China: Merger Control Review 2009 - China

Last Updated: 19 September 2010
Article by Susan Ning

I INTRODUCTION

The following two authorities deal with mergers:

a. the Anti-Monopoly Bureau within the Chinese Ministry of Commerce ('Mofcom') is the authority responsible for reviewing and clearing merger filings; and

b. the Anti-Monopoly Commission (a division of the State Council) is the authority responsible for formulating and issuing merger guidelines (it is also the coordinating government agency between Mofcom and the two other antitrust enforcement agencies, the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC)).

In China, pre-merger notification is required when the entities participating in the merger possess a certain amount of turnover. Specifically, pre-merger notification is mandatory when, during the previous fiscal year:

a. the total global turnover of all business operators participating in the concentration exceeded 10 billion renminbi, and at least two of these business operators each had a turnover of more than 400 million renminbi within China; or

b. the total turnover within China of all the business operators exceeded 2 billion renminbi, and at least two of these operators each had a turnover of more than 400 million renminbi within China.

The Anti-Monopoly Law (AML) is the primary antitrust legislation which governs merger control. Since the AML was enacted in August 2008, a number of regulations and guidelines relating to  mergers, have been promulgated. The regulations and guidelines listed below, came into effect in 2009:

a. Market Definition Guidelines issued by the Anti-Monopoly Commission of the State Council (effective on 1 January 2009);

b. Rules for Calculating Turnover concerning Concentration Notification of Financial Operators (effective on 15 July 2009);

c. Working Guidance for Anti-Monopoly Review on Concentration of Business Operators (effective on 5 January 2009);[1]

d. Guidance on the Documentation of the Notification of Concentration of Business Operators (5 January 2009); [2]

e. Measures for the Undertaking Concentration Declaration (released on 21 November 2009, effective on 1 January 2010); and[3]

f. Measures for Examination of Concentration of Business of Operators (released on 24 November 2009, effective on 1 January 2010).[4]

II YEAR IN REVIEW

In 2009, we understand that Mofcom received approximately 87 merger review filings. In the same year, we understand that Mofcom made decisions on 67 of the filings. Among these 67 decisions, 62 mergers were approved without conditions; four mergers had conditions imposed; and one merger was not cleared.

As can be seen from above, the vast majority of merger filings were cleared without conditions. The four mergers that were approved with conditions along with the merger that was not approved have sparked considerable discussion and interest. The following are brief descriptions of these five merger cases.

i Merger that was not approved

The merger which was not approved was Coca-Cola Company's (Coke) proposed acquisition of China Huiyuan Juice Group Limited (Huiyuan). In this case, Huiyuan's market share in the Chinese juice market was 10.3 per cent. Coke's market share in the same market was 9.7 per cent. Therefore, post-acquisition, the merged entity's market share would be just under 20 per cent. Due to this relatively low combined market share figure, commentators therefore assumed that the proposed-acquisition would be cleared smoothly. However, Mofcom did not approve of the proposed acquisition. The main reason cited was because Mofcom was of the view that Coke would have the ability to leverage its dominant position in the carbonated soft drink market into the juice market.

According to Mofcom, this leveraging would have the effect of restricting or eliminating competition from other juice supply entities, and would eventually harm the interests of beverage consumers.

ii Mergers that were approved with conditions.

The following four mergers were approved with conditions:

Acquisition of Lucite International Group Limited (Lucite) by Mitsubishi Rayon Co., Ltd. (Mitsubishi)

Mitsubishi is a leading manufacturer of monomers and polymers, based on methyl methacrylate (MMA) and acrylonitrile (AN) complexes. Lucite is the world's leading supplier of MMA, accounting for approximately 24 per cent of the global acrylic monomer market. The merged entity, Mitsubishi Rayon possessed approximately 64 per cent of the MMA market in China. Mofcom imposed a variety of conditions on this acquisition, including a partial divestiture of the MMA output of Lucite China and restrictions on expansion in China in respect of the merged entity over the next five years.

Acquisition of Delphi Corp (Delphi) by General Motors Company (GM)

Delphi is a supplier of automobile components. General Motors is a vehicle or automobile manufacturer. This was an acquisition between two vertical entities. The conditions stipulated by Mofcom were behavioural conditions. For instance, Mofcom stipulated that after the acquisition was completed, both Delphi and GM must guarantee that Delphi and its controlling affiliates shall continue to supply products to Chinese vehicle manufacturers without any discrimination. These behavioural conditions are aimed at eliminating and mitigating anti-competitive adverse effects on other entities in the automobile components and vehicle or automobile manufacturing markets in China.

Acquisition of Wyeth Corp (Wyeth) by Pfizer Inc (Pfizer)

Both Pfizer Inc and Wyeth Corp supply a range of pharmaceutical products in the human health and animal health sector. Mofcom stipulated that Pfizer had to divest its swine mycoplasma pneumonia vaccine business in China.

