68 countries.

125 Xugong is a listed company. Its parent company is a group controlled by Government of Xuzhou City of Jiangsu Providence.

126 Carlyle Group to Acquire 85% of Chinese Construction Firm by Laura Santini, The Wall Street Journal, October 25, 2005, Page C5

127 Carlyle Drops Stake in Xugong Group, Xinhua News Agency October 18, 2006

128 Carlyle cuts its stake to 50% in Xugong takeover bid, Source: China Daily 2006-10-19

129 Xugong to cut stake sales to Carlyle to 45 pct, China Daily, 2007-03-18, http://www.chinadaily.com.cn

130Shi Jiansan ed., Report of M&A law of China, Beijing: Law Press, pp.364-365 [史建三主編： 中國並購法報告, 法律出版社, 2006, pp.364-365

131See Xinhua Net, the Case of Carlyle’s Acquisition of Xugong Gets New Attention: Is that means trade protectionism is rising? At http://news.xinhuanet.com/fortune/2006-08/13/content_4954703.htm.

132 See State [2006] 8, published by State Council on February 13, 2006.

133 See Article 5 of Provisions of Equity Change of Investors Foreign-Invested Enterprises.

134 Such as in Arcelor and Mittal’s acquisition of Laiwu Steel Corporation, Development and Reform Commission raised two dissidents excluding national security factors.

135 See Case of Carlyle acquisition of Xugong was again concerned: trade protection tend to rise? From Xinhua Net, At http://news.xinhuanet.com/fortune/2006-08/13/content_4954703.htm

136Hu Dan, Legal Issues on U.S. National Security Review System of Cross-border M&A, Master Dissertation, China University of Political Science, 2005 [胡丹：《美國外資並購國家安全審查制度法律問題研究》，中國政法大學2005年碩士學位論文]

137Qin Haibo, Radio and TV equipment-stuffing monopoly dilemma, At http://www.hebei.com.cn/node2/node17/node1077/userobject1ai163037.html

138Zhu Andong, Three Important Problems to be Solved in System of Science and Research, See Sina Net: http://finance.sina.com.cn/review/20041108/10261138603.shtml

139See Cross-border M&A of steel industry meets new trend, See http://www2.sdnews.com.cn/fortune/qiye/2006-4/21_195638.html

140 Biggest M&A Case of Arcelor and Mittal’s acquisition of Laiwu Steel Corporation, See http://economy.enorth.com.cn/system/2006/02/22/001238729.shtml

141 See 21 Century Economy Report, September 22, 2006.

142See http://finance.sina.com.cn/stock/s/20070309/22143393631.shtml，

143 Id.

144 See http://news2.eastmoney.com/060406,390690.html

145 Refer to views of the report “national economic security in the open environment” by the Chinese Academy of Social Sciences. The report is finished by a research group, in which Zhao Ying, Lee Haijian, Wang Yanzhong , He DeXu, Zhang Wenmu, Li Jianmin, Shi Dan, Xie Xiaoxia, Lu Zhoulai, Yang Bin, Wang Yanmei, Yang Danhui, Weng Ming, and other researchers are responsible for the relevant sub-topic of research, and the drafting of the report. The final report was drafted by Zhao Ying and Lee Haijian.

146 OECD, National Treatment for Foreign-Controlled Enterprises: LIST OF MEASURES REPORTED FORTRANSPARENCY,28 February 2007,available at: http://www.oecd.org/dataoecd/57/46/38273182.pdf.

147 OECD held three times of Round Table Meeting on Trade Liberalization, National Security and Strategic Industries in Paris in 2006.

148Wang Huhua, International Public Law (2nd Edition), Beijing: Peking University Press, 2006, pp. 49[王虎華主編：《國際公法學》（第二版），北京大學出版社2006年版，第49頁]

149 See Article 2. 2(a)(b), Charter of Economic Rights and Duties of States, GA Res. 3281(xxix), UN GAOR, 29th Sess., Supp. No. 31 (1974) 50.

150 See The General Agreement on Tariffs and Trade (GATT 1947)

151 OECD: OECD Code Of Liberalization of Capital Movements (June 2006), pp.127-129, available at: http://www.oecd.org/dataoecd/10/62/4844455.pdf.

152 50 U.S.C.A. App. Sec. 2170

153 Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, 31 C.F.R. § 800.201

154 50 U.S.C.A. app. § 2170a

155 31 C.F.R. §800.401

156 National Defense Authorization Act for Fiscal Year 1993, Pub. L. No.102-484, 106 Stat. 2315 (1992).

157 Exec Order No.12860, 58 Fed. Reg. 47201 (Sept. 3, 1993).

158 DP World is a subsidiary of Dubai World, a holding company owned by the government of Dubai in the United Arab Emirates.

