Overseas investments by Chinese energy companies are on the rise. In addition to the United States and Europe, which have long been home to high-quality energy assets, Chinese energy companies have also maintained a high level of interest and investment in Central Asia and Latin America in response to the historical opportunities presented by the "One Belt, One Road".1 However, there are both opportunities and challenges when invest abroad, Chinese energy companies often face antitrust reviews in multiple jurisdictions, the reviews may become even more stringent due to the state-owned background as global trade protectionism is still lingering.
In 2022, the acquisition of Maersk Container Industry by CIMC failed to pass the antitrust reviews of the United States and Germany. The two parties had to terminate the transaction while CIMC paid Maersk a "reverse breakup fee" of USD 85 million (about RMB 600 million) based on the requirements of the transaction agreement. 2 Whether a transaction can be approved by antitrust authorities in various jurisdictions has long been one of the decisive factors for the success of overseas investment projects. When "becoming global", Chinese energy companies should understand and pay attention to the antitrust regulatory risks, make preparation and contingency plans in advance, and stop losses in a timely manner if necessary.
1. The Antitrust Review Challenges for Chinese Energy Companies Investing Abroad
The main ways for Chinese energy companies to carry out overseas projects are to provide equipment and construction as suppliers or contractors, or to directly purchase overseas assets. Investment involving the direct acquisition of overseas assets usually have high requirements in terms of investment scale, transaction difficulty, regulatory intensity, and other aspects. It is also the type of overseas project that directly and deeply face antitrust regulation in the invested jurisdictions, and the response to antitrust regulation involving multiple jurisdictions is more of a systematic project.
1. Antitrust approval is a decisive factor in the success or failure of overseas investment
The legal work for overseas investment usually involves many steps, such as due diligence, design of shareholding and transaction structure, negotiating and drafting the agreements for equity or asset acquisition, arrangement of closing date and post-closing obligations. Proper arrangement for timely merger filing assessment in the involved jurisdiction is a necessary step of the overall transaction risk assessment, which is one of the decisive factors for the success of the transaction. The reason is simple: most jurisdictions stipulate that the closing of a transaction cannot take place prior to the receipt of antitrust clearance from such jurisdiction. The antitrust review eventually leads to three outcomes: unconditional approval, approval with restrictive conditions, and prohibition. If the transaction has or may have the effect of excluding or restricting competition, the transaction may be subject to materially restrictive conditions or even prohibited. The transaction, as well as the rights and interests of the parties will be seriously affected and even the transaction itself may fail. In view of the importance of merger filing and review in cross-border M&A projects, the terms of equity or share and purchase agreements ("SPA") are usually arranged with "governmental approval" as a condition precedent clause or termination clause of the transaction. In addition, the SPA of some transactions also includes "reverse breakup fee" to be paid by the buyer if the transaction is terminated due to the failure to obtain antitrust approval, which may amount to approximately 8% of the transaction amount. The "reverse breakup fee" in major transactions can run into hundreds of millions or even billions of US dollars.
2. The essence of antitrust review is a policy tool for overseas market access
M&A is the fastest and most convenient way for incumbent companies in the relevant market to expand their scale, and likewise, the fastest and most convenient way for potential entrants in the relevant market to enter the market directly to compete. M&A could change the market structure in the long run. The purpose of the antitrust review is to prevent the market being monopolized by a single undertaking or several undertakings jointly. This is the reason why antitrust notification in M&A projects is also known as Merger Review or review of concentration of undertakings.
