Originally published in International In-house Counsel Journal Vol. 5, No. 19, Spring 2012, 1
Global M&A activity increasingly focuses on businesses with assets and/or sales in the BRIC countries - Brazil, Russia, India and China. From the end of May 2012, when the regime in Brazil becomes suspensory, each BRIC country will operate a mandatory pre-merger control regime requiring transactions that meet relevant thresholds to be notified to, and approved by, the local competition authority prior to closing. A new Russian regime came into force in January of this year, while the first functioning Indian regime came into force in June of last year. We have recently seen the Chinese competition authority intervening in international transactions, imposing conditions for clearance not imposed by other competition authorities. These developments create a new regulatory environment with additional hurdles for international transactions.
This article summarises the new regimes, highlighting the recent changes and aspects of particular interest for international transactions, such as low or ambiguous notification thresholds, the risk of lengthy review periods and broader policy considerations potentially coming into play. The authors also draw comparisons with the existing regimes in the United States, Europe and elsewhere, as well as the 2002 Recommended Practices for Merger Notification Procedures of the International Competition Network (ICN).2
Brazil has been operating a well-established merger control regime for many years, with approximately 8,000 mergers reviewed since 1994.3 Brazilian filings have been numerous (2011: 758 filings) because thresholds are easily triggered by transactions involving large international companies. Filings typically led to a lengthy review process by three authorities with overlapping competences – the Secretariat of Economic Law (SDE), the Secretariat for Economic Monitoring (SEAE) and the Council for Economic Defence (CADE). However, this did not unduly concern transaction parties in most cases, because the regime has been "non-suspensory" and so allowed for closing of a transaction prior to conclusion of the investigation. The issue of most concern was the filing deadline, which required the parties to make a filing within fifteen business days from the signing of the first binding agreement related to the transaction.
Potentially lengthy standstill period. The attention paid to the Brazilian regime will increase significantly from the end of May 2012, when Brazil's new merger control rules will come into effect.4 The reform will bring a dramatic shift to a regime that prevents the parties from closing a notifiable transaction before clearance has been received from CADE. The "standstill period" under the new regime while CADE reviews a transaction can take up to 330 calendar days5: this is one of the longest review periods of all the 100+ jurisdictions operating a merger control regime worldwide. While CADE is expected to clear straightforward cases much more quickly, the potentially extremely long statutory review period creates concerns, particularly in light of the lengthy reviews which were typical under the non-suspensory regime.6 Regrettably, a Phase 1 contained in draft legislation was not included in the final bill, contrary to ICN principles. The authorities are discussing potential regulations to deal with this issue, but have issued no guidance yet. As a result, there may be considerable timetable uncertainty for transaction parties when a Brazilian filing is required. Although the 15 business day filing deadline will thankfully disappear under the new regime, parties would be well-advised to continue to make early filings, given the possibility for delay in clearance.
Agency consolidation and new thresholds. In addition to introducing a suspensory regime, the new rules: (i) consolidate investigative powers within one of the former three Brazilian authorities (CADE); (ii) abolish the former 20% market share threshold; and (iii) introduce a domestic sales threshold for a second party to the transaction. A filing is triggered under the new regime only if one party's group sales in Brazil were at least R$400 million ($234 million) and any other party's group sales in Brazil were at least R$30 million ($17.5 million) in the previous year. These changes are welcome as they should render the review process more efficient and avoid the uncertainties stemming from market share thresholds. However, contrary to ICN principles, the target itself is not required to meet either of the sales thresholds; rather, the seller's group (as well as the purchaser's group) could meet the thresholds and a filing could be triggered on the basis of minimal target sales in Brazil. As such, it will remain the case that a transaction between two major conglomerates can easily require a Brazil filing even when the transaction is small and the target has little activity in Brazil.
Clawback. A new area of potential concern is a clawback provision which allows CADE to review transactions that fall below the notification threshold within one year after transaction closing. Comparable risks exist in only a few other jurisdictions worldwide, including China, the United States and Canada. This creates potential uncertainty for the acquiring party.
Sanctions. Absent a waiver of the standstill obligation, closing without necessary clearance from CADE can lead to fines of up to BRL60 million ($34 million). Under the previous regime, Brazilian authorities have frequently imposed fines for failure to comply with the filing deadline. It can be expected that CADE will equally vigorously enforce fines for breaching the standstill obligation.
Broader policy considerations. Brazilian authorities have previously also considered broader policy issues in merger reviews, such as the effect of the transaction on employment, and have apparently been willing to approve the creation of "national champions" to compete globally, notwithstanding high Brazilian market shares, e.g. the creation of AmBev and Brasil Foods. However, as the review process at an institutional level has been consolidated with CADE, it remains to be seen whether or not broader policy considerations continue to influence decision-making.
