On 19 May 2011, the European Commission (the "Commission") issued clearance under the EU merger control rules for the proposed joint venture between DSM and Sinochem (the "Proposed Transaction").1 Sinochem is one of the largest Chinese State-Owned Enterprises (the "SOEs") and the joint venture will be mainly active in the field of certain antibiotics products. The Proposed Transaction was notified to the Commission on 8 April 2011.

This notification is the latest clearance granted by the Commission involving a Chinese SOE. Commissioner Almunia, in a recent speech at the International Competition Law Forum held in Switzerland, also specifically mentioned two other cases: the acquisition of Elkem by China National Bluestar and the acquisition of Intergen by Huaneng.2 All three cases involved a Chinese SOE and a non-Chinese company. They were all decided in 2011

Independent commercial decision-making power test for SOEs

EU merger control applies to transactions between "undertakings" that exceed specific turnover thresholds. As a general rule, the undertakings concerned for the turnover calculation are: the merging parties in a merger; the purchaser and target in an acquisition; and in the case of the creation of a joint venture, the parents. The general rule is that the turnover of all the companies belonging to the same single economic entity as the undertakings concerned is taken into account, i.e., the ultimate parent company of a group together with all of its subsidiaries (which are deemed to be "controlled" by the ultimate parent). When dealing with SOEs (irrespective of nationality), the Commission will have to assess whether the SOE concerned should be viewed as an undertaking in its own right or as part of a larger "single economic entity" including other SOEs. Since by its very nature, an SOE is controlled by the State, the usual "control" test is not appropriate in the case of SOEs. The essential test is whether the SOE has independent commercial decision-making power and if not, what other undertakings should also be included in the scope.3 This is relevant not only for calculating the turnover of the SOE but also for assessing the substantive competition concerns that the transaction may cause: the Commission will aggregate the market shares of all SOEs forming part of the same single economic entity for the purpose of calculating the market share of the SOE in the markets concerned.

In the past, the Commission has applied the test mainly in analysing SOEs in Europe, such as in France, Spain and Italy. Recently, the Commission also applied the test in the context of Chinese SOEs, partly as a result of their increasing outbound investment activities and increasing turnover generated outside China. In China, SOEs are managed by the State-Owned Assets Supervision and Administration Commission (the "SASAC"). At national level, the central SASAC is a government agency under the State Council (the central government in China). At provincial and local level, the local SASACs are part of provincial and local governments. Among all SOEs, more than 100 SOEs are managed by the central SASAC and the rest (more than 12,000) are managed by the local SASACs.

Is there a "China Co"?

The Commission has adopted a rather cautious approach in examining the relationship between Chinese SOEs and SASAC and also the relationship between Chinese SOEs managed by the central SASAC and those managed by local SASACs. The Commission looked into the decision-making process, the relevant laws and regulations in China, and the history of coordination by the State intervention. In this connection, the Commission not only viewed possible coordination by SASAC, but also into possible coordination by other bodies of the Chinese State, such as Ministries or Chambers of Commerce.

In the two earlier cases, the Commission left the question of the composition of single economy entity open, as it would not change the conclusion of lack of competition concerns in the relevant markets. In DSM/Sinochem, the Commission also did not adopt a final position as to the exact scope of the "single economy entity" involving Sinochem. The Commission adopted a cautious approach also in the light of responses from market players that expressed concerns over possible coordination between Chinese SOEs in the field of antibiotics.

For these reasons, the Commission conducted its substantive analysis based on two alternative scenarios where: (1) Sinochem is deemed as a single economic entity with independent decision-making power, and (2) all Chinese SOEs act as one entity in the sector concerned. The Commission reached the conclusion that even if all Chinese SOEs act as one entity, in the present case the combined market share would remain moderate, and there would still be sufficient competition in the relevant market from a range of large independent competitors. Therefore, the Proposed Transaction would not lead to competition concerns.

It is noteworthy that in the press release of Bluestar/Elkem, the Commission seemed to indicate that a difference exists between SOEs managed by the central SASAC and those by local SASACs. However, in DSM/Sinochem, the Commission did not make such a distinction but considered the market position of all Chinese SOEs active in the sector.

Future filings involving Chinese SOEs

Commissioner Almunia stated in the same speech that Europe will not import principles and practices from the non-market economy countries. Instead, it will apply its rules to all companies irrespective of nationality.

The Commission has thus far not provided a definite answer as to whether a Chinese SOE is a single economy entity or whether all Chinese SOEs are to be considered as one entity. It adopts a case-by-case approach which unavoidably requires more information and data for the assessment.

Currently, there are cases still pending involving Chinese SOEs before the Commission and the parties have been required to provide a broad range of information and data, not only for the SOE concerned but also for all other SOEs active on the same market.

Chinese companies should be prepared to devote additional time and resources in the pre-consultation period and may consider collecting a broader scope of information even before contacting the Commission. It will facilitate communication and the filing process with the Commission and thus prevent unnecessary delays.


1. Press release by the European Commission of 19 May 2011, IP/11/617.

2. J. Almunia, Recent developments and future priorities in EU competition policy, International Competition Forum, 8 April 2011.

3. This principle has been set forth in the so-called Jurisdictional Notice of the Commission.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.