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PRC antitrust authorities have expanded their focus from domestic operational issues to the offshore transactions of foreign companies. Since China’s Antimonopoly Law (AML) took effect August 1, 2008, the PRC government has increasingly asserted its authority to stop abusive market dominance that could negatively affect competition in China. It has also begun to review the competition aspects of offshore transactions. Companies considering a merger, acquisition, or joint venture anywhere in the world should thus acquaint themselves with PRC law and recent rulings—and factor in the PRC Ministry of Commerce’s (MOFCOM) decisions as they do those of US and EU antitrust regulators.
Since the AML took effect, MOFCOM’s Antimonopoly Bureau has approved most merger transactions. At the end of 2009, MOFCOM had concluded 59 cases: 53 were cleared unconditionally, 5 were cleared with conditions, and 1 was rejected. To date, MOFCOM has published six rulