Government control of cross-border M&A: Legitimate regulation or protectionism

Abstract

Recently, much light has been shed on the conditions under which Foreign Direct Investment (FDI) inflows are beneficial to the receiving state and its citizens. However, when inbound FDI takes the form of cross-border mergers and acquisitions (M&As, as opposed to 'greenfield investment'), nations often see their interests affected. Whereas favouring domestic over foreign ownership is restricted to the field of national security in some countries,other governments seem to perceive a general threat with any takeover from abroad. Accordingly, an increasing number of states have installed control mechanisms that attempt to screen cross-border takeovers for their compatibility with national interests. This article consists of both a legal and an economic analysis. First, an inventory is made of national policy instruments that provide a nation with control over the takeover of domestic firms by foreign investors. Second, we examine the extent to which national control instruments are compatible with international economic law, including regional integration agreements. Third, we discuss the economic reasons for cross-border M&A and the reasons for government control of these transactions.Consisting of both normative and positive elements, the analysis is not restricted to questioning whether and why governments should provide for state control of cross-border takeovers; rather, it extends to the actual motivation behind state interference. The article concludes with several policy proposals. © The Author 2012. Published by Oxford University Press. All rights reserved.