Acquisition of SANYO Electric (Sanyo) by Panasonic Corporation (Panasonic)

Panasonic and Sanyo are Japanese conglomerates with diversified businesses and operations worldwide. Mofcom identified competition issues in three specific product markets: (1) rechargeable coin-shape lithium batteries; (2) nickel-metal hydride batteries for daily use; and (3) nickel-metal hydride batteries for vehicle use. Both Sanyo and Panasonic were required to divest their businesses (to different extents) in respect of the categories in (1) to (3).

The merger control decisions listed above show that Mofcom is a very active competition authority and would not hesitate to impose conditions (structural or behavioural conditions, or both) or to deny clearance to a merger, when the need arises. Companies who wish to merge or acquire in China should therefore should plan ahead and put in place a well-thought-out merger control strategy.

In practice, we note that Mofcom consults widely with the relevant stakeholders in respect of each merger filing. Relevant stakeholders could include other government authorities, industry associations, competitors and entities in the upstream and downstream industries. We understand that Mofcom undertakes these consultations by questionnaire, by way of phone interviews and sometimes even through visiting and interviewing these stakeholders face-to-face.

III THE MERGER CONTROL REGIME

i Waiting periods and time frames

There are broadly two review phases in which a merger filing would have to go through with Mofcom. First, there is a pre-acceptance phase. Second, there is a formal review phase.

Pre-acceptance phase

When entities submit a merger filing or notification to Mofcom, a 'pre-acceptance' case handler within Mofcom would determine if Mofcom is able to formally accept the filing. This case handler would review the filing for completeness and may also seek clarifications or ask for more details in respect of the filing, if certain aspects of the filing are unclear or need to be supplemented. From our experience, this pre-acceptance period generally takes between two and six weeks. I n other cases (for instance in the Coke/Huiyuan and Mitsubishi/Lucite cases) this phase may even 'stretch' to two or three months. We understand that during this pre-acceptance phase, the entities listed above were repeatedly asked by Mofcom to submit supplementary information in respect of their filings.

Formal review phase

Pursuant to the AML, there are two phases within the formal review phase: Phase 1, the preliminary review period and Phase 2, the further review period. Phase 1 is known as the preliminary review period and lasts 30 calendar days. During this phase, Mofcom will attempt to review the merger filing and make a decision as to whether the filing should be cleared. If merging entities do not hear from Mofcom upon the expiry of these 3 0 days, then the merger or acquisition is by default cleared or approved.

Phase 2 is known as the further review period and lasts 90 calendar days. I f Mofcom has made a decision that a merger filing warrants further review, Mofcom will inform the parties (in writing) before or by the expiry of Phase 1 that the review period is extended into Phase 2.

Furthermore, Mofcom may extend the Phase 2 period by another 60 calendar days at the most, provided that:

a. the applicant agrees to extend the time limit for the review;

b. the documents submitted by the applicant are inaccurate and require further verification; or

c. the circumstances surrounding the filing have significantly changed after notification by the applicant.

It is important to note that if Mofcom fails to make a decision upon the expiry of each set period of time as stated above, the parties may execute the transaction.

The following table summarises the various waiting periods as described above and possible outcomes of the review (i.e., approved, approved with conditions or prohibited).

No Decision

Phase Duration Possible Results Clearance

Phase 1  (preliminary) 30 days Decision for no further review Pending
Decision for further review Attachment Obtained conditionally
No restrictive conditions Obtained
No Decision Obtained

Phase 2  (Further review) 90 days possibly additional days)   Decision of prohibition Denied
Decision of not prohibiting the transaction Attachment of restrictive conditions Obtained conditionally
No restrictive conditions Obtained
Obtained

ii Parties' ability to accelerate the review procedure

Most mergers are time-sensitive. Most merging entities generally wish for the merger review period and procedures to be as swift as possible. I n order to assist Mofcom in clearing merger filings smoothly and efficiently, we would recommend the following approach: first, articulate why your merger is time-sensitive (e.g., is one entity a failing firm?); second, ensure that your merger filing report is complete (according to the Mofcom requirements) and accurate; and third, if Mofcom asks any supplementary questions or asks for clarifications, respond to these further questions swiftly.

iii Third-party access to the file and rights to challenge mergers

Third parties do not possess a statutory right to access merger control files, nor do they possess a statutory right to challenge mergers in the process of review. However, in its review process, Mofcom may seek opinions from third parties (including government agencies, industry associations and other entities) in respect of the proposed acquisition and third parties may voice their opinions through these consultations.

