The Case of Chinese State- Owned Enterprises and EU Merger Control Regime

The Interactions of Competition Law and Investment Law: The Case of Chinese State- Owned Enterprises and EU Merger Control Regime

Alexandr Svetlicinii

Contents Introduction ...... 2 Chinese SOE Acquisitions under the EU Merger Control Scrutiny ...... 5 “Legitimate Interests” of the Member States in the EU Merger Control Regime ...... 12 The EU FDI Screening Framework as a Regulatory Response to SOE Acquisitions ...... 15 Conclusion ...... 20 Cross-References ...... 21

Abstract With the unveiling of the Belt and Road Initiative and the industrial policy “Made in China 2025,” the outward investments of the Chinese state-owned enterprises (SOEs) have been on the rise with the strong political backing and financial support from the state-owned banks. The acquisitions of the Chinese SOEs have been scrutinized under the EU merger control regime with the EU Commission attempting to forecast their effect on competition. The EU merger cases involving Chinese SOEs demonstrated significant challenges in assessing the corporate governance of these enterprises, exercise of state control, and possible coordination of commercial conduct among the SOEs. The competition authorities of the EU Member States have not managed to develop a coherent methodology for competitive assessment of the SOE acquisitions either. The difficulties of applying traditional competition law tests to the mergers and commercial conduct of SOEs have prompted numerous calls for the revision of the current merger control regime to allow for the establishment of the European “national champions.” In parallel, the EU has considered application of alternative regulatory means such as trade defense measures and foreign investment screening. The present chapter analyzes the challenges posed by the SOE acquisitions for the EU merger control. It also addresses the emerging EU framework for the

A. Svetlicinii (*) Faculty of Law, University of Macau, Macao SAR, China e-mail: [email protected]

security screening of the foreign investments that has been partly prompted by the abovementioned challenges. The combination of the merger control rules with the foreign investment screening and other regulatory frameworks could signiﬁcantly affect the future of the Chinese SOEs’ investments in the EU in light of the ongoing negotiations of the EU-China investment agreement.

Keywords State-owned enterprise · China · European Union · Merger control · Foreign direct investment · National security · Competition law · Investment law

Introduction

The Action Plan on the Belt and Road Initiative (BRI), released by the Chinese authorities on 28 March 2015, proclaimed the removal of investment barriers among its overarching goals: “We welcome companies from all countries to invest in China, and encourage Chinese enterprises to participate in infrastructure construction in other countries along the Belt and Road, and make industrial investments there.”1 The BRI Action Plan pledged that that these investments “will abide by market rules and international norms” so that the market will play a decisive role in resource allocation.2 Another direction of the Chinese industrial policy unveiled in 2015 was “Made in China 2025,” which aimed at gradual replacement of the foreign manufacturing technologies by the domestic ones with the aim of launching the Chinese technology companies as powerful players on the global markets.3 According to the Chinese President Xi Jinping, “We will move Chinese industries up to the medium-high end of the global value chain, and foster a number of world- class advanced manufacturing clusters.”4 The Chinese companies have been requested to “steadily make outbound investment that drives the export of domestic superior production capacity, high-quality equipment, and applicable technology” and “enhance investment cooperation with overseas high-tech and advanced manufacturing enterprises, and are encouraged to establish R&D centers abroad.”5

1State Council, Full text: Action plan on the Belt and Road Initiative (30 March 2015), http:// english.gov.cn/archive/publications/2015/03/30/content_281475080249035.htm 2Ibid., Section II Principles 3MERICS (Mercator Institute for China Studies) (2016) Made in China 2025: the making of high- tech superpower and consequences for industrial countries. https://www.merics.org/sites/default/ ﬁles/2018-07/MPOC_No.2_MadeinChina2025_web.pdf. Accessed 25 Mar 2019 4Xi Jinping, “Secure a decisive victory in building a moderately prosperous society in all respects and strive for the great success of socialism with Chinese characteristics for a new era” (18 October 2017), http://www.xinhuanet.com/english/download/Xi_Jinping’s_report_at_19th_CPC_National_Congress. pdf 5Notice of the General Ofﬁce of the State Council on Forwarding the Guiding Opinions of the National Development and Reform Commission, the Ministry of Commerce, the People’s Bank of China, and the Ministry of Foreign Affairs on Further Guiding and Regulating the Directions of Outbound Investment (4 August 2017), Article 3 The Interactions of Competition Law and Investment Law: The Case of Chinese... 3

As a result of the abovementioned policies, the Chinese outbound foreign direct investment in Europe saw a 77% increase between 2015 and 2016.6,7 A substantial portion of these investments has been realized by the China’s national champions – state-owned enterprises (SOEs) with funding provided by the state-owned banks.8 Among the factors pushing the expansion of the Chinese SOEs overseas were “empire building incentives, exacerbated by weak corporate governance structures and the lack of financial disclosure”.9 The support for SOE-led investments went in parallel with the suppression of the FDI by private companies through tightening financial regulations due to the concerns about capital flight.10,11,12 In the early 2019, the EU Commission released a report on the scope and scale of the foreign investment in the Union, which noted the growth of investments by the SOEs, primarily from China, Russia, and the United Arab Emirates, during 2007–2017 period.13 When considered in terms of number of acquisitions, the Commission’s report shows that out of total 385 mergers by SOEs in 2007–2017, China accounts only for 60 (including Mainland, Hong Kong SAR, and Macao SAR).14 The initial official rhetoric from the EU was cautious of China’s industrial policy aspirations: “It is important for the EU to work with China to promote open and fair competition in each other’s markets and to discourage China from underwriting its companies’ competitiveness through subsidisation or the protection of domestic markets.”15 The EU was generally welcoming Chinese investment in Europe and

