US media the last hurdle for China
buyouts By Thomas H Wilkins
For many years, China was ranked the
number one destination for foreign domestic
investment. Now the cash flow could reverse from
an inward-bound journey to an outward-bound one.
Take for example the state-owned Aluminum
Corporation of China joining Alcoa in a surprise
12% purchase of Rio Tinto. China is concerned that
the combined Rio Tinto and BHP Billiton would
create a monopoly and could cause a disruptive
interference with China's iron ore needs.
But what if the transaction were a Chinese
state-owned enterprise (SOE) offering to buy a US
firm? How would US regulators feel about this?
What rules would be invoked?
Robert M
Kimmitt, deputy secretary of the US Department of the
Treasury, has outlined
the following three "triggers for policy reviews".
The first is whether the transaction will
perpetuate "undesirable underlying macroeconomic
and financial policies". In other words, would the
transaction operate "within the framework of sound
domestic fiscal, monetary and exchange-rate
policies". The second trigger would be whether the
transaction would have an impact on "financial
stability". The third possible trigger for policy
intervention would occur when the transaction
would take active control of a private company,
especially if the company is involved with
national security. Even if there are no national
security concerns, the third trigger could be
invoked if the buyer seeks board seats or unusual
voting rights. The acid test is whether the
transaction would be classified as a "passive" or
an "active" transaction.
There are several
review portals that may have to be crossed. First
is the Committee on Foreign Investment in the
United States (CFIUS), an inter-agency committee
that would be alarmed if there were national
security implications. This committee is chaired
by the secretary of the Treasury, Henry Paulson.
If a buyer does not notify this committee of its
intent, CFIUS has 30 days to permit or begin an
investigation. If it chooses the latter option, it
has 45 days to issue an order to divest.
Headlines on China-US takeovers have
focused on high-profile controversies such as the
China National Offshore Oil Corporation (CNOOC)
2005 attempt to buy Unocal. This bid provoked the
US House of Representatives to refer the matter to
President George W Bush on national security
grounds. CNOOC soon withdrew its bid and Unocal
merged with Chevron for US$17 billion in stock and
cash. This event demonstrates the power of public
opinion in the press and television. Another
high-profile case which was blocked was Dubai
Ports World's attempted takeover of operations at
some US ports.
On the other side of these
headlines, there are many transactions that go
through. The most recent annual figures show that
there have been approximately 10,000 mergers and
acquisitions in the US, of which 1,730 were
foreign in score. Of these only 6.5% were reviewed
by CFIUS and none were blocked. The CNOOC
transaction in 2005 was not formally blocked by
CFIUS but was blocked in the realm of public
opinion ... mainly television and newspapers.
Another portal would be the Securities and
Exchange Commission (SEC). This group would be
greatly interested as to if the transaction would
violate some corporate governance. Would the
transaction compromise the integrity of the
accounting statements and forward-looking
statements? Would the transaction lead to possible
violation of US securities laws?
A Chinese
SOE would not be immune from The Foreign Sovereign
Immunities Act of 1976. While the SOE may argue
that it is not a foreign sovereign, the burden of
proof would be to prove that the investors do not
represent the authority of a foreign state. This
would be unlikely. As recently as December, 2007,
SEC chairman Christopher Cox, in a presentation to
the American Enterprise Institute Legal Center for
the Public Interest, discussed PetroChina in this
context. He argued that even though 12% of its
shares were offered to the Chinese public, the
balance of the shares is owned by the Chinese
government.
One of the theoretical
arguments that would be in the mind of the SEC
would concern control. For example, if a foreign
private issuer is accused of violating US
securities laws, then the SEC would expect
cooperation from the foreign government of the
foreign private issuer. However, if the government
is the controlling entity, then a conflict of
interest would erupt and fair play would be
jeopardized. In other words, how can a foreign
government be both referee and player?
A
final issue that would greatly concern the SEC
would be transparency. In the US, shareholders can
inquire, criticize and form joint action
committees against the affairs of public
companies. However, if inquiry, criticism and
joint action are constrained by government
policies, then the SEC would question the ability
and willingness of SOEs to be forthcoming with
investors. Due to the legislation that formed the
SEC in the 1930s after the Great Depression, which
some say was caused by the 1929 Wall Street crash,
the most important mission statement of the SEC is
to protect the investor. If transparency and
confidence in information are not solid, the SEC
will assuredly be the public defender in any court
or committee proceeding.
Former US
Treasury secretary Larry Summers argued in the
London-based Financial Times' "Economists" forum
during the summer of 2007 that "The logic of the
capitalist system depends on shareholders causing
companies to act so as to maximize the value of
their shares. It is far from obvious that this
will over time be the only motivation of
governments as shareholders."
While the
above cited arguments could be used in court or in
an administration proceeding, it behooves SOEs to
remember how Napoleon Bonaparte once mused ... The
pen is greater than the sword. The power of the
press and television in the US could be the most
decisive factor in any rejection of a SOE's
attempt to merge or acquire a US corporation.
Thomas H Wilkins is
chief executive manager of Joseph Jekyll Advisors
LLC in Athens, Georgia, USA, and a chartered
financial analyst. He holds a master of arts
degree in economics from the University of
Georgia.
(This article first appeared
in ChinaStakes.com. Used with permission.)
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