When State Enterprises Have Deeper Pockets: Ensuring Competitive Neutrality in Cross-Border M&A

State enterprises (SEs) are playing an increasingly important role in cross-border mergers and acquisitions (M&A). Due to their special relationship with the government, SEs often have undue competitive advantages over their private competitors. SEs may leverage these undue competitive advantages in cross-border M&A to outbid private investors. This results in an inefficient allocation of production resources and prevents private competitors from reaching their full potential of economic efficiency. Although this problem is accentuated in the context of Chinese SEs, it is also of general importance, as SEs in numerous countries benefit from undue competitive advantages. However, the current national competition laws, international investment agreements (IIAs) and domestic investment screening regimes inadequately address this concern. In particular, international investment agreements traditionally focus on investor protection and less on achieving competitive neutrality. Even the provisions on competitive neutrality contained in recently concluded international investment and trade agreements do not apply to cross-border M&A. Investment screening regimes, on the other hand, primarily assess foreign acquisitions with regard to national security. Merger control under competition law also has a limited focus. It deals with the impact of M&A on the relevant markets and does not assess whether the acquisition itself is in accordance with the principle of competitive neutrality. Regulatory reform proposals in this regard are largely missing. A three-pillar approach, focusing on international investment principles, international investment agreements and domestic investment screening and competition law regimes, may prove useful for further regulatory attempts to ensure competitive neutrality in cross-border M&A.