6MERICS (Mercator Institute for China Studies) (2017) Record flows and growing imbalances: Chinese investment in Europe in 2016. https://www.merics.org/sites/default/files/2018-04/MPOC_ 03_Update_COFDI_Web.pdf. Accessed 25 Mar 2019 7European Parliamentary Research Service (2017) Briefing: foreign direct investment screening: a debate in light of China-EU FDI flows. http://www.europarl.europa.eu/RegData/etudes/BRIE/2017/ 603941/EPRS_BRI(2017)603941_EN.pdf. Accessed 25 Mar 2019 8Huang B, Le X (2018) China ODI from the middle kingdom: what’s next after the big turnaround? BBVA Research. https://www.bbvaresearch.com/wp-content/uploads/2018/02/201802_ ChinaWatch_China-Outward-Investment_EDI.pdf. Accessed 25 Mar 2019 9Zhang A (2014) Foreign direct investment from China: sense and sensibility. Northwest J Int Law Bus 34(3):395–453, 451 10Hanemann T (2014) Chinese direct investment in the EU and the US: a comparative view. Asia Europe J 12:127–142. https://doi.org/10.1007/s10308-014-0379-5 11Jacoby W (2014) Different cases, different faces: Chinese investment in Central and Eastern Europe. Asia Europe J 12:199–214. https://doi.org/10.1007/s10308-014-0380-z 12Huang B, Ortiz A, Rodrigo T, Le X (2019) China: five facts about outward direct investment and their implication for future trend. BBVA Research. https://externalcontent.blob.core.windows.net/ pdfs/201903_edit_ChinaWatch21stmar.pdf. Accessed 25 Mar 2019 13EU Commission, press release IP/19/1668 Foreign direct investment report: continuous rise of foreign ownership of European companies in key sectors (13 March 2019), http://europa.eu/rapid/ press-release_IP-19-1668_en.htm 14EU Commission, Staff Working Document on Foreign Investment in the EU following up on the Commission Communication “Welcoming Foreign Direct Investment while Protecting Essential Interests” of 13 September 2017, SWD(2019) 108 final, 13 March 2019, p. 57 15EU Commission, Joint Communication to the European Parliament, and the Council “Elements for a new EU strategy on China” JOIN(2016) 30 final, 22 June 2016, p. 6 4 A. Svetlicinii expecting reciprocity for EU investments in China: “the EU expects Chinese Over- seas Direct Investment in Europe to be based on free market principles, and will use all the means at its disposal to address the potential market distortions and other risks of investment by enterprises which benefit from subsidies or regulatory advantages provided by the state.”16 However, following the frustration stemming from the lack of reciprocity concerning market access and the rising suspicions against the SOE acquisitions as a tool of Chinese economic statecraft, the EU attitude has changed from cautious to a proactive one.17,18,19 In its 2019 policy paper “EU-China – A strategic outlook,” the EU Commission openly labelled China as “an economic competitor in the pursuit of technological leadership, and a systemic rival promoting alternative models of governance.”20 It realized the importance of the China’s SOEs’ global engagement: “China’s proactive and state-driven industrial and economic policies such as “Made in China 2025” aim at developing domestic champions and helping them to become global leaders in strategic high-tech sectors. China preserves its domestic markets for its champions, shielding them from competition through selective market opening, licensing and other investment restrictions; heavy subsidies to both state-owned and private sector companies...”21 On the subject of the BRI-related investments by the Chinese SOEs, the European Parliament noted that “such investments are part of an overall strategy to have Chinese state-controlled or state-funded companies take control of banking and the energy sector, as well as other supply chains”22 and expressed concerns “about state-orchestrated acquisitions that might hinder European strategic interests, public security objectives, competitiveness and employment.”23,24 The gradual shift in attitude toward the Chinese SOE investments in the EU has been prompted among others by the application of the existing regulatory frameworks such as EU merger control. Due to the size of the centrally controlled SOEs such as China National Chemical Corporation (ChemChina), Sinochem Corpora- tion, China National Petroleum Corporation (CNPC), or China General Nuclear Power Corporation (CGN), their acquisitions in the EU were subject to notification

16Ibid., p. 7 17Du M (2014) When China’s national champions go global: nothing to fear but fear itself? J World Trade 48(6):1127–1166 18Hooijmaaijers B (2019) Blackening skies for Chinese investment in the EU? J Chin Polit Sci 24:451. https://doi.org/10.1007/s11366-019-09611-4 19Malkawi B (2019) Chinese SOE investment: an economic statecraft. EFILA Blog. https:// efilablog.org/2019/01/04/chinese-soe-investment-an-economic-statecraft/. Accessed 25 Mar 2019 20EU Commission, Joint Communication to the European Parliament, the European Council, and the Council “EU-China – A strategic outlook” JOIN(2019) 5 final, 12 March 2019, p. 1 21Ibid., p. 5 22European Parliament resolution of 12 September 2018 on the state of EU-China relations (2017/ 2274(INI)), para 8 23Ibid., para 21 24Meunier S (2014) A Faustian bargain or just a good bargain? Chinese foreign direct investment and politics in Europe. Asia Europe J 12:143–158. https://doi.org/10.1007/s10308-014-0382-x The Interactions of Competition Law and Investment Law: The Case of Chinese... 5 and approval under the EU Merger Regulation (EUMR).25,26 When assessing these acquisitions, the EU Commission has been applying ownership-neutral concepts of “concentration,”“single economic unit,”“control,” and “decisive influence,” which, due to the lack of evidence and apparently lack of understanding of the Chinese SOEs’ governance, did not allow to ascertain the potential anticompetitive effects stemming from the state coordination of the SOEs’ commercial conduct.27 As a result, the European policymakers have increasingly turned to alternative regulatory regimes for control and/or containment of the Chinese SOE investments such as foreign investment screening, trade defense measures, and public procurement arrangements. The present chapter addressed the peculiar interactions between the EU merger control regime and the newly introduced foreign investment screening framework prompted by the challenges posed by the Chinese SOEs’ acquisitions in Europe. The analysis is structured in the following way. Section “Chinese SOE Acquisitions under the EU Merger Control Scrutiny” reviews the application of the traditional merger control tools in the Chinese SOE merger cases by the EU Commission. Section ““Legitimate Interests” of the Member States in the EU Merger Control Regime” deals with the “legitimate interests” exception embedded in the EUMR and its applicability in SOE merger cases. Section “The EU FDI Screening Framework as a Regulatory Response to SOE Acquisitions” addresses the EU foreign investment screening mechanism as an emerging regulatory response to the state-led investments. The concluding section provides an outlook on the interaction of the two regulatory regimes (merger control and investment screening).

Chinese SOE Acquisitions under the EU Merger Control Scrutiny

The EUMR is ownership-neutral and is applied in a nondiscriminatory manner to SOE acquisitions and mergers of the private companies alike. Since the application of the EUMR is triggered by the change of “control” over an undertaking, “In the public sector, calculation of the turnover of an undertaking concerned in a concentration needs, therefore, to take account of undertakings making up an economic unit with an independent power of decision, irrespective of the way in which their capital is held or of the rules of administrative supervision applicable to them.”28 Therefore, “a merger or an acquisition of control arising between two undertakings owned by the same State (or the same public body) may constitute a concentration if the

25Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ L24, 29 January 2004 (EUMR) 26Zhang H, Van Den Bulcke D (2014) China’s direct investment in the European Union: a new regulatory challenge? Asia Europe J 12:159–177. https://doi.org/10.1007/s10308-014-0383-9 27Svetlicinii A (2017) The acquisitions of the Chinese state-owned enterprises under the EU merger control regime: time for reﬂection? Revue Lamy de la concurrence 67:30–36 28EUMR, recital 22 6 A. Svetlicinii undertakings were formerly part of different economic units having an independent power of decision. If this is the case, both of them will qualify as undertakings concerned although both are owned by the same State.”29 Hence, “where a State- owned company is not subject to any coordination with other State-controlled holdings, it should be treated as independent.”30 The EU Commission’s practice of applying the abovementioned provisions to the SOEs has been primarily accumulated from the merger cases involving the SOEs controlled by the EU Member States. For example, in SoFFin/Hypo Real Estate case, the EU Commission has considered an acquisition by the German SOE, Financial Market Stabilisation Fund (Sonderfonds Finanzmarktstabilisierung or SoFFin).31 The acquiring SOE was managed by the Financial Market Stabilisation Fund Agency, a public agency managed by the Federal Ministry of Finance in consultation with the German Central Bank. The EU Commission has concluded that the ultimate decision-making power rested at least with the Federal Ministry of Finance and left it open whether the independent power of decision reaches up to the levels of the German government or the German state.32 The same conclusion was reached in Republic of Austria/Hypo Group Alpe Adria in relation to the Austrian Ministry of Finance, without ascertaining the role of the Austrian government or the Austrian state.33 In 1998, the EU Commission has considered the merger of two Finnish SOEs: Neste (with state shareholding of 83.17%) and IVO (with state shareholding of 95.6%).34 Based on the evidence that the two companies acted independently on the market and there were no signs of past state coordination of their commercial conduct, the Commission concluded that the notiﬁed transaction constituted a concentration for the purpose of the EUMR.35 In EDF/Segebel case, the EU Commission addressed possible coordination of the commercial activity of GDF Suez (Electrabel) and of EDF, both of which had substantial shareholdings owned by the French State.36 The state shareholding in both companies was managed by the Government Shareholding Agency (Agence des Participations de l’Etat or APE). Nevertheless, since the state shareholding in Electrabel amounted only to 35%, the Commission concluded that the two undertakings were able to set their commercial strategies independently.37 In 2011, the EU Commission assessed the acquisition of Norwegian producer of silicon metal Elkem SA by China National BlueStar Group, a subsidiary of

29Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings, OJ C95, 16 April 2008, para 153 30Ibid., para 194 31Case No. COMP/M.5508 Sofﬁn/Hypo Real Estate, decision of 14 May 2009 32M.5508, para 25 33Case No. COMP/M.5861 Republic of Austria/Hypo Group Alpe Adria, decision of 4 August 2010 34Case No. IV/M.931 Neste/IVO, decision of 2 June 1998 35Ibid., para 8 36Case No. COMP/M.5549 EDF/Segebel, decision of 12 November 2009 37Ibid., para 92 The Interactions of Competition Law and Investment Law: The Case of Chinese... 7

ChemChina, a wholly owned Chinese SOE, controlled by the central State-Owned Assets Supervision and Administration Commission (SASAC). The EU Commis- sion sought to ascertain the “possible power of the State to influence the companies’ commercial strategy and the likelihood for the State to actually coordinate their commercial conduct, either by imposing or facilitating such coordination.”38 Since in the present case the market share of the companies controlled by the SASAC in the relevant market was not significant, the EU Commission concluded that the question can be left open.39 The concentration has been cleared as the position of the Chinese SOEs under control of the central SASAC and provincial SASACs was very limited on the European markets.40 During the same year of 2011, the EU Commission assessed the proposed joint venture in the petroleum sector involving Sinochem, another centrally held Chinese SOE. When explaining the role of the SASAC, the parties have referred to the “purely supportive role of SASAC which does not interfere in SOEs’ production and operation activities, apart from performing the responsibilities of investor.”41 How- ever, the EU Commission referred to an OECD report42 and an academic publica- tion43 admitting that Chinese State can influence the conduct of the SOEs in less formal ways.44 Another evidence that the Commission noted in its assessment is the following sentence from Sinochem’s annual report: “as the key state-owned enterprise, Sinochem Group is dedicated to serving the greater good of the national political stability, economic development, and social progress”.45 As a result, “in the absence of representations by the Chinese State,” the EU Commission decided to left open the question whether Sinochem enjoys an independent power of decision.46 The same approach was later followed in merger cases involving China National Agrochemical Corporation (CNAC), a subsidiary of ChemChina,47 and PetroChina, a member of the state-owned CNPC Group.48 In the merger case involving CNAC, the competitors voiced their concerns that China Crop Protection Industry

38Case No. COMP/M.6082 China National BlueStar/Elkem, decision of 31 March 2011, para 10 39M.6082, para 22 40M.6082, para 34 41Case No. COMP/M.6113 DSM/Sinochem/JV, decision of 19 May 2011, para 14 42OECD (2009) Reviews of regulatory reform, China 2009: deﬁning the boundary between the market and the state. http://www.oecd.org/gov/oecd-reviews-of-regulatory-reform-china-2009- 9789264059429-en.htm. Accessed 25 Mar 2019 43Naughton B (2006) The Chinese economy: transitions and growth. The MIT Press, Cambridge, MA 44Desai K, Mohan M (2011) Fear of the Chinese or business as usual at the European Commission? EU merger regulation and the assessment of transactions involving Chinese state-owned enterprises. CPI Antitrust Chron 2:1–10 45M.6113, footnote 10 46M.6113, para 16 47Case No. COMP/M.6141 China National Agrochemical Corporation/Koor Industries/ Makhteshim Agan Industries, decision of 3 October 2011 48Case No. COMP/M.6151 PetroChina/Ineos/JV, decision of 13 May 2011 8 A. Svetlicinii

Association could facilitate price coordination among the Chinese companies active in the relevant market.49 The EU Commission displayed sufficient confidence in the effectiveness of the EU antitrust rules to prevent such practices: “this practice could fall under the antitrust rules of the Treaty on the Functioning of the European Union. They have thus an incentive not to engage in such practices.”50 In 2015, the EU Commission assessed the acquisition of Italian tire manufacturer Pirelli by China National Tyre & Rubber Co., a wholly owned subsidiary of ChemChina.51 For the purpose of merger assessment, it was necessary to establish whether the ultimate decision-making power belongs to ChemChina or to the Chinese government through the central SASAC. The acquiring party argued that central SASAC does not interfere in the managerial decisions and that “any action that can undermine the independence of the top managers of SOEs is prohibited under the law of the People’s Republic of China.”52 The EU Commission, however, has managed to avoid taking a decision on the managerial autonomy of ChemChina because the analysis of the existing vertical links between the merging parties and other Chinese SOEs raised no anticompetitive concerns.53,54 In 2016, another subsidiary of ChemChina, China National Chemical Equipment Co., sought to acquire KraussMaffei Group GmbH, “a global market leader in the plastics and rubber processing machinery industry.”55 The case has brought up a question whether SOEs controlled by the central SASAC, such as ChemChina, should be distinguished from those controlled by provincial and regional/municipal SASACs. The notifying party stated that “regional governments own the Regional SOEs, have managerial appointment authority and have their own interests” and that central SASAC and regional SASACs do not have a direct-command relationship.56 In the absence of anticompetitive concerns, the EU Commission has not reached any definitive conclusions on the specified issue. This “wait and see” approach was interpreted as unwillingness of the Commission to create any precedents in the absence of sufficient evidence.57 This approach provided little guidance to the national competition authorities of the Member States that routinely reviewed acquisitions by Chinese SOEs that did not reach the EU merger control thresholds. A recent study on the enforcement practice of the national competition authorities in