In terms of the function of "monopoly control", antitrust review is also a policy tool for market access. In most jurisdictions, such as the US, the EU, China, and Peru, merger filings shall be conducted before closing, i.e., the undertakings involved in the transaction cannot close their shares or assets without the prior approval of the antitrust authorities. In a few jurisdictions, such as Kazakhstan, merger filings are wholly or partially subject to post-closing filing (or notification) review, e.g., the Entrepreneur Code and related competition regulations of Kazakhstan provide that, when that certain notification conditions and thresholds are met (e.g., the same person holds positions on the executive bodies, boards of directors, supervisory boards or other management bodies of two or more undertakings and the very individual determines the business activities of those undertakings), the undertakings involved in the concentration may notify to the antitrust authority within a certain period of time after the closing of the transaction. Of course, regardless of whether the notification is made beforehand or afterward, all the parties are faced with the risk of being unable to close the transaction if it fails the antitrust review. If antitrust approval is not obtained, the parties will have no choice but to give up the transaction. On the other side, the antitrust review system fulfills its mission of restricting or impeding market access.
Other supporting measures of antitrust review can also be policy tools for market access. In the EU, although it has a well-established antitrust review system, its antitrust authorities still apply the "single economic entity" rule3 several times to examine the entry into the European market by state-owned Chinese companies under a relatively strict policy.
II. Antitrust Review Trends and Requirements in Main Jurisdictions
In addition to the traditionally active antitrust enforcement regions such as the EU and the US, countries along "One Belt, One Road" and Latin American countries have also gradually improved their antitrust laws and enforcement mechanisms. For example, in 2020, Kazakhstan established the Agency for the Protection and Development of Competition, incorporated the promotion of competition and active competition policy into the priorities of the entire executive branch, and introduced mechanisms and methods for assessing the impact of draft laws on competition4; and in 2021, Peru enacted legislation on the concentration of undertakings that applies uniformly to all industries to replace the Antitrust and Anti-Oligopoly of the Electricity Industry Act, which only applied to the electricity industry5. At the same time, the EU and the US have increased their antitrust scrutiny of Chinese companies, e.g., ChemChina's acquisition of Syngenta was strictly scrutinized and eventually subjected to restrictive conditions in the EU, while CIMC's deal with Maersk was directly prohibited by the antitrust authorities of the US and Germany.
1.. US
The Clayton Act, the Hart-Scott-Rodino Antitrust Improvements Act, and other laws established the primary major merger control mechanisms in the US, with the primary purpose of restraining anti-competitive mergers and the concentration of capital and economic power. The Hart-Scott-Rodino Antitrust Improvements Act supplements in detail the principal requirements of the Clayton Act regarding the control of concentrations of undertakings and establishes a mechanism for the prior review and notification of concentrations by FTC and DOJ. The US adopts a composite criterion such as transaction volume, business turnover, and asset value of the parties to the transaction, and makes adjustments every year according to economic development indicators such as gross national product and inflation rate. Therefore, it is worth paying attention to whether the criteria are changed from year to year.
2. EU
Council Regulation (EC) No. 139/2004 of 20 January 2004 on the Control of Concentration Between Undertakings (also known as "the EC Merger Regulation") has established a premerger notification and review mechanism led by the European Commission. For Chinese companies investing in Europe, they should pay attention to whether the global turnover of all parties involved in the transaction and the turnover in the EU meet the thresholds stipulated in the EC Merger Regulation. In addition, for Chinese energy companies with state-owned backgrounds, the European Commission has treated all state-owned companies in the Chinese energy industry as a single economic entity in several cases, increasing the turnover of Chinese state-owned enterprise groups to meet the thresholds for EU merger filing and obtain the jurisdiction. For example, in the case that CGNPC and EDF's joint control of NNB (2016), because CGNPC's turnover in Europe was too small to meet the threshold by its own turnover, the European Commission would not have been able to exercise jurisdiction over the transaction. In the end, the European Commission combined the turnover of CGNPC with that of other state-owned nuclear power companies, and the transaction ultimately met the threshold of filing.
3. Central Asia
Most of the countries in Central Asia have established their own merger filing mechanisms. Kazakhstan's Enterprise Code and other laws have established a notification system combining pre-closing notification and post-closing notification, under which undertakings are required to conduct pre/post-closing filing to the antitrust authorities based on the nature of their transactions, provided that the turnover thresholds are met. The Competition Law of Uzbekistan, on the other hand, has established an antitrust review system of pre-closing notification and the turnover threshold for merger notification is calculated based on the multiple of the "basic calculation value", a reference index established in Uzbekistan. The developmental potential of the energy industry of oil and gas, new energy, etc., in Central Asia attracts many Chinese energy companies, which need to pay attention to the individualized merger filing mechanism of the target countries in the process of investment in Central Asia.
