Originally published March 2, 2010 Keywords: China, Anti-Monopoly Law, AML,
regulatory, enforcement, merger control, multinationals, Mofcom,
Coca Cola, Huiyuan, SOEs Click here to read
China's Anti-Monopoly Law Merger Control Regime - 10 Key
Questions Answered (Part II) China's Anti-Monopoly Law ("AML") has been in
force for 19 months. At present, the provisions dealing with merger
control are the primary focus of AML regulatory enforcement
endeavours, and several decisions under these provisions by
China's Ministry of Commerce ("Mofcom") have
generated significant international headlines. Perhaps the most
notable of these decisions is Mofcom's prohibition of
Coca-Cola's proposed acquisition of China juice giant Huiyuan
in March 2009. However, in the 12 months since that decision,
Mofcom has also applied the AML to impose conditions on deals
involving such high profile multinationals as Mitsubishi Rayon,
General Motors (GM), Delphi, Pfizer, Sanyo and Panasonic. These developments have heightened foreign interest in the AML
merger control regime, particularly amongst multinationals whose
annual China turnover is sufficiently high to raise the prospect
that some of their M&A deals will qualify for mandatory
reporting in China. Representatives of these multinationals may be
nervous about submitting their transactions for review under a
regime that is not noted for its transparency, and keen for
insights into the regime's track-record and Mofcom's
priorities when it comes to the review process. In this update (the first in a
two-part series) we provide comments in response to five
questions international business operators commonly pose about the
AML merger control regime. Part II of this update series, to be
published shortly, will address five further questions, and both
updates also provide compliance tips of general application. Senior representatives of Mofcom's Anti-Monopoly Bureau have
publicly stated that domestic and foreign business operators are
treated equally under the AML merger control regime, both from a
procedural and 'substantive review' perspective. Despite this, it is telling that all of Mofcom's conditional
approval decisions to date have applied to transactions wholly
between foreign multinationals (i.e. InBev/Anheuser Busch,
Mitsubishi Rayon/Lucite, Pfizer/Wyeth, GM/Delphi and
Sanyo/Panasonic), while the single prohibition decision that has
been announced concerned a foreign takeover of a domestic Chinese
business (Coca-Cola/Huiyuan). To date, no mergers or acquisitions
between Chinese business operators have been the subject of adverse
Mofcom decisions. This raises the question of whether the AML's merger control
provisions evidence any inherent bias against foreign firms. For the most part, the answer is no. Most of the merger control
provisions in the AML apply uniformly to foreign and domestic
Chinese business operators, and do not contain language that
obviously invites application of the regime in a way that may be
said to discriminate on the basis of corporate nationality.
However, there are some notable exceptions. For example, Article 27 lists various factors that Mofcom will
take into consideration when conducting merger reviews. Most of
these relate to general market conditions, and align with key
aspects of merger assessment that apply in mature antitrust
jurisdictions like the US and EU. However, one of the factors listed in Article 27 is "the
effect of the proposed concentration on the development of the
national economy". When the AML was promulgated, some
commentators queried whether this type of consideration could
encourage Mofcom to rule against transactions simply because they
may be capable of adversely impacting domestic Chinese companies or
the development of Chinese industry. It is arguable this question has been answered in the
affirmative, most notably via Mofcom's decision in the
Coca-Cola / Huiyuan case. Although Mofcom spokespersons have
stressed that this decision was based solely on "competition
law" considerations, the decision statement justifies the
prohibition order in part by referring to the harm the transaction
could have caused to China's domestic small and medium-sized
manufacturers and the healthy development of the Chinese
fruit-juice drink industry more generally. This language suggests
that industrial policy considerations played a significant role in
the outcome, and that Mofcom may be accused of seeking to protect
'competitors' (when they are domestic entities) as much as
the 'competitive process'. Article 31 of the AML is also significant. This Article applies
to transactions involving a foreign investor that are deemed to
raise national security concerns, and provides that national
security review of such transactions (separate from any required
competition review) will be conducted. These reviews will be the
responsibility of an inter-agency panel jointly established by
Mofcom and the National Development and Reform Commission, which
panel is believed to be there modelled on the Committee on Foreign
Investments in the US. However, to date, it is not clear whether
any transaction has been reviewed under these provisions. Very little information is available regarding the intended
scope and relevant procedural aspects of the 'national security
review' process. However, based on comments by senior Chinese
officials, it is understood that the definition of "national
security" in this context may be read as effectively extending
to cover "national economic security" (rather than just
matters of national defence) and reflects China's intention of