49M.6141, para 77 50M.6141, para 78 51Case No. COMP/M.7643 CNRC/Pirelli, decision of 1 July 2015 52M.7643, para 12 53M.7643, para 21 54James TA, Morse MH (2017) Regulatory hurdles facing mergers with Chinese state-owned enterprises in the United States and the European Union. China Antitrust L J 1:1–24 55Case No. COMP/M.7911 CNCE/KM Group, decision of 15 March 2016, para 3 56M.7911, para 9 57Fountoukakos K, Puech-Baron C (2012) The EU merger regulation and transactions involving states or state-owned enterprises: applying rules designed for the EU to the People’s Republic of China. Concurrences 1-2012:44–54, 52 The Interactions of Competition Law and Investment Law: The Case of Chinese... 9 the EU indicates that the state ownership attributed little attention in the merger assessments and the merger decisions issued at the national level provide even less clarity than Commission’s “wait and see” approach.58 In 2016, the EU Commission has cleared joint investment by Electricité de France S. A. and CGN into three newly built nuclear power plants in the UK: Hinkley Point, Sizewell, and Bradwell.59 When examining the ultimate level of control over CGN, the EU Commission considered (1) the SOE’s autonomy from the State in deciding strategy, business plan, and budget and (2) the possibility for the State to coordinate commercial conduct by imposing or facilitating coordination.60 In its assessment the EU Commis- sion concluded that China’s law on SOEs and 2003 Interim Measures for the Supervi- sion and Administration of the Investments by Central Enterprises accorded SASAC with certain influence over the major decision-making of the centrally controlled SOEs, including CGN.61 The Commission also noted the creation of the China Nuclear Industry Alliance, which was led by the Chinese government to achieve certain synergies in the nuclear industry and eliminate detrimental competition in the export markets.62 These factors led to a conclusion that “Central SASAC can impose or facilitate coordination between SOEs in the energy industry.”63 As a result, all Chinese SOEs in the energy industry were regarded as members of a single economic entity.64 The EU Commission’s decision in the present case is notable due to its “willingness to grapple to any serious degree with the issue of defining the relevant group in mergers involving Chinese SOEs in the text of its clearance decision.”65 In 2017, the EU Commission assessed the acquisition of Swiss agrochemical company Syngenta by ChemChina, which was already active in this sector through its subsidiary, CNAC.66 The Commission identified 17 Chinese SOEs (local, regional, and national) that produced active ingredients that overlapped with those marketed by Syngenta. The acquiring party argued that ChemChina cannot be regarded as a part of a single economic entity comprising other SOEs owned by the central government: (1) the principle of nonintervention in the commercial activities of the SOEs by SASAC; (2) SASAC acts only as an investor without affecting “strategic decisions” of the SOEs; (3) SASAC does not have authority to

58Svetlicinii A (2018) The acquisitions of the Chinese state-owned enterprises under the national merger control regimes of the EU member states: searching for a coherent approach. Mark Comp L Rev 2:99–120 59Case No. COMP/M.7850 EDF/CGN/NNB Group of Companies, decision of 10 March 2016 60M.7850, para 30 61M.7850, para 37 62M.7850, para 44 63M.7850, para 48 64Lallemand-Kirche G, Tixier C, Piffaut H (2017) The treatment of state-owned enterprises in EU competition law: new developments and future challenges. J Eur Comp L Pract 8:295–308. https:// doi.org/10.1093/jeclap/lpx016 65Riley A (2016) Nuking misconceptions: Hinkley point, Chinese SOEs and EU merger law. Eur Comp L Rev 37:301–324, 312 66Case No. COMP/M.7962 ChemChina/Syngenta, decision of 5 April 2017 10 A. Svetlicinii influence the commercial strategy of the SOEs; and (4) there are no interlocking directorships in ChemChina and other SOEs, and China’s Anti-Monopoly Law prohibits exchange of commercial information among the competitors.67 The EU Commission did not address any of the abovementioned claims since “for the purpose of the Transaction, whether ChemChina is regarded as one economic entity with other companies owned by the Chinese Central Government or not, does not have an impact for the competitive assessment of the Commission.”68 As the EU Commission is growing more accustomed to the assessment of the corporate governance features of the Chinese SOEs, one can expect that following the EDF/CGN/NNB case, the SOEs in sectors other than energy could be also considered as a single economic entity, which would place the mergers of such SOEs outside the ambit of the EUMR and outside the enforcement of Article 101 TFEU, which prohibits anticompetitive practices among independent undertakings.69,70 A real test to the Commission’s assessment could arrive when it will decide to oppose a merger involving SOEs due to the likelihood of anticompetitive effects.71 The commentators have also questioned the Commission’s declared ownership-neutral approach to SOE mergers contrasting its preparedness to consider all Chinese SOEs as parts of “China Inc.”,72,73 while such approach would be unthinkable if the SOEs in question were controlled by any of the EU Member States.74 As shown by the above considerations, the “wait and see” approach taken by the Commission in the majority of the merger cases involving the Chinese SOEs cannot be explained solely by the absence of sufficient or reliable evidence. In its 2017 report on state-initiated distortions in the Chinese economy,75 the EU Commission conducted a detailed analysis of various legal and policy documents related to the corporate governance of the Chinese SOEs, which is much more detailed and sector- specific than the evidence discussed in the context of the abovementioned merger cases. In this report, the EU Commission referred to “more informal arrangements”

67M.7962, paras 84–87 68M.7962, para 88 69de Kok E (2017) Chinese SOEs under EU competition law. World Comp L Econ Rev 40:583–612 70Zhang A (2012) The single-entity theory: an antitrust time bomb for Chinese state-owned enterprises? J Comp L Econ 8:805–830. https://doi.org/10.1093/joclec/nhs026 71Slot PJ (2015) The application of the EU merger control rules to state owned enterprises. Eur Comp L Rev 36:484–492 72Zhang A (2012) The single-entity theory: an antitrust time bomb for Chinese state-owned enterprises? J Comp L Econ 8:805–830. https://doi.org/10.1093/joclec/nhs026 73Zhang A (2017) The antitrust paradox of China, Inc. NYU J Int L Politics 50:159–226 74Stemsrud O (2011) “China Inc” under merger regulation review: the Commission’s approach to acquisitions by Chinese public undertakings. Eur Comp L Rev 32:481–487 75Commission Staff Working Document on Significant Distortions in the Economy of the People’s Republic of China for the Purposes of Trade Defence Investigations, SWD(2017) 483 final/2, 20 December 2017 The Interactions of Competition Law and Investment Law: The Case of Chinese... 11 such as “networked hierarchy,” which is defined as a “dense network of connections and personal links between individual SOEs managers and political cadres which in turn are an expression of the Party exercising control over the economy.”76,77,78 The analysis of the legal framework governing the state control over SOEs exercised by the SASAC and other state authorities led the EU Commission to conclude that it “sets up a system in which the SOEs, rather than acting according to commercial considerations, have to pursue a number of other objectives, such as complying with national industrial policies.”79 The role of the party influence over SOEs was also addressed in relation to the personnel appointments: “The Corporate Governance GO therefore effectively confer on the Party the power to exercise significant influence within the SOE’s central decision making body, as well as to nominate the SOE’s management.”80 It should be emphasized that the specified Commission’s report has been produced in the context of the trade defense framework based on the implementation of the new anti-dumping methodology under the Regulation 2017/ 2321.81 While it bears no precedent for the merger control assessment, it indicates that the EU Commission possesses sufficient resources and analytical capabilities to carry out an in-depth assessment on the corporate governance and state control of SOEs in particular sectors of the Chinese economy. The unwillingness of the EU Commission to engage in precedent setting in merger control assessments involving Chinese SOEs is understandable. It should be noted, however, that if the EU merger control regime won’t be able to effectively prevent potential risks stemming from the state-coordinated and state-initiated anticompetitive conduct of SOEs, it would be for the antitrust rules to address such conduct ex post. This will require the EU enforcers to engage in the development of the appropriate competition law standards that would be suitable to the specifics of the SOE corporate governance.82,83