From 2006 to 2011, Russia operated a relatively complex pre- and post-closing merger control system (i.e. certain transactions must be cleared prior to closing and others may close while clearance is pending).7 In recent years, the Federal Antimonopoly Service (FAS) reviewed around 3,000 to 4,000 pre-merger filings annually.
New thresholds for "foreign" transactions.
P revious Russian filing thresholds could technically be met on the basis of worldwide assets or revenues alone, even if the parties had no nexus whatsoever to Russia, so parties to international transactions often had to consider whether a filing could be avoided under less clear rules on "local presence". With effect from January 2012, Russia has adopted the Third Antimonopoly Reform Package.8 Among other things9, there are new rules for "foreign" transactions (where the target has no Russian subsidiaries): (i) only an acquisition of at least 50% of the voting rights in a non-Russian target can potentially require a Russian filing (while for "domestic" transactions, certain minority investments remain notifiable); (ii) foreign transactions will require a Russian filing only if the target group achieved sales in Russia exceeding one billion roubles ($33.5 million) in the year preceding the transaction. These changes bring welcome clarity for the application of Russian merger control when the target group does not include a Russian subsidiary, although the sales threshold is relatively low in light of the size of the Russian economy and its expected growth in the coming years.
New thresholds for "domestic" transactions.
& quot;Domestic" transactions (i.e. those where the target group includes a Russian subsidiary) require notification if: (i) the combined worldwide asset value of the parties exceeds 7 billion roubles ($235 million) or their combined worldwide sales exceed 10 billion roubles ($336 million) and (ii) the target group's worldwide asset value exceeds 250 million roubles ($8.4 million). The new rules clarify that the seller's assets and sales are not relevant to the 7 billion rouble asset threshold and 10 billion rouble sales threshold unless it retains joint control over the target. Note that these thresholds apply at a worldwide level. Therefore, if the target group includes a Russian subsidiary, a Russian filing may be required even if the target group has no Russian sales or assets.
Standstill period and sanctions. Cases that raise no concerns are cleared within a 30 day Phase 1 review period. For complex cases, the FAS can open a Phase 2 investigation, which extends the review period by up to two additional months. These are speedy review periods and the FAS is not known for holding up transactions with lengthy reviews. An acquiring party which fails to report a notifiable transaction or does not provide requested information can be fined up to 500,000 roubles ($17,000) and the FAS has imposed a number of fines in the past.
Broader policy considerations. Russian competition law specifically provides that FAS may take into account "the enhancement of the ability of Russian companies to compete on the global market" as a factor in its decision-making. This "national champions" reasoning apparently allowed the FAS to clear a number of transactions creating strong market positions in Russia, such as Rexam/Rostar and Uralkali/Silvinit. Special rules also apply to transactions involving financial institutions and national security industries.
India was the last of the BRIC countries to introduce a functioning merger control regime, when a new pre-closing competition regime entered into force in June 2011.10 Unusually for a suspensory regime, the Indian rules require a filing to be submitted within 30 days from the signing of a binding agreement in the case of an acquisition and, in the case of a merger, within 30 days from the board resolution approving the merger. For the time being, little can be said of the limited decisional practice of the Competition Commission of India (CCI), as it has thus far cleared unconditionally all transactions notified to it.
Potentially lengthy standstill period. The statutory waiting period of up to 210 calendar days is long by international standards. It remains to be seen whether the CCI will deliver on its welcomed promise to clear up to 95% of cases within 30 calendar days and to review cases with serious concerns within 180 calendar days. There are promising signs: prompt and effective delivery of decisions has been identified as a key priority by the CCI's new chairman. Also, the first case under the new regime was cleared within 14 days. The subsequent 23 transactions notified to the CCI were cleared on average in two to six weeks, which is prompt by international standards. However, concerns remain that the CCI may not have sufficient resources to meet the mounting caseload, in particular if de minimis exemptions for filing expire (see below), which may lead to longer reviews and timetable uncertainty for transaction parties.
Complex notification thresholds. The new merger control regime is complex and foresees multiple alternative filing thresholds (based on the parties´ worldwide and Indian sales and asset values and depending on whether the parties are competitors), some of which would frequently be met by substantial international transactions. The new regime was accompanied by a welcome de minimis rule (expected to be effective at least until 2016). According to the de minimis rule, no filing will be required if the book value of the target group´s assets in India is less than Rs2.5 billion ($51 million) or the target group´s sales in India are less than Rs7.5 billion ($153 million). Therefore, unless a target has substantial sales and assets in India, an Indian filing will not be required. There was another recent clarification that the regime does not apply to intra-group transactions or acquisitions of less than 25% of shares or voting rights. Special rules also apply to transactions involving the insurance and defence industries.