159 Donaldson & Jackson, “The Foreign Investment Review Act: An Analysis of the Legislation”, CAN. B. REV, 1975, No.53, pp.171-172.

160 FIRA, Act of December 12, 1973

161See Art. 18(2), 19(2), 20(2) and 21(2) of Foreign Acquisition and Takeover Law

162 Id. See Art. 25, 26 and 16A

163 US General Accounting Office, Foreign Investment: Foreign Laws and Policies Addressing National Security Concerns, April 1996, p.33.

164 See id,p.34

165 http://www.wenzhouglasses.com/html/news/186677.html

166 Article 56 of Enterprise Law.

167 Id. Article 55.

168 Fried, Frank, Harris, Shriver & Jacobson LLP, French Decree Requires Government Approval for Foreign Investment in Strategic Business Sectors, January 13,2006.

169 Liu Hong,” Administration Pattern of Japan absorbing Foreign Investment”, Journal of Price, No.5, 1997. pp.22 [劉宏, 日本引進外資的管理模式, 價格月刊, 1997, 5: 22].

170 Art. 27(b)(g) of Foreign Exchange and Foreign Trade Control Law of Japan.

171 3831C FR 8002.09

172 3931C FR8 002.11

173 4031C FR 8002.13

174 4131C FR 8002.0442

175 31C FR 8002.22

176 31C FR 8002.01

177 See Art. 25(1) of Investment Canada Act, added by C-59 Amendment

178 Id. See Art. 26

179 Id. See Art. 26(21.1)

180 Id. See Art. 25

181 Id. See Art. 28(1)

182 Id. See Art. 28(41)

183 See Art. 26(1), Foreign Exchange and Foreign Trade Control Law of Japan

184 Id. See Art. 26(5)

185 Id. See Art. 26(2)

186 31C FR 8002.04

187 The original factors included: (a) domestic production needed for projected national defense requirements; (b) the capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials and other supplies and services; (c) control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the US to meet the requirements of national security; (d) potential effects of the transaction on sales of military goods, equipment or technology to any country identified by the Secretary of State as a country that either supports terrorism, or is a country of concern regarding missile, chemical or biological weapons proliferation; and (e) potential effects of the transaction on US technological leadership in areas affecting national security.

188 Susan W. Leibeelr and William H. Lash III, Exon-Florio: Harbniger of Economic Nationalism? The Caot Review o f Busniess & Government, at http/:w/wwc.atoo.gr/pubs/regulation/reg16n1d.hmtl, Apr.2007.

189 Ronald D. Lee, The Dog Doesn’t Bark: CFIUS, the National Security Guard Dog with Teeth, Glasser Legal Works, in February 2005.

190 31C FR 8004.01

191 31C FR 8005.0562

192 31C FR 8005.02

193 31C FR 8005.04

194 31C FR 8006.01

195 Art 25 (2) of Investment Canada Act

196 Id. See Art. 25(3)

197 Id.

198 Id. See Art. 25(2)

199 See Art. 26(4) of Foreign Exchange and Foreign Trade Control Law of Japan

200 Id. See Art. 27(1)

201 Id. See Art. 27(3)

202 Id. See Art. 27(2)

203 See Art. 27(1) See Art. 27(4,5,6 and 7)

204 Id. See Art. 27(8)

205See Administration Order 11858 Amendment

206 Ronald Lee, The Dog Doesn’t Bark: CFIUS, the National Security Guard Dog with Teeth, Glasser Legal Works, in February 2005.

207 See Art. 55(3) of Foreign Exchange and Foreign Trade Control Law of Japan

208 Preliminary Reviews is 30 days, Investigation 45 days, President Decision 15 days, and 90 days in total.

209 Tang Changli & Meng Haili, “Holistic Reflection on Economic Reform in China”, Theory Journal, No.6, 2007, pp.36-41

210 Id.

211 See art.173 of Company Law of China

212 See art.2 of M&A Regulation 2006.

213 Art.7 of Provisions on Guiding Foreign Investment Direction, Decree [2001] No.336 of the State Council The Regulation of the People's Republic of China on the Administration of Insurance Companies with Foreign Investment has been passed at the 49th executive meeting of the State Council on December 5, 2001 an d is hereby promulgated for implementation as of February 1, 2002.Premier of the State Council: Zhu Rongji December 12, 2001(11-26 10:47)

