China's Ministry of Commerce ("MOFCOM") announced on 17 June 2014 that it had prohibited the P3 Alliance between three large shipping companies. This is only the second time in 5 years that MOFCOM has blocked a transaction under China's Anti-Monopoly Law ("AML").
This decision shows once more that MOFCOM does not hesitate to flex its muscles in global transactions, especially when the interests of Chinese companies – even competitors – are at stake.
The P3 Alliance
Three of the leading worldwide shipping companies, Moller-Maersk, CMA CGM and MSC Mediterranean, entered into a cooperative agreement, the P3 Alliance. The purpose of the Alliance was to share the capacity of the three shipping companies on Asia-Europe, Trans-Pacific and Trans-Atlantic shipping lanes. They would create a joint vessel operation center to coordinate the fleets of the alliance members. Importantly, the parties had structured the transaction to ensure that each of them would "retain its separate identity and shall have fully separate and independent sales, pricing and marketing functions." Thus, while they would coordinate capacity, they would continue to compete against each other.
The Alliance was approved by the US Federal Maritime Commission ("FMC"). The EU Commission similarly decided not to open a formal investigation into the alliance.
China took a different approach.
MOFCOM considered that the relevant market was that of international container liner shipping services. Its investigation was particularly focused on the Asia-Europe routes. MOFCOM considered that the combined market shares of the three shipping companies on these routes would amount to 47% in terms of capacity. It found that this would lead to a significant increase in the parties' market power and also increase concentration in the market. In addition, MOFCOM found that the transaction would increase barriers to entry, although without offering further details. Of greatest significance, MOFCOM considered that other competitors would be put at a competitive disadvantage and that customers as well as ports have weak bargaining power against shipping companies.
According to the published decision, the parties attempted to negotiate possible remedies with MOFCOM but could not offer an acceptable remedy package.
MOFCOM concluded that the P3 Alliance would have the effect of restricting or eliminating competition on the Asia-Europe container liner shipping services market, and prohibited the transaction.
1. MOFCOM had not outright blocked a transaction since 2009, when it prohibited Coca-Cola's acquisition of Huiyuan, a Chinese producer of soft drinks http://www.jonesday.com/antitrust-alert--coca-cola--huiyuan-deal-is-first-acquisition-blocked-by-china-antitrust-review-03-19-2009/. It has imposed remedies in a number of transactions, including "hold-separate" remedies that force the buyer to keep the acquired business separate and to ensure that the two entities continue to compete independently (see for example www.jonesday.com/antitrust-alert-lessons-from-chinas-merger-review-decisions-learned-in-recent-hard-drive-acquisitions-03-09-2012/). While these hold-separate remedies are in effect "soft prohibitions," because they prevent the buyer from exercising control over the acquired business, MOFCOM had not formally blocked a combination since 2009. The P3 Alliance decision, and the failure of the parties to come up with acceptable remedies, demonstrate that in some cases MOFCOM will take a hard line. Interestingly, in this particular case, the three shipping companies already had put measures in place to hold separate some aspects of their commercial policies, but these apparently were not viewed by MOFCOM as sufficient to allay its concerns.
2. The decision raises interesting questions about the interplay between Article 13 of the AML (prohibiting anticompetitive agreements between competitors) and the merger control provisions. In principle, the merger control provisions only apply when there is acquisition of control over another undertaking. In this case, although the alliance technically involved the creation of a new entity, the parties' cooperation did not entail the acquisition of control over any pre-existing entity, but rather was a cooperative agreement between competitors. In addition, the three members of the alliance would continue to compete independently in most respects.
The US FMC and the EU Commission reviewed the P3 Alliance under provisions relating to anticompetitive agreements, rather than merger control. The MOFCOM decision does not further explain why MOFCOM considered that the Alliance fell under the merger control provisions of the AML, other than by saying that this would be a tight alliance. It is generally understood that MOFCOM views the creation of a new separate legal entity as resulting in the acquisition of control over that entity – in this case presumably joint control by the three parties – and thus to be a "concentration" under the AML. However, it would have been useful guidance to understand why this particular structure, leaving the alliance members competing separately, actually would constitute a concentration. It could also be that the parties themselves preferred to characterize their alliance as a concentration in China.
One benefit of the AML merger control provisions is that they force MOFCOM to issue a decision within a certain period of time. There are no such binding deadlines when the other anti-monopoly regulators review an agreement under Article 13 of the AML and the alliance otherwise could have been subject to future antitrust scrutiny at any time in the future.
3. The Chinese shipping industry – the parties' competitors – vehemently objected to the P3 Alliance and asked MOFCOM to block it. Under the AML, MOFCOM must consider industrial policy considerations, such as the effect on the development of the national economy. This may explain why MOFCOM took a decision contradicting the findings of the European Commission on the Asia-Europe routes, although the facts reviewed by both regulators presumably were identical.
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