Sanctions. Failure to notify a "combination" could attract a penalty of 1% of the total sales or assets of the "combination" whichever is higher. Closing prior to approval will render the transaction void.
China has been operating its current merger control regime for over three years.11 The rules were modelled on those of other international regimes, notably the European Commission's. Since 2008, the Chinese Ministry of Commerce (MOFCOM) has issued several implementing measures and, in September 2011, its first set of guidelines on competitive assessment took effect, providing improved transparency into how it evaluates the competitive effects of transactions.
Enforcement record. By February 2012, MOFCOM had reviewed more than 400 cases. It has so far issued only one prohibition, namely Coca Cola's attempted buyout of Chinese juice and beverage manufacturer Huiyuan in 2009. MOFCOM has imposed conditions in twelve further cases, including recently in February 2012 in connection with the creation of a joint venture between chemical companies Tiande Chemical and Henkel Hong Kong.12 Tiande/Henkel is the second decision on a proposed joint venture, thus confirming the applicability of the Chinese merger rules to joint ventures.13 Eleven out of these twelve conditionally cleared cases have been foreign-to-foreign transactions. The remaining conditionally cleared case, like the prohibited Coca Cola case, was a foreign acquisition of a Chinese company. MOFCOM has not to date intervened in any transactions between Chinese companies. However, with GE/Shenhua being the first conditional clearance involving a state-owned enterprise (SOE)14, MOFCOM has demonstrated that it is willing to intervene in cases involving SOEs.
Despite operating under relatively new rules, MOFCOM has shown confidence in taking decisions that do not always follow those of its US and European counterparts. For instance, it has not shied away from imposing conditions on foreign-to-foreign transaction which have previously been unconditionally cleared in the US and Europe. Remedies were imposed in 2011 to clear Seagate's acquisition of Samsung's hard disk drive business. Seagate/Samsung had been cleared unconditionally in Europe and the United States. Another example is MOFCOM's ongoing review of Google/Motorola, during which MOFCOM has stressed the autonomy of the Chinese merger review process.
MOFCOM also appears to favour behavioural remedies more than most other competition authorities, which typically favour structural remedies, generally business divestments. For example, Seagate was required to form an independent Samsung production line and an independent subsidiary for selling Samsung hard disks and to set Samsung prices independently of Seagate. Seagate was also required to increase Samsung production capacity and to invest at least $800 million in research and development for three years. Also, in Uralkali/Silvinit, MOFCOM's conditions for clearance included a requirement that the merged entity maintain existing potassium chloride quality and supply arrangements in China.
Broader policy considerations. The Chinese rules explicitly state that MOFCOM should take into account the potential impact of a transaction on "national economic development" in its decision-making process. MOFCOM also generally consults within the Chinese Government regarding merger reviews. Accordingly, broader political and industrial concerns can be taken into account, although all the published decisions to date have been reasoned on competition grounds. This inter-agency consulting may partly explain why MOFCOM has reached a different conclusion to other competition authorities in relation to some transactions, as well as the longer review period on average than in other countries for transactions that do not raise potential competition concerns.
Lengthy standstill period. On paper, the Chinese Phase 1 review period of 30 calendar days appears to be in line with international standards. However, in practice most transactions proceed to a Phase 2 review even if the transaction raises no potential competition issues in China (e.g. transactions between companies which are not competitors). Phase 2 can last up to an additional 90 calendar days, although we understand that many transactions are cleared early in Phase 2. In exceptional cases, the Phase 2 review period can be extended for another 60 calendar days. Accordingly, it is not uncommon for MOFCOM to be the last regulator to clear a transaction. We understand that MOFCOM is currently developing a summary procedure, or "fast track", for relatively easy and straightforward cases in an effort to shorten the review period, which would be a welcome development.
Notification thresholds. A Chinese filing is required if: (i) the combined worldwide sales of the transaction parties exceed RMB 10 billion ($1.6 billion); and (ii) Chinese sales of each of at least two parties exceed RMB 400 million ($63.5 million). Alternatively, a Chinese filing is also required if: (i) combined Chinese sales of the transaction parties exceed RMB 2 billion ($317.5 million); and (ii) Chinese sales of each of at least two parties exceed RMB 400 million ($ 63.5 million). These thresholds are sensible in the context of a single acquiring party - they require both parties to have substantial Chinese activities. However, they have inherited the defect in the European Commission system that requires a filing when jointly controlling parents with relevant Chinese sales acquire a target group or set up a joint venture that has little or even no activities in China.
Clawback. The Chinese rules also contain a clawback provision which allows MOFCOM to review transactions that fall below the notification threshold for an unlimited period after closing of a transaction (albeit we are not aware that MOFCOM has yet done so). As is the case with respect to Brazil, Canada and the United States, this creates potential uncertainty for the acquiring party. The US agencies have used their equivalent powers increasingly recently and in Canada the Competition Tribunal is currently considering a case that had not met the filing thresholds.15 It remains to be seen whether MOFCOM will follow suit.
Sanctions. In December 2011, MOFCOM officially issued rules on failure to file a notifiable transaction or closing a transaction before MOFCOM clearance has been given. The rule came into effect on February 1, 2012. MOFCOM can issue fines of up to RNB 500,000 ($79,000) and/or make an order requiring the parties to take measures to restore the situation to that existing prior to the transaction. Companies are also encouraged to "whistleblow" if they are aware of transactions that have not been notified to MOFCOM. Failure to notify MOFCOM when required, or closing without a necessary clearance, is therefore a risk for buyers, but also sellers, who may find themselves required to take back ownership of a business they have sold.
There is no doubt that merger clearances in the BRIC countries will rightly play an increasingly important role in international transactions, alongside those in the US, Europe and elsewhere. Transaction parties seek clear and sensible thresholds to determine whether filings are required and speedy and predictable investigations, with a consistent approach by multiple competition authorities. These objectives are reflected in the ICN merger control principles.
There have been many welcome developments in the BRIC merger control regimes in recent years. However, it remains the case that the thresholds for filings in a number of BRIC countries are either ambiguous or too easily met by international transactions with limited local impact (e.g. where the thresholds can be met by the seller rather than the target). In addition, the review periods are potentially lengthy in several of the BRIC countries (even where a transaction does not raise substantive competition law concerns), which creates transaction timetable uncertainty and can lead to delayed closing.
We have also seen that broader policy considerations appear to be taken into account more readily in the decision-making process in some of the BRIC countries than, for example, in the United States and Europe, where more limited powers exist regarding issues such as national security or plurality of the media. This perhaps reflects the different macro-economic policies of the various Governments in question and may result in either a more interventionist or a more lenient approach in BRIC countries, each of which could be of concern to businesses in terms of predictability and international consistency.
Transaction parties should therefore no longer assume that the increasingly harmonised approach of the US and European competition authorities will set the tone – and the timetable - which all other authorities follow. At an early stage of transaction planning, parties should identify where filings are required, the likely approach of the various regulators and the timetable implications. With early planning and a coordinated approach to the different filing jurisdictions, filings can be made and clearances ideally received more quickly, allowing earlier closing.
1 Emily Roche is Senior Competition Counsel at Rio Tinto plc. Alasdair Balfour is a competition partner and Tobias Caspary is a competition associate with Fried Frank. The authors would like to thank José Alexandre Buaiz Neto of Pinheiro Neto Advogados, Natalia Korosteleva of Egorov Puginsky Afanasiev & Partners, Shashivansh Bahadur of Dua Associates and Barry Nigro of Fried Frank for their valuable comments regarding Brazil, Russia, India and the US respectively, and Fried Frank intern Valentins Hitrovs for his valuable assistance. The law is as stated at 7 March 2012.
2 Recommended Practices for Merger Notification Procedures ("ICN Recommended Practices"), available at http://www.internationalcompetitionnetwork.org. See also the 2005 Recommendation on Merger Review by the OECD, - C(2005)34, available at www.oecd.org.
3 The main competition act, Law 8884/94 (BAL) was enacted in 1994.
4 Law No. 12529/11 of 30 November 2011.
5 The maximum review period of 240 calendar days can be extended by up to 90 additional calendar days.
6 On average, each review took 182 days to complete in 2009, improving to 147 days in 2011.
7 Federal Law № 135-FZ of July 26, 2006 on Protection of Competition (LPC) entered into force on October 26, 2006, available at: www.fas.gov.ru/english/legislation/26940.shtml.
9 Further amendments include the abolishment of post-merger notifications for certain transactions involving financial institutions and the scope of information to be provided in the notification.
10 Indian Competition Act 2002 (as amended); India also promulgated accompanying regulations, all available at: http://www.cci.gov.in/.
11 The Anti-Monopoly Law of August 30, 2007 entered into force on August 1, 2008.
12 Tiande is one of the largest global suppliers of an essential input for the production of chemicals by the notified joint venture and other manufacturers. The transaction was cleared subject to Tiande's commitment to supply the joint venture's competitors on fair, reasonable and non-discriminatory (FRAND) terms.
13 In November 2011 MOFCOM conditionally cleared the joint venture between General Electric (GE) and state-owned coal supplier Shenhua Corp.
14 The case was also the first clearance by MOFCOM of the establishment of a joint venture.
15 Commissioner of Competition v. CCS Corporation, Complete Environmental Inc., Babkirk Land Services Inc., Karen Louise Baker, Ronald John Baker, Kenneth Scott Watson, Randy John Wolsey, and Thomas Craig Wolsey (CT-2011-002).
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