retaining control over key sectors of the economy. Indeed, it is
widely assumed that Article 31 of the AML overlaps with provisions
in Mofcom's 2006 'Merger Guidelines', which provide for
special review of any 'inbound' M&A deals that may
affect "key industrial sectors" in China, " the
"national economy," or involve "well known
trademarks or traditional brands" of China. Obviously the
prospect of this kind of review may prove particularly problematic
for inbound acquisitions of high-profile or economically
significant Chinese companies. Of course, apart from the issue of how neutrally relevant AML
provisions are framed, there is the matter of whether Mofcom will
(or can) apply even the most objective aspects of the law in an
impartial fashion. In this context, there are concerns that Mofcom may struggle to
obtain the support it needs from high levels within China's
Communist Party in order to challenge domestic deals that, whilst
raising competition concerns, also align with the Party's
policy of encouraging consolidation in domestic markets and the
building of national champion firms. A related problem is that many of China's largest companies
(and thus many of the domestic companies whose deals are likely to
qualify for AML merger review) are State Owned Enterprises
("SOEs"). Although the AML contains provisions that may
be read to allow SOEs operating in key industrial sectors in China
to receive special treatment under the law, Mofcom has indicated
that this will not be the case in respect of the merger control
regime. However, whether or not this turns out to be accurate, a
more pressing issue has emerged in that some SOEs appear reluctant
to submit to the merger regime at all. This issue is discussed
further in our response to Question 2 below. It would be wrong to conclude on the basis of the factors
mentioned above that the AML merger control regime will always be
heavily skewed in favour of domestic Chinese business operators,
although there is cause for some concern in this regard.
Nonetheless, the evidence to date suggests that foreign firms have
good reason to be especially vigilant in complying with the regime,
and in seeking to foster good relationships with China's
enforcement officials. Where business operators implement a transaction in violation of
the AML merger control regime (including as a result of a failure
to comply with the mandatory notification provisions), Mofcom is
empowered to order parties to terminate and/or unwind the
transaction, dispose of relevant assets, shares/equity or
businesses within a certain period, and take other measures to
restore the conditions that existed before the transaction. Mofcom
may also impose fines of up to RMB 500,000 on the business
operators responsible for the violation, and those business
operators could additionally be the subject of private action
claims for damages. However, to date no party appears to has been fined or subjected
to other penalties under the AML merger regime, notwithstanding
that there appears to have been several cases where transactions
were implemented in clear breach of the relevant provisions. Perhaps the most notable transaction falling into this category
is the October 2008 merger between two of China's leading
telecommunications companies - China Unicom Limited ("China
Unicom") and China Netcom Group Corporation (Hong Kong)
Limited ("China Netcom"). The merger, which was implemented as part of broad reforms of
China's telecommunications industry, clearly qualifies as a
"concentration" under the AML and - given the enormous
China turnover of the parties involved - should have triggered the
AML provisions requiring mandatory prior notification to (and
approval by) Mofcom. However, it is understood no filing was made
by the relevant companies. When questioned on this, senior Mofcom officials have reportedly
expressed frustration, and have confirmed that a filing should have
been made. For its part, it is understood that representatives of
China Unicom have defended their actions based on the fact that the
transaction was consistent with a reform plan drafted by
China's Ministry of Industry and Information Technology, and
thus was government-approved. This difference of views is likely to
have been (and may continue to be) repeated in relation to other
transactions by China SOEs for as long as other Ministries at a
similar hierarchical level to Mofcom believe that their regulation
and management of businesses operating within the sectors they
oversee should not be subject to 'second-guessing' by
Mofcom. Given this wilful domestic disregard of the regime, Mofcom may
be reluctant to commence penalising foreign firms for similar
transgressions - lest they be accused of double-standards. It is also likely that Mofcom's hesitation in taking action
against business operators who fail to comply with the mandatory
reporting provisions in the AML reflects its recognition that too
many uncertainties have existed in relation to the operation of
these provisions. In particular, Mofcom may have taken into account
the lack of clarity that has existed regarding which minority share
acquisitions and joint ventures qualify for mandatory notification
and review, due to the fact that Mofcom's implementation
measures dealing with these issues remained in draft form
throughout 2009. However, it should be noted that Mofcom recently finalised
several of these measures (such as the Measures for the
Notification of the Concentration of Business Operators and the
Measures for the Examination of the Concentration of Business
Operators, both of which were effective from 1 January 2010).