4. Latin America
Since Latin American countries joined the "One Belt, One Road" international cooperation, Chinese energy companies have shown a strong interest in quality assets in Latin America. In 2020, Three Gorges Group's listed company Changjiang Power Co. Ltd. acquired Peruvian company Lutus for a base price of US$3.59 billion, helping the Three Gorges Group entering the overseas power distribution market for the first time. In Latin America, Mexico, Brazil, Chile, Peru, and other countries favored by Chinese energy companies have established pre-closing notification mechanisms, while Mexico, Chile, and Peru have not issued specific monetary amounts for notification thresholds, but have established notification criteria based on reference index multiples. Therefore, Chinese energy companies investing in Latin America need to pay attention to the annual changes in the reference index of merger filing in the above-mentioned countries in order to accurately calculate the threshold.
III. Practical Responses to Challenges from Antitrust Review in Overseas Projects
The above antitrust review mechanisms and cases in various jurisdictions prove that under the increasingly stringent global regulatory and enforcement environment, the road of investing abroad by Chinese energy companies is not destined to be a straightforward one. However, companies can still take various precautionary measures to face the challenges. On the one hand, companies can assess and deal with the risks that may lead to overseas antitrust review in advance; on the other hand, if a transaction must be filed abroad, Chinese energy companies can still reduce the risks of the transaction through a professional team of lawyers and a systematic response plan.
1. Ex-ante prevention: assessment and control of merger filing risks
A comprehensive understanding of the trends and priorities of merger filings and reviews in other jurisdictions is a prerequisite for effective risk assessment and control. For overseas investment projects of Chinese energy companies, internal or external lawyers who are well-versed in domestic and foreign antitrust laws and regulations should be brought in from the very beginning to participate in the design of the transaction structure, negotiation, and determination of the terms of the transaction in advance.
First of all, Chinese energy companies should understand the mechanism of merger filing and review in other jurisdictions before carrying out overseas investment projects, fully and comprehensively assessing whether merger filing should be made in a particular jurisdiction, the timeframe, and the results. Second, where there is a high risk of restrictive conditions or prohibitions being imposed on the transaction, the level of antitrust risk should be identified during the agreement drafting, pre-negotiation, and negotiation process, and a response plan should be made, including the consideration of the worst-case scenarios such as deal structure, divestiture or prohibition, and "break-up fee/reverse break-up fee" provisions. Third, the antitrust risks of the transaction are usually assessed by the buyer's antitrust lawyers, but it is also a common risk management strategy to have the seller's antitrust lawyers reassess the antitrust risks of the transaction during the negotiation. Finally, Chinese energy companies also need to keep an eye on the major jurisdictions' legislative progress and regulatory enforcement trends in the energy and antitrust fields which would be an important reference basis for investment decisions.
