On September 2, 2011, China's Ministry of Commerce
("MOFCOM") released on its website the
Provisional Rules on Assessment of Competitive Effects of
Concentration of Business Operators (MOFCOM 2011 Announcement No.
55, the "Rules"). With 14
articles, the Rules elaborated on the factors to be considered by
MOFCOM in assessing the competitive effects of a business
concentration, which have been listed in Article 27 of the
Anti-monopoly Law ("AML")1
. The Rules are implemented as of today (September 5,
2011).
The Rules set out the basic methodology for its competitive
analysis and the basic elements for application of each factor in a
merger review process. The Rules appear to identify market
share/market control power and market concentration levels as the
most important factors to be considered by MOFCOM in assessment of
competitive effects of a concentration.
Noticeably, the Rules have the following major breakthroughs/new
features:
1.The Rules outlined the basic methodology MOFCOM applies
in assessing competitive effects of a concentration.
According to Article 4 of the Rules, in its competitive
analysis, MOFCOM will first evaluate whether a concentration will
create or strengthen the capability, incentive and likelihood for a
single operator to unilaterally exclude or restrict competition, or
for relevant operators to jointly exclude or restrict competition
if there are only a limited number of operators in the relevant
market. Where the operators are not actual or potential
competitors in the same relevant market, MOFCOM will focus on
whether the concentration is likely to exclude or restrict
competition in the upstream/downstream market or adjacent
market.
Comment
MOFCOM did not use such terms as "unilateral
effects/coordinated effects" (as in the U.S.) or
"non-coordinated effects/coordinated effects" (as in the
E.U.) in the Rules. Neither did it explicitly refer to
"foreclosure effect" (likely caused by a vertical merger)
or "portfolio effect" (likely caused by a conglomerate
merger). However, it appears, both from the Rules and its own
practices, that MOFCOM adopts essentially the same methodologies as
its counterparts in major foreign antitrust
jurisdictions.
For example, in the Coca Cola/Huiyuan case, the only deal
prohibited by MOFCOM thus far, it appears that MOFCOM relied on the
"portfolio effect" theory in finding that "Coca Cola
is capable of leveraging its dominance in the carbonated soft
drinks market to the juice beverage market".2 In
the Mitsubishi Rayon/Lucite case, MOFCOM appears to have relied on
the "foreclosure effect" theory in establishing that
since post-merger, Mitsubishi Rayon will achieve dominance in the
Methylmethacrylate ("MMA") market,
Mitsubishi Rayon "is capable of foreclosing the downstream
operators" of the supply of MMA.3
2 .The Rules outlined the elements that are relevant
for assessment of whether the merging parties have "market
control power".
Article 5 of the Rules explicitly listed 7 factors that
are relevant for assessing the merging parties' market control
power, such as merging parties' market shares, substitutability
of the their products or services, their ability to control the
sales market or the procurement market for raw materials,
production capability of non-merging parties, and purchasing power
of the merging parties' downstream customers.
Comment
In determining if the merging parties have market control power,
the Rules copied a number of factors from Article 18 of the AML,
which are relevant for determining dominant market position of a
business operator. Nevertheless, we understand that it would
require a lower threshold to establish "market control
power" than "dominant market position".
3 .The Rules confirmed that market concentration level
can generally be measured by the Herfindahl-Hirschman Index
("HHI") and the Concentration Ratio Index
("CRn").
Under Article 6 of the Rules, HHI is defined as the sum of the
squares of the market shares of individual operators in a relevant
market; CRn is defined as the sum of market shares of the leading N
operators in a relevant market.
The Rules further set out the basic rule for assessment of
competitive effects by the concentration levels, namely the higher
the concentration level of a relevant market and the higher the
increase of the concentration level post-merger, the more likely a
merger will have anti-competitive effects.
Comment
Both the HHI and CRn are economic concepts that are widely
accepted by major antitrust jurisdictions in determining the level
of concentration in a relevant market. MOFCOM itself had
applied the HHI in the Pfizer/Wyeth case. In this case,
MOFCOM found that post-merger, the HHI of the relevant market (the
PRC market for swine mycoplasma hyopneumoniae vaccines) will reach
2182 with a delta of 336. On this basis, MOFCOM reached the
conclusion that the relevant market is highly concentrated, which
contributed to its finding that this particular deal is likely to
have anti-competitive effects.4
It appears that MOFCOM is willing to rely more on these economic
tools in determining the concentration levels in its merger review
process. However, unlike the practice in U.S. and E.U. where
the post-merger level of the HHI and the increase in the HHI
resulting from a transaction can be a direct indicator of whether a
transaction will likely have adverse competitive effect, the Rules
did not provide a scale of measurement for any competitive
assessment by HHI or CRn.
The Rules have also explicitly identified (without
furnishing any details though) public interests, economic
efficiency, bankruptcy defense and countervailing buyer power as
additional factors that MOFCOM will weigh in during its review
process.
Understandably, although having drawn upon its three years
of practice, the Rules are still lacking in details.
Nevertheless, it demonstrates the efforts of MOFCOM to be in line
with its more experienced foreign antitrust counterparts and to
further improve transparency of its decision-making process.
It will be interesting to see how MOFCOM applies and further
develops the Rules in its future practice.
1 Under Article 27 of the AML, factors to be considered when assessing the competitive effects of a concentration include (i) market shares and market control power of the merging parties in the relevant market; (ii) concentration levels of the relevant market; (iii) impact of the concentration on market entry and technological development; (iv) impact of the concentration on consumers and other relevant operators; (v) impact of the concentration on national economic development; and (vi) other factors that should be considered.
2 See MOFCOM's decision in the Coca Cola/Huiyuan case
at
http://fldj.mofcom.gov.cn/aarticle/ztxx/200903/20090306108494.html
(in Chinese).
3 See MOFCOM's decision in the Mitsubishi Rayon/Lucite case at
http://fldj.mofcom.gov.cn/aarticle/ztxx/200904/20090406198805.html
(in Chinese).
4 See MOFCOM's decision in the Pfizer/Wyeth case at http://fldj.mofcom.gov.cn/aarticle/ztxx/200909/20090906541443.html (in Chinese).
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