76Ibid, p. 86 77Eaton S (2013) The gradual encroachment of an idea: large enterprise groups in China. Copen- hagen J Asian Stud 31(2):5–22 78Lin L-W (2017) A network anatomy of Chinese state-owned enterprises. EUI Working Paper RSCAS 2017/07. http://cadmus.eui.eu/bitstream/handle/1814/45184/RSCAS_2017_07.pdf? sequence=1. Accessed 25 Mar 2019 79Commission Staff Working Document, Ibid, p. 92 80Ibid, p. 101 81Regulation 2017/2321 of 12 December 2017 amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union, OJ L338, 19 December 2017 82Sappington DEM, Sidak JG (2003) Competition law for state-owned enterprises. Antitrust L J 71:479–523 83Sokol D (2009) Competition policy and comparative corporate governance of state-owned enterprises. BYU L Rev 2009:1713–1812 12 A. Svetlicinii

“Legitimate Interests” of the Member States in the EU Merger Control Regime

A proper understanding of the interaction between the EU competition law and investment regulations would be incomplete without examining the range of measures that the EUMR provides to the Member States for the protection of their “legitimate interests” other than free market competition. For that purpose, Article 21(4) EUMR allows the Member State concerned to impose additional conditions or to prohibit a merger that has been approved by the EU Commission. It is not possible, however, to clear a concentration that has been prohibited by the Commis- sion due to anticompetitive concerns. Among the recognized “legitimate interests” under the EUMR are public security, plurality of the media, and prudential rules. Any other interests must be recognized by the EU Commission after an assessment of their compatibility with the general principles and other provisions of the EU law. The concept of public security can be applied to mergers concerning the production of or trade in arms, munitions, and war material, as well as those related to the security of supply of a product or service considered of vital or essential interest for the protection of population such as energy supply.84 On that ground, the UK has managed to impose additional conditions on the concentrations affecting its defense industry in order to secure sensitive information that was viewed as vital for the maintenance of the UK’s capability for developing, operating, and maintaining technologies essential to the country’ssecurity.85 The security of supply included various types of public utilities such as water or electricity. For example, in Lyonnaise des Eaux/Northum- brian Water case, the EU Commission recognized the legitimate interest of the British authorities in applying their national regulations aimed to ensure a sufficient number of independent water suppliers on the market.86 In EdF/London Electricity case, the intervention of the British authorities on security of supply grounds was acknowledged by the Commission, but not recognized under Article 21 EUMR as it did not require any modifications to the Commission’s clearance decision because the regulatory oversight by the UK could be also exercised post-merger.87 The concept of media plurality covers “measures aimed to maintain diversified sources of information for the sake of plurality of opinion and multiplicity of views.”88 For example, in Newspaper Publishing merger case, the UK Secretary of State for Culture, Media and Sport requested to apply additional requirements

84OECD (2016) Public interest considerations in merger control: note by the European Union. DAF/COMP/WP3/WD(2016)11 (3 June 2016), p. 4 85Case No. COMP/M.1858 Thomson-CSF/Racal (II), decision of 15 June 2000; Case No. COMP/ M.3418 General Dynamics/Alvis, decision of 26 May 2004; Case No. COMP/M.3559 Finmeccanica/Augusta-Westland, decision of 20 September 2004; Case No. COMP/M.3720 BAES/AMS, decision of 14 March 2005; Case No. COMP/M.4561 GE/Smiths Aerospace, decision of 23 April 2007 86Case No. IV/M.567 Lyonnaise des Eaux/Northumbrian Water, decision of 21 December 1995 87Case No. IV/M.1346, EdF/London Electricity, decision of 27 January 1999 88OECD (2016) Public interest considerations in merger control: note by the European Union. DAF/COMP/WP3/WD(2016)11 (3 June 2016), p. 4 The Interactions of Competition Law and Investment Law: The Case of Chinese... 13 under the merger provisions of the 1973 Fair Trading Act to ensure the accurate presentation of the news and the free expression of opinion.89 When assessing the News Corp/BSkyB concentration, the EU Commission has acknowledged the intervention of the UK authorities on the ground of media plurality.90 The Commission noted that “media plurality review has also a different scope and focuses on issues going beyond a competition assessment” such as plurality of persons with control of the media enterprises; availability of a wide range of broadcasting; ensuring due impartiality of news, taste, and decency; etc.91 The broadcasting standards have served the basis of a successful intervention by the UK authorities in the assessment of the Fox/Sky merger case.92 The prudential rules is another “legitimate interest” besides competition, acknowledged in the EUMR. These rules apply to providers of financial services by the national regulatory agencies entrusted with the surveillance of banks, stock- broking firms, and insurance companies.93 For example, in Sun Alliance/Royal Insurance merger case, the EU Commission has admitted the intervention of the UK State Secretary for Trade and Industry on the basis of this “legitimate interest” under the EUMR.94 Outside the ambit of the “legitimate interests” recognized in the EUMR, the Member States may communicate for the Commission’s approval of other public interests not explicitly mentioned. The Commission has been traditionally vigilant not to allow the Member States to block EU-level mergers under the pretext of such “other interests.” For example, in BSCH/A. Champalimaud, the Commission opposed the attempt of the Portuguese government to prevent an acquisition of a Portuguese insurance company by a Spanish bank, thus refusing to acknowledge “national interest in strategic sectors” as legitimate justification for blocking the concentration.95 Similarly, the Commission has opposed the Polish government’s intervention in the UNICREDITO/HVB refusing to recognize the national rules on privatization as “other legitimate interests.”96 In 2006, the Commission rejected the Italian government’s opposition to the acquisition of the Italian motorway toll management company Autostrade by the Spanish company Abertis.97 The concern that the merged entity won’t be able to carry out the necessary investments for the