In addition, pursuant to Articles 7 and 8 of Mofcom's Draft Measures for Inspecting Concentration of Business Operators, third parties may be involved in the merger control review process if Mofcom decides to conduct hearings. Participants in these hearings may include: entities involved in the filing; competitors; representatives of upstream and downstream entities (and other related entities); experts; representatives of industry associations; representatives of relevant government authorities; and consumers. Third parties may therefore express their opinions on the proposed merger or acquisition through these hearings.

iv Resolution of authorities' competition concerns, appeals and judicial review

Pursuant to Article 29 of the AML, Mofcom has the right to impose conditions in respect of mergers, in order to alleviate the negative impact of a merger on competition. This gives Mofcom wide discretion to impose a variety of conditions, including structural and behavioural conditions or both. Further, pursuant to Article 11 of Mofcom's Draft Measures for Inspecting Concentration of Business Operators, either the entities involved in the merger or Mofcom may propose conditions.

Pursuant to Article 53 of the AML, entities that are not satisfied with a Mofcom decision in respect of merger control, may seek a review of the decision (i.e., appeal).

We understand that this review process and decision will be undertaken by the Treaty and Law Department of Mofcom.

Entities who are dissatisfied with the decision of the Treaty and Law Department of Mofcom may then seek a further review of the Treaty and Law Department's decision in the courts (i.e., judicial review).

Entities may only seek a review of Mofcom's decisions based on an error of law (including because administrative procedures are in violation of the law, administrative discretionary power has been abused or the result of the merger control review is unjust).

v Effect of regulatory review

Mofcom is the sole authority formally in charge of reviewing mergers. Therefore, it is not obligated by law to consult with or seek the opinions of other authorities or regulators.

However, we are aware that Mofcom does consult with other government agencieson certain mergers. For instance, Mofcom may consult with the State Administration of Radio, Film and Television (SARFT) and obtain the SARFT's opinions in respect of a merger within the broadcasting industry. Such consultation procedures will take time and this is a factor that entities have to consider when submitting a merger filing. Mofcom may consider that such consultations are important and a merger filing may therefore last into Phase 2 if Mofcom is awaiting responses from other government agencies.

IV OTHER STRATEGIC CONSIDERATIONS

i How to coordinate with other jurisdictions

We are not aware of any formal agreements signed between Mofcom and the competition authorities of other jurisdictions in respect of sharing information or otherwise coordinating with each other (in the context of multi-jurisdictional merger filings). We note also that China has not yet joined the International Competition Network.

However, we understand that Mofcom does regularly consult with the competition authorities from the more experienced jurisdictions such as the United States and European Union. The competition authorities from these jurisdictions also conduct capacity building or technical assistance programmes for Mofcom officials.

In practice (in the context of multi-jurisdictional filings), we note that Mofcom will monitor the progress of merger control reviews in other jurisdictions very closely. Mofcom may also ask the entities involved in the proposed merger or acquisition to supply information in respect of their filings in other jurisdictions.

ii How to deal with special situations – financial distress and insolvency, hostile transactions, minority ownership interests, etc.

Financial distress and insolvency

Previously, foreign entities that wished to purchase domestic entities in financial distress or insolvency could apply to Mofcom for an exemption (in respect of notification or review). Despite the fact that there are no statutory exemptions (pursuant to the AML or in related regulations and rules) in respect of acquiring entities in financial distress or insolvency, we are of the view that Mofcom will take this factor into consideration when undertaking the merger review. This is, in particular, in terms of allocating a time-frame for the review.

Hostile transactions

There are no provisions within the AML or in its related regulations or rules that address the manner in which a hostile transaction will be reviewed. We are of the view that under such circumstances, the target entity should nevertheless submit its views to Mofcom for consideration.

Minority ownership interests

There are no provisions within the AML or in its related regulations and rules that address acquiring minority ownership interests. However, the conduct of acquiring minority interests in another entity may also be a notifiable transaction (depending on whether such conduct is construed by Mofcom, as acquiring 'control' of the target company).

V OUTLOOK & CONCLUSIONS

i Pending legislation

Currently, the measures listed are in draft form:

a. Tentative Measures for Investigation and Handling of Concentration of Business Operators That Are Not Legally Notified (Draft); Cf Article 54(2) of the now-repealed Acquisition of Domestic Enterprises by Foreign Investors Provisions.

b. Tentative Measures for Investigation and Handling of Concentration of Business Operators Not Satisfying Notification Thresholds But Involving Alleged Monopoly Acts (Draft); and

c. Tentative Measures for Collection of Evidences on Concentration of Business Operators Not Satisfying Notification Thresholds But Involving Alleged Monopoly Acts (Draft).

ii Unresolved issues

In our view, it would be useful for the merger control regime if Mofcom could clarify matters pertaining to the following issues:

a. the factors that Mofcom would consider when determining whether a joint venture is a notifiable transaction;

b. the factors that Mofcom would consider when determining whether acquiring minority shares in an entity is a notifiable transaction; and

c. whether the resale of goods to China should be taken into consideration when considering an entity's turnover in China.

In addition, it would be helpful if Mofcom could issue public statements (or give a summary of issues considered) in relation to some of the mergers that have been cleared.

This would be helpful in terms of building jurisprudence and increasing transparency in relation to the merger clearance process.

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.

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