214 See art.9 and 20 of Industrial Catalog for Foreign Investment

215 See art.85, 86, 87 and 89 of Securities Law of China.

216 See art.25 of Interim Procedures for Management of Transferring Property Rights of State-owned Enterprises

217 See art.3 of Interim Management Approach for Approval of Items of Foreign Investment.

218 See art.14 of M&A Regulation 2006.

219 See art.23 of Management of Assessment of the state-owned Assets.

220 See art.18 of Management of Assessment of the state-owned Assets.

221 Published on July 19, 2004

222 Published on October 9, 2004

223 See Article 3 of Interim Management Approach of Foreign Investment Projects Approval

224 See Art. 55 of M&A Regulation 2006

225 See Art. 12 of M&A Regulation 2006

226 Id.

227 Id.

228 Conference Report for Pub.L.100-418, H. Rep. 100-576,100th Cong.2d Sess. (1988), pp.924-928

229 Published on February 11, 2002 and took into effect on April 1, 2002

230Published by State Development and Reform Commission and Ministry of Commerce on November 30, 2004, and took into effect on January 1, 2005

231 See Art. 1 of the UN Economic Right and Oblige Charter

232 Andress Hasenelever, Pete: Mayer, Vollke: Pittberger, Theories of international enemies, London: Cambridge University Press,1997, P.26

233Shan Feiyue & Liu Sishou, Concept Explanation of Economic Security Law, Modern Law, No.1, 2003, pp.59

234 Robert Poitofsky, Labor standards and tide, see Mareo Bronekers and Reinhaand Quick: New Direction in International Economic Law. Kluwer Law International Press, 2000, pp.426

235 Li Changlin, Economic Law, China University of Political Science Press, 1995, pp.41[李昌麒:經濟法學,中國政法大學出版社,1995年版,第41頁]

236 See Enterprise Tax Law, which was published on March 16, 2007 and took into effect on January 1, 2008

237Zhang Wenlian, Protection Approach for National Industrial Security of Developed Countries, see http://cn.biz.yahoo.co/061020/16/jicv.htm

238Xiong Xuehui, Cross-border M&A is Developing, See http://www.cb.com.cn/news/showNews.aspx?newsld=5613

239 Wu Fan, “National Treatment in the Field of International Investment”, Journal of Hebei Polytechnic University (Social Science Edition), No.3, 2007, pp.18-22

240 He Shuquan & Wang Xiaoying, “Economic Impact on National Treatment for FDI and China's Strategies”, Contemporary Economy & Management, No.2, 2008, pp.7-10

241 Randall Schuler & Susan Jackson, “HR Issues and Activities in M&A”, European Management Journal, Vo1.19, No.3, 2001, pp.35

242 Pei Jianjun, “The Prediction on WTO National Treatment Development”, Journal of Zhejiang Wanli University, No.3, 2004, pp.128-130

243 Ding Wei, “Reasonability and Logicality of Super National Treatment”, Forum of Polity and Law, No.2, 2004. Pp.45 [丁偉“超國民待遇合理合法”評析, 政法論壇, 2004, ( 2), pp.45].

244 Liu Kaixiang, “Establishment of Principle of National Treatment in Foreign Investment Law of China”, Beijing Social Science, No.1, 2001, pp.36 [劉凱湘, 任頌論我國外資立法中國民待遇原則之確立, 北京社會科學, 2001, (1), pp.36].

245 Jiang Xin, “Research on the legal application of the principle of the proportionality”, Journal of Yunnan University (Law Edition), No.2, 2007, pp.102

246 Case No.ARB (AF)/00/2 (May 29, 2003. The Tribunal held that Mexico breached its obligations under Articles 4(1) (fair and equitable treatment) and 5(1) (nationalization and expropriation) of the Bilateral Investment Treaty (“BIT”) between Mexico and Spain (“Acuerdo para la Promoción y Protección Recíproca de Inversiones firmado por el Reino de Espa?a y los Estados Unidos Mexicanos”). TECMED, a Spanish company, claimed that the refusal by the Instituto Nacional de Ecología (National Ecology Institute or “INE”) to renew TECMED’s license to operate a waste confinement facility resulted in an act tantamount to expropriation in violation of the BIT.

247 R. Gaston Gelos & Shang-Jin Wei, “Transparency and International Investor Behavior”, Working Paper 9260, NBER working paper series, National Bureau of Economic Research, October 2002.

248 Id.

249 Id.

250 Countries commonly require licenses for investment limit the level or degree of foreign ownership in capital assets or otherwise impose restrictions on the entry and activity of foreign actors in the markets. Government bureaucracy controls these types of restrictions and regulations. These controls provide easy avenues for corruption. This can take the form of bribes for import or export licenses, exchange rate controls or loans. This type of corruption reduces efficiency.

251 Neven, D., Papandroupulos P. & Seabright, Trawling for Minnows; European Competition Policy and Agreements between Firms, London: CEPR, 1998, pp.28.

252 Long Sheng, “On the Principle of Reciprocity”, Journal of Zhang Zhou Teachers College and Social Philosophy, No.4, 2001, pp.26-28

253 Id.

254 Peng Dingguang, “Discussing Reciprocity Principle-The Rational Limitation of Inequality”, Journal of Xiangfan University, No.1, 2002, pp.14-18

255 Id.