89Case No. IV/M.423 Newspaper Publishing, decision of 14 March 1994 90Case No. COMP/M.5932 News Corp/BSkyB, decision of 21 December 2010 91M.5932, para 308 92Case No. COMP/M.8354 Fox/Sky, decision of 7 April 2017 93OECD (2016) Public interest considerations in merger control: note by the European Union. DAF/COMP/WP3/WD(2016)11 (3 June 2016), p. 4 94Case No. IV/M.759 Sun Alliance/Royal Insurance, decision of 18 June 1996 95Case No. IV/M.1616 BSCH/A. Champalimaud, decision of 20 July 1999 96Case No. COMP/M.3894 UNICREDITO/HVB, decision of 18 October 2005 97Case No. COMP/M.4249 Abertis/Autostrade, decision of 22 September 2006 14 A. Svetlicinii maintenance of the motorway toll system were not supported by sufficient evidence. The vaguely framed “national economic interests” were rejected by the Commission in the two merger cases affecting the Italian banking sector: BBVA/BNL98 and ABN AMRO/Banca Antonveneta.99 The European Court of Justice has upheld the Com- mission’s refusal to recognize “other legitimate interests” where the Member States have failed to provide sufficient evidence to justify their opposition to the mergers cleared at the EU level.100 The above examples indicate that the EU Commission is willing to oppose the potentially protectionist measures of the Member States that would interfere with the freedom of establishment within the EU internal market or contradict the competition assessment carried out under the EUMR.101 It should be noted that the “legitimate interests” of the Member States recognized under the EUMR do not permit the discrimination on the basis of the nationality of the acquiring undertaking or its ownership status (public or private). The EU Commission openly recognized that due to the ownership-neutral approach of the EU merger control, it may be ineffec- tive in addressing the challenges posed by the SOEs: “EU merger control does not allow the Commission to intervene against the acquisition of a European company solely on the grounds that the buyer benefitted from foreign subsidies. Trade defence instruments address subsidies that affect the price of products imported into the EU. However, these instruments do not cover all potential effects of unfair subsidies or support by third countries.”102 In order to identify possible regulatory responses to these challenges, the EU Commission has planned the following action: “To fully address the distortive effects of foreign state ownership and state financing in the internal market, the Commission will identify before the end of 2019 how to fill existing gaps in EU law.”103 This intention has been reaffirmed by the European Council at its meeting on 22 March 2019: “The Commission intends to identify before the end of the year how to fill gaps in EU law in order to address fully the distortive effects of foreign state ownership and state-aid financing in the Single Market.”104 Among the first steps undertaken for this gap-filling exercise was the adoption of the EU-wide FDI screening framework, which is discussed in the following section of this chapter.

98Case No. COMP/M.3768 BBVA/BNL, decision of 27 April 2005 99Case No. COMP/M.3780 ABN AMRO/Banca Antonveneta, decision of 27 April 2005 100Case C-196/07 Commission v Kingdom of Spain, judgment of 6 March 2008; Case C-42/01 Portuguese Republic v Commission, judgment of 22 June 2004 101Bradford A, Jackson R Jr, Zytnick J (2018) Is E.U. merger control used for protectionism? An empirical analysis. J Empir Leg Stud 15(1):165–191 102EU Commission, Joint Communication to the European Parliament, the European Council, and the Council “EU-China – A strategic outlook” JOIN(2019) 5 ﬁnal, 12 March 2019, p. 8 103Ibid., p. 8 104General Secretariat of the Council, European Council meeting (21 and 22 March 2019) – Conclusions, EUCO 1/19, https://www.consilium.europa.eu/media/38789/22-euco-ﬁnal-conclu sions-en.pdf The Interactions of Competition Law and Investment Law: The Case of Chinese... 15

The EU FDI Screening Framework as a Regulatory Response to SOE Acquisitions

The launch of the Chinese industrial policy initiatives such as BRI and Made in China 2025, followed by the series of Chinese SOEs’ acquisitions in Europe, has prompted individual Member States to express their concerns about the potential risks to the competitiveness of the European businesses coupled with the recurrent limitations on their market access in China. The 2017 Berlin Declaration on industrial policy adopted by Austria, Belgium, Bulgaria, Croatia, the Czech Republic, France, Germany, Hungary, Italy, Latvia, Lithuania, Luxembourg, the Netherlands, Poland, Romania, the Slovak Republic, Slovenia, and Spain urges the EU policymakers to address the “challenges that are raised by competitive foreign industries which are supported through tools that are not in accordance with their obligations under international law or the applicable principles of the EU internal market including EU competition law and ﬁnd an appropriate and balanced response.”105 In response to these concerns, the EU Commission has proposed “an enabling framework for Member States to screen foreign direct investments that may pose a threat to security or public order, as well as a cooperation mechanism and a framework for screening at EU level.”106 The EU Member States continued to insist on reforming the existing competition rules including merger control in order to address the risks stemming from the state- led foreign investments. On 18 December 2018, following the sixth Ministerial Conference “Friends of Industry,” the economy ministers of France, Austria, Croa- tia, the Czech Republic, Estonia, Finland, Germany, Greece, Hungary, Italy, Latvia, Luxembourg, Malta, the Netherlands, Poland, Romania, Slovakia, and Spain have issued a joint statement calling for the “identiﬁcation of possible evolutions of the antitrust rules to better take into account international markets and competition in merger analysis.”107 According to the authors of the communique, the European competition policy must take into account “the evolution of the global competitive environment in terms of investment, trade and industry.”108 The document also proposes to carry out “a comparative assessment of competition policies and State aids control mechanisms of third countries with a view to...explore the adaptations

105Orgalim (2017) Berlin declaration – ministerial conference of the friends of industry. https://www. orgalim.eu/press-releases/berlin-declaration-ministerial-conference-friends-industry. Accessed 25 Mar 2019 106EU Commission, Communication from the Commission “Investing in a smart, innovative, and sustainable Industry: A renewed EU Industrial Policy Strategy,” COM (2017) 479 final (13 September 2017), Sect. 8 107Friends of Industry, sixth Ministerial Meeting, Joint statement by France, Austria, Croatia, the Czech Republic, Estonia, Finland, Germany, Greece, Hungary, Italy, Latvia, Luxembourg, Malta, the Netherlands, Poland, Romania, Slovakia, and Spain (18 December 2018), https://www. gouvernement.fr/sites/default/files/locale/piece-jointe/2018/12/929_-_declaration_finale_-_6eme_ reunion_des_amis_de_lindustrie-en.pdf 108Ibid., p. 4 16 A. Svetlicinii to be made to European competition policy so that it allows European players of international scale to emerge.”109 The leading European economies, France and Germany, have been promoting the idea of establishing and strengthening the “European champions” of the industry, which would require the revision of the existing merger control standards. The German National Industrial Strategy 2030 places a special emphasis on the national champions highlighting that “critical mass necessary for an industrial stakeholder to successfully participate in international competition or to be able to offer certain products and services.”110 It expresses the concern that German or European mergers that would create competitive companies at the international level often fail due to the competition concerns focused on the national and regional markets. The strategy calls for the revision of the applicable merger control rules “so that international competition “at eye level” remains possible for German and European companies.” It also proposes the review of competition and state aid rules that would take a more effective stance against dumping and abuse of dominance and at the same time would “facilitate company mergers in areas in which size is an absolute necessity for entrepreneurial success.” The calls have been opposed by the EU Commission, which was reluctant to allow the Member States to interfere with the merger control enforcement for the purposes of economic protectionism. This echoes the approach of the EU Commis- sion from more than a decade ago expressed by the former EU Competition Commissioner Mario Monti: “Competition policy is key to establishing a level playing field in this common market, which is also a major request by industrial operators helping in particular those with competitive advantages to grow, expand and enter into other markets.”111 This attitude is best illustrated in the rare prohibition decision issued by the Commission in the Siemens/Alstom merger case,112 which according to its promoters was supposed to create a European champion that could rival China’s state-owned rolling stock manufacturer CRRC on the global markets. The prohibition was due to the expected lessening of competition on European markets for railway signalling systems and very-high-speed trains.113 Shortly after the Commission’s decision to oppose the merger, the French minister of economy Bruno Le Maire and German minister for economic affairs and energy Peter Altmaier have issued a Franco-German Manifesto for a European