These documents do not provide complete clarity on the scope of the
AML's mandatory notification regime, but they do resolve
several longstanding uncertainties - and Mofcom has made it clear
that other issues can be resolved on a case-by-case basis through
formal consultation. In this context, it may be considered that any window for
unpunished 'avoidance' of the regime is fast closing. According to Article 30 of the AML, Mofcom is only required to
publish merger review decisions prohibiting or imposing conditions
on a transaction. Accordingly, Mofcom has not publicly announced
its unconditional clearance decisions, and only rarely releases
statistics on the volume of transactions it has reviewed. However, from the information available to date, it is
understood that the rate of Mofcom's unconditional clearance
decisions is presently at least 93 percent. This is on the basis
that: However, it is worth repeating that there appears to be a number
of transactions (particularly involving SOEs in China) that have
not been reviewed by Mofcom, notwithstanding that they appear to
qualify for mandatory reporting under the AML. This may make
Mofcom's clearance rate appear more favourable than it would
otherwise be, particularly as some commentators believe that a
number of the consolidation transactions that have occurred between
China's largest SOEs in recent times have warranted close
antitrust analysis. Chapter IV of the AML sets out a clear timeline for
Mofcom's merger reviews. Specifically: Accordingly, Mofcom's formal review process in relation to
notified deals can last up to 180 days. However, it should be noted that Mofcom has sole discretion in
determining what constitutes a complete filing, and may make
multiple requests for additional materials after a notifying party
has made it initial submission. Therefore, Mofcom's delay in
accepting an initial submission can considerably prolong the
overall review period. By way of example, it is understood that the period between
submission of an antitrust filing and its acceptance by Mofcom as
being complete (after relevant supplemental information requests)
was approximately two weeks in relation to the GM / Delphi deal,
four weeks in relation to the Mitsubishi Rayon / Lucite deal, seven
weeks in relation to the InBev / Anheuser deal, two months in
relation to the Coca-Cola / Huiyuan deal and three months in
relation to the Sanyo / Panasonic deal. Mofcom officials have publicly stated that they expect the vast
majority of deals to be cleared within the Phase I formal review
period, and the evidence available to date supports this. However,
several important factors need to be taken into account by parties
considering the potential review period for deals: The AML's mandatory notification obligation will commonly
apply where two business operators participating in a relevant
transaction (such as two merging parties) are each part of
corporate groups that achieved RMB 400 million (US$58.6 million)
sales in China in the previous financial year. That China turnover does not need to have been derived from a
business within the corporate group that is directly related to the
transaction - it can come from other distinct business lines or
affiliates which are essentially unrelated to that transaction.
This is true whether the transaction is conducted in China or
elsewhere. As a result, it is not uncommon for foreign transactions with no
obvious nexus to China to qualify for mandatory reporting under the
AML. This can lead to unforeseen costs and delays. At this stage, Mofcom has not introduced any measures or
processes by which such transactions, or other relevant deals with
no significant China impact, may benefit from 'short form'
notification requirements or qualify for 'expedited'
review. This differentiates China's regime from a number of mature
merger review jurisdictions, which have "fast track" or
"simplified" review procedures for transactions that (for
example) can be shown not to raise substantive issues in the
relevant domestic market. However, it is worth noting that there are signs Mofcom is
becoming more willing to 'waive' certain filing
requirements if it can be demonstrated (through pre-filing
consultation or submissions) that the relevant information
otherwise required to be provided is extraneous and its production
will be unduly onerous for the parties concerned. Experience has
shown that Mofcom is more likely to indulge such waiver requests in
relation to deals that have no direct nexus with or relevant impact
on a market in China. In Part II of this update series, we will address five further
questions, as follows: Learn more about our
Hong Kong office and
Antitrust & Competition practice. Visit us at
www.mayerbrown.com. Copyright 2010. JSM, Mayer Brown International LLP
and/or Mayer Brown LLP. All rights reserved. Mayer Brown is a
global legal services organization comprising legal practices that
are separate entities ("Mayer Brown Practices"). The
Mayer Brown Practices are: JSM, a Hong Kong partnership, and its
associated entities in Asia; Mayer Brown International LLP, a
limited liability partnership incorporated in England and Wales;
and Mayer Brown LLP, a limited liability partnership established in
the United States. The Mayer Brown Practices are known as Mayer
Brown JSM in Asia. This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications Disclaimer.Question 1
IS THE REGIME BEING APPLIED EQUALLY TO FOREIGN AND DOMESTIC
CHINESE FIRMS?
Question 2
HAVE ANY BUSINESS OPERATORS BEEN FINED FOR NON-COMPLIANCE WITH
THE REGIME?
Question 3
WHAT IS THE CLEARANCE RATE FOR NOTIFIED DEALS?
Question 4
WHAT IS THE LIKELY TIMEFRAME FOR A MOFCOM DECISION?
Question 5
IS THERE ANY PROSPECT OF 'SHORT FORM'
NOTIFICATION OR 'EXPEDITED' REVIEW FOR DEALS THAT DO NOT
APPEAR TO HAVE ANY REAL CHINA NEXUS?