Republican lawmaker readies bill mandating foreign subsidy disclosures for mergers

Rep. Scott Fitzgerald, R-Wis., Is seen on the steps of the Capitol during a group photo with newcomers to the House Republican Conference on Monday, Jan. 4, 2021.

Tom Williams | CQ Roll Call, Inc. | Getty Images

A Republican legislature is preparing a bill that would require foreign government-subsidized companies to disclose this information when they enter into large mergers that are subject to US regulators.

The bill, spearheaded by Rep. Scott Fitzgerald, R-Wisc., And tentatively referred to as the Stopping Foreign Government Subsidies for Mergers Act, requires companies that are supported by government agencies to notify regulators of that assistance when they report a deal worth more than $ 92 million.

This additional information can help regulators assess how a company might behave after a merger, Republican federal trade commissioner Noah Joshua Phillips, who supports the legislation, said in an interview with CNBC on Wednesday.

Federal Trade Commission commissioner Noah Phillips testifies during the Senate Commerce, Science and Transport hearing on the lifting of the EU-U.S. Privacy Shield and the future of transatlantic data flow on Wednesday, December 9, 2020 in the Russell building .

Tom Williams | CQ Roll Call, Inc. | Getty Images

“Our legal assumptions and the way we do our jobs are largely based on the idea that companies maximize profits. They strive to make money, ”said Phillips. “But state-owned corporations don’t necessarily have the pursuit of profit as their prime motive, and so may not act in the same way as the corporations we normally look at.”

A company that puts certain policy objectives above profits might make a different calculation when it comes to the risk of anti-competitive behavior, such as undercutting competitive prices so that they can later be increased. While Phillips refused to speculate on the types of conduct a state-owned company might engage in, he said it would help knowing their potential incentives in order to gauge the facts of each individual case.

As it stands, regulators may become aware of a foreign government subsidy in a merger case, but Phillips said the requirement that information be required upfront allows them “to develop expertise and ask the right questions”.

The bill builds on a recommendation by the non-partisan US-China Economic and Security Review Commission last year. In its annual report to Congress, the commission recommended that the FTC put in place a system to determine how such foreign government support would affect proposed transactions.

The commission found that the Chinese government would support companies they saw to become national champions and eventually push them to expand into the US and other countries.

“This process helps Chinese national champions to outperform and oust the world market leaders,” the commission wrote in its annual report to Congress.

The commission said “China’s trade-distorting practices” mean that “US workers and businesses, no matter how innovative and efficient they may be, compete against each other when the Chinese government rules the playing field through a variety of legal and regulatory measures changed in favor of Chinese companies “. and financial mechanisms, and allowing US companies access to the Chinese market comes at the expense of the transfer of valuable intellectual property to their Chinese counterparts. “

The group warned that the risk is particularly acute with new technologies, where China is allegedly trying to “outperform and oust the United States as a whole”.

“It would be bad not to see the seriousness of this challenge and to defend the competitiveness of the US,” wrote the commission. “As these emerging technologies are the drivers of future growth and the building blocks for future innovation, there is a risk that losing leadership today will hold back US economic and technological advancement for decades.”

Although Fitzgerald said he was in the early stages of working with colleagues on co-sponsoring the bill, he said he believes China’s apparent willingness to devote large resources to corporate subsidies is putting lawmakers on both sides of the aisle behind the proposal could.

The bill would not impose national safety assessment requirements on antitrust authorities, which Phillips says is best left to the existing authorities responsible for this type of review. The US Foreign Investment Committee (CFIUS) within the Treasury Department is already responsible for examining the national security implications of, for example, mergers with foreign companies.

Phillips and Fitzgerald said, however, that there is still a need to evaluate foreign subsidized companies from a potential competitive perspective that falls directly within the purview of antitrust authorities.

Doug Melamed, a law professor at Stanford University and former assistant attorney general for the Justice Department’s Antitrust Division, said one possible outcome of such a law, if passed, would be to deter mergers with state-owned companies.

“The most important effect of such a requirement could be to deter the takeover in the first place,” said Melamed. “Because if the Chinese have an interesting stake in Company X that wouldn’t normally show up … it could put them off if they didn’t want their position to be known.”

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