109Ibid., p. 5 110Federal Ministry for Economic Affairs and Energy, National Industrial Strategy 2030: Strategic guidelines for a German and European industrial policy (5 February 2019), https://www.bmwi.de/ Redaktion/EN/Publikationen/Industry/national-industry-strategy-2030.html 111Monti M (2003) Contribution of competition policy to competitiveness of European economy. Institute of European Affairs, Dublin, 26 May 2003. http://europa.eu/rapid/press-release_SPEECH- 03-264_en.pdf. Accessed 25 Mar 2019, p. 2 112Case No. COMP/M.8677 Siemens/Alstom, decision of 6 February 2019 113EU Commission, press release IP/19/881 Mergers: Commission prohibits Siemens’ proposed acquisition of Alstom (6 February 2019), http://europa.eu/rapid/press-release_IP-19-881_en.htm The Interactions of Competition Law and Investment Law: The Case of Chinese... 17 industrial policy fit for the twenty-first century.114 The manifesto calls for a more ambitious European industrial policy, which should be based on (1) massive investment in innovation including the European strategy for technology funding, strong commitment to disruptive innovation, cooperation in artificial intelligence, and other cutting-edge technologies; (2) reform of the regulatory framework including the revision of competition rules in order “to adequately take into account industrial policy considerations in order to enable European companies to successfully compete on the world stage”; and (3) full implementation of the recently agreed European foreign investment screening framework, using reciprocity in public procurement with third countries, and using trade defense measures against trade- distorting practices. The proposed revisions of the EU competition rules, according to the Franco-German Manifesto, entail the consideration of the following options: (1) taking into greater consideration the state control of and subsidies for undertakings within the framework of merger control; (2) updating the EUMR and merger guidelines in order to take greater account of competition at the global level and potential future competition in the long term; (3) allowing the European Council to override the Commission’s decisions in certain cases; and (4) revising state aid rules to facilitate the implementation of the major research and innovation projects. The abovementioned proposal has been strongly opposed by a number of prom- inent academics led by Massimo Motta (Barcelona Graduate School of Economics) and Martin Peitz (University of Mannheim). Their open letter argues that “competition policy should be independent from political interference based on perceived European industrial goals, and respond to efficiency considerations and the protection of the competitive process.”115 The authors emphasize that the EU competition rules do not prevent the establishment of the “national champions” as long as it creates sufficient synergies and complementarities that would compensate the antic- ipated anticompetitive effects on buyers and consumers. They conclude: “European firms will be successful in international markets if the costs of doing business are lower and if new ideas have the chance to succeed. This also requires vigilant and independent competition authorities that intervene whenever established firms do not compete on the merit, engage in anti-competitive agreements, and plan mergers which would harm customers and final consumers.”116 The EU Commission pushed on with the establishment of the EU-wide FDI screening framework as an alternative to the introduction of further “legitimate interests” in the EUMR. As a result, on 5 March 2019, the EU Council adopted a

114Federal Ministry for Economic Affairs and Energy, A Franco-German Manifesto for a European industrial policy fit for the twenty-first century (19 February 2019), https://www.bmwi.de/ Redaktion/DE/Downloads/F/franco-german-manifesto-for-a-european-industrial-policy.html 115Open letter “More, not less, competition is needed in Europe,” https://www. competitionpolicyinternational.com/wp-content/uploads/2019/02/Open-letter-on-European-champions- with-signatures.pdf 116Motta M, Peitz M (2019) Competition policy and European firms’ competitiveness. Vox CEPR Policy Portal. https://voxeu.org/content/competition-policy-and-european-firms-competitiveness. Accessed 25 Mar 2019 18 A. Svetlicinii regulation establishing an EU framework for the screening of foreign direct investments.117 The EU Council has approved the Commission’s proposal almost unani- mously, with only the UK and Italy opposing it.118 It should be also noted that despite the fact that the EU Commission has no prior expertise in conducting FDI security screening, the abovementioned regulation was drafted and proposed for adoption without carrying out a proper impact assessment.119 The regulation entered into force in April 2019 and will become fully operational from 11 October 2020. The EU Commission has stressed the importance of effective implementation of the FDI regulation: “To detect and raise awareness of security risks posed by foreign investment in critical assets, technologies and infrastructure, Member States should ensure the swift, full and effective implementation of the Regulation on screening of foreign direct investment.”120 In its recent resolution addressing the security threats connected with the rising Chinese technological presence in the EU, the European Parliament welcomed the entry into force of the EU regulation establishing a framework for the FDI screening and emphasized “that this regulation establishes for the first time a list of areas and factors, including communications and cyberse- curity, which are relevant for security and public order at EU level.”121 The regulation aims to “to provide legal certainty for Member States’ screening mechanisms on the grounds of security and public order, and to ensure Union-wide coordination and cooperation on the screening of foreign direct investments likely to affect security or public order.”122 The most important novel features of the regulation are common criteria for FDI screening and the involvement of the EU Com- mission in the FDI screening carried out by the Member States. While it leaves it to the Member States to decide whether to maintain, amend, or adopt any FDI screening mechanisms,123 the regulation requires Member States to “notify the Commis- sion and the other Member States of any foreign direct investment in their territory that is undergoing screening.”124 The Commission and Member State(s) concerned can provide comments to the Member State that is undertaking the FDI screening.

117Regulation 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJ L79, 21 March 2019 118Casarini N (2019) Rome-Beijing: changing the game. IAI Papers 19. https://www.iai.it/sites/ default/ﬁles/iaip1905.pdf. Accessed 25 Mar 2019, p. 7 119Reins L (2019) The European Union’s framework for FDI screening: towards an ever more growing competence over energy policy? Energy Policy 128:665–672. https://doi.org/10.1016/j. enpol.2019.01.029, p. 668 120EU Commission, Joint Communication to the European Parliament, the European Council, and the Council “EU-China – A strategic outlook” JOIN (2019) 5 ﬁnal, 12 March 2019, p. 10 121European Parliament resolution of 12 March 2019 on security threats connected with the rising Chinese technological presence in the EU and possible action on the EU level to reduce them (2019/ 2575(RSP)), para 22 122Regulation 2019/452, recital 7 123Regulation 2019/452, Article 3(1) 124Regulation 2019/452, Article 6(1) The Interactions of Competition Law and Investment Law: The Case of Chinese... 19