2. In-process response: multi-jurisdictional merger filings and coordination
Chinese energy companies need to consider how to respond to simultaneous or sequential merger filings in multiple jurisdictions around the world. First, although the merger filing system is similar across jurisdictions, there are still differences in the substantive and procedural details of the system across jurisdictions, requiring an assessment of the filing criteria, the pre/post-filing mechanisms, the timeframe of notification and review, and the impact of the merger filing on the transaction itself. Secondly, it is not easy to coordinate merger filing from multiple jurisdictions. the antitrust lawyers and the cross-border M&A lawyers should first determine the jurisdictions in which an overseas investment project needs to be notified in accordance with the corporate structure, asset holding structure, and transaction structure. In addition, different language and culture, way of thinking and even time differences also create barriers to communication between different jurisdictions. Therefore, it is important to find lawyers with matching professional ability and high-quality service in a timely manner, so as to understand the demands of Chinese companies more accurately. Generally speaking, in view of the complexity of multi-jurisdictional filing and the serious legal consequences that may arise from failure to file, companies need to hire professional antitrust lawyers as early as possible to conduct the assessment of merger filing. It would be better to choose a well-known law firm with offices in major jurisdictions around the world as the team leader, together with some local lawyers in the jurisdictions involved for specific merger filing work. The lead law firm will be responsible for collecting the required materials from the transaction parties based on the filing requirements of the jurisdictions involved, preparing reports on market definition, market share, and competition analysis, and fully coordinating the domestic and foreign filings with reference to the transaction timeframe and the antitrust review timeline to ensure the approval of all required filing jurisdictions before the close of the transaction. 6
3. Post-facto improvement: closing, adjustment, and termination of investment
For transactions subject to antitrust review, the antitrust authorities in each jurisdiction will grant unconditional approval, approval with restrictive conditions or prohibition. If the overseas investment project is unconditionally approved by the antitrust authorities of all jurisdictions, which is a happy ending and the Chinese company may proceed to complete the subsequent closing of the transaction with its transaction partners; if the overseas investment project is approved with additional conditions in some jurisdictions, the company may negotiate with the transaction partner on the restrictive conditions to obtain a supplementary agreement to the transaction, which is more favorable to itself and reducing the possible losses. If the project is prohibited in some jurisdictions, the target would become "peacefully separate" from its transaction partners. The parties shall fulfill other obligations in the transaction agreements that have survived the termination of the agreements.
IV. Conclusion
As more and more Chinese energy companies become active in the global M&A market, the legal risk of antitrust review may increase. Chinese energy companies are not only subject to increasingly strict antitrust reviews in the EU and the US but also have to deal with the constantly evolving antitrust review systems in Central Asia and Latin America. Against the background that countries with major high-quality assets around the world continue to pay more attention to the investment by Chinese energy companies, it is necessary to have a deep understanding of the regulations and antitrust review mechanisms in the target countries. Chinese companies should fully use the transaction arrangements such as transaction agreements, and hire professional legal teams to prevent the global antitrust review risks before, during and afterward.
Footnotes
1. For example, Uzbekistan has signed cooperation agreements with two new energy companies, Huaneng and Poly, to build solar photovoltaic plants with a total capacity of 2,000 MW in Jizak and Tashkent，See http://www.chinapower.com.cn/xw/gjxw/20230227/189966.html.
2. https://mp.weixin.qq.com/s/howaZ1Jsh3cqRMdR_1YNVw.
3. The European Commission, on the grounds that Chinese SOEs are not independent in decision-making under the supervision of the State-owned Assets Supervision and Administration Commission ("SASAC"), treats Chinese SOEs participating in concentration and other SOEs in the same industry or have certain connections under the supervision of SASAC as an single entity, and uses the combined turnover and competitive effects of the sigle entity as the basis for the notification of concentration and the assessment of competitive effects. See Jet Deng, Ken Dai：Antitrust Regulatory Challenges for SOEs Going Global: Independence Issues under EU Notification of Concentration of Undertakings System《国企走出去面临的反垄断监管挑战：欧盟经营者集中申报独立性问题》, China Market Regulation News.
4. Antimonopoly agency in Kazakhstan: working in a new way, https://www.dentons.com/en/insights/articles/2021/february/5/antimonopoly-agency-in-kazakhstan-working-in-a-new-way。
5. Yao Shunyu: A first look at the centralised control system of Peru's operators in the context of electricity industry compliance《电力产业合规视域下秘鲁经营者集中控制制度初探》, https://mp.weixin.qq.com/s/Bhx1oIWmH4Gg4UUOrUZMxg。
6. See Jet Deng, Ken Dai: A Practical Review of Notification of Concentration of Undertakings in M&A Transactions《企业并购交易的经营者集中反垄断申报法律实务》，https://mp.weixin.qq.com/s/kSp3EBw-LqjQ87HqnVumQA。
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