The latter should “give due consideration to the comments of the other Member States...and to the opinion of the Commission.”125 Even in cases where a planned or completed FDI which is not undergoing screening in the respective Member States is likely to affect security or public order, the EU Commission and the Member State(s) concerned can provide comments and opinions.126 In addition, the Commission may issue opinions in relation to FDI that are likely to affect projects or programs of Union interest: (1) European GNSS programs (Galileo & EGNOS); (2) Copernicus; (3) Horizon 2020; (4) Trans-European Networks for Transport (TEN-T); (5) Trans- European Networks for Energy (TEN-E); (6) Trans-European Networks for Tele- communications; (7) European Defence Industrial Development Programme; and (8) Permanent structured cooperation (PESCO).127 The regulation introduces a non-exhaustive list of factors that may be considered by the Member States or the Commission during the FDI screening: (1) critical infrastructure; (2) critical technologies; (3) supply of critical inputs such as energy, raw materials, and food; (3) access to sensitive information including personal data; and (4) freedom and pluralism of media. When assessing the proposed foreign investments, the Member States and the EU Commission may also consider “whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding.”128 To allow the Commission and the Member States to assess these links to a foreign state, the investor will be requested to provide information concerning its ownership structure as well as the source of funding for its planned investment.129 At the time of the adoption of the EU FDI screening framework, less than half of the Member States had a regulatory framework for security screening of foreign investments.130,131 As the debate on the need of EU-wide FDI screening unfolded, several Member States have revised and strengthened their existing rules, while other considered the adoption of new legislation. While the EU Commission has not carried out an impact assessment prior to the adoption of the FDI screening regulation, the independent studies suggest that the increased scrutiny of foreign investments will require more administrative resources required to conduct the screening, which will result in “the increased compliance costs, uncertainty and delays expe- rienced by the acquiring firms and risk of lower FDI inflows and reduced access to

125Regulation 2019/452, Article 6(9) 126Regulation 2019/452, Article 7 127Regulation 2019/452, Annex List of projects or programs of Union interest referred to in Article 8(3) 128Regulation 2019/452, Article 4(2)(a) 129Regulation 2019/452, Article 9(2) 130European Parliamentary Research Service (2018) Briefing: EU framework for FDI screening. http://www.europarl.europa.eu/EPRS/EPRS-Briefing-614667-EU-framework-FDI-screening- FINAL.pdf. Accessed 25 Mar 2019 131Meunier S (2014) Divide and conquer? China and the cacophony of foreign investment rules in the EU. J Eur Publ Policy 21(7):996–1016. https://doi.org/10.1080/13501763.2014.912145 20 A. Svetlicinii capital for domestic firms.”132 The commentators have cautioned that “the real risk of this Regulation is not so much the screening of FDI but that it could be abused as a tool for disguised protectionism and classic state-governed economic national- ism.”133 For example, the EU Commission could “force” individual Member States to block certain foreign investments that would be competing with European companies or on the basis of geopolitical reasons.

Conclusion

As discussed in this chapter, the implementation of the China’s industrial policies has resulted in the increased outward investments in various strategic sectors and infrastructure projects by the SOEs supported by the state-owned banks. Due to the size of the centrally controlled SOEs, their acquisitions in the EU have reached the turnover thresholds, which require their notification and assessment by the EU Commission applying the merger assessment standards of the EUMR. The ownership-neutral merger assessment standards, as well as lack of understanding or sufficient evidence concerning corporate governance of the Chinese SOEs, posed significant challenges in applying the concepts of “control” and “single economic entity” and ascertaining the likelihood of coordinating the commercial practices of the SOEs. The Commission’s “wait and see” approach provided little guidance to the national competition authorities, which produced substantial heterogeneity in assessing the Chinese SOEs’ acquisitions among various Member States. The present chapter has explored inter alia whether and how the Member States make use of the “legitimate interests” exception embedded in the EUMR, which allows the Member States to block or condition the EU-level mergers on the grounds of various public interests such as national security, media plurality, and prudential rules. It has been shown that at times Member States have attempted to block the concentrations cleared by the EU Commission for the purposes of economic protectionism, but such attempts have been continuously overruled by the Commission and the European Court of Justice. Up to date there have been no attempts to invoke Article 21 EUMR in order to challenge any of the Chinese SOE acquisitions that have been cleared by the EU Commission. The cautious attitude of the EU policymakers toward the Chinese SOE investments in Europe coupled with the expectations of better market access in China for the European companies has gradually shifted toward more defensive and proactive in constructing the regulatory framework that would address potential security risks and unfair competition generated by such investments. While the leading economic powers

132Copenhagen Economics (2018) Screening of FDI towards the EU. https://www. copenhageneconomics.com/publications/publication/screening-of-fdi-towards-the-eu. Accessed 25 Mar 2019, p. 47 133Lavranos N (2019) The new EU Regulation on the screening of foreign direct investments: a tool for disguised protectionism? EFILA Blog. https://eﬁlablog.org/2019/01/22/the-new-eu-regulation- on-the-screening-of-foreign-direct-investments-a-tool-for-disguised-protectionism/. Accessed 25 Mar 2019 The Interactions of Competition Law and Investment Law: The Case of Chinese... 21 of Europe (primarily France and Germany) have been calling on the EU Commission to consider the revision of the existing merger control rules in order to allow the establishment of the “European champions,” the EU competition law enforcers have been continuously opposing this move fearing that such revisions would hamper competition on the EU internal market causing prejudice to the European consumers. Thus, without considering the alteration of the existing merger control and antitrust standards, the EU Commission has considered a range of alternative regulatory responses to the competition challenges and security risks posed by the foreign SOE investments in Europe. The regulatory package included strengthening the trade defense rules that would provide for imposition of anti-dumping measures as permitted by the WTO rules and the establishment of the EU framework for the FDI security screening. Therefore, it should be expected that the newly introduced EU FDI screening framework and the continuous implementation and strengthening of the national FDI screening mechanisms will present a more substantial hurdle for Chinese SOE acquisitions than the national or EU merger control rules. The status of SOEs will remain among the challenges in the current negotiations of the EU-China investment agreement, especially in relation to the applicability of the dispute settlement mechanisms and the competitive neutrality of SOEs.134,135,136,137

Cross-References

▶ China’s Bilateral Investment Treaties ▶ Essential Security Interests in International Investment Law: A Tale of Two ISDS Claims Against India ▶ From SEZ to FTZ: An Evolutionary Change toward FDI in China ▶ National Security Exception in International Economic Law in an Age of Hege- monic Rivalry ▶ National Security: The Role of Investment Review Mechanisms ▶ State-Controlled Entities: International and Arbitration Challenges ▶ The EU as a Global Actor for FDI: EU Competence in FDI (Lisbon + Opinion) and Issue of EU International Responsibility (Post-Lisbon Directives)

134Gallagher N (2016) Role of China in investment: BITs, SOEs, private enterprises, and evolution of policy. ICSID Rev 31(1):88–103. https://doi.org/10.1093/icsidreview/siv060 135Mendenhall J (2016) Assessing security risks posed by state-owned enterprises in the context of international investment agreements. ICSID Rev 31(1):36–44. https://doi.org/10.1093/icsidreview/ siv056 136Spano A (2017) The EU-China CAI negotiations and ISDS mechanisms: the role and status of Chinese SOEs. EU-China Obs 2:13–17 137Wei Y (2019) Challenges, issues in China-EU investment agreement and the implication on China’s domestic reform. Asia Paciﬁc L Rev 26:170. https://doi.org/10.1080/ 10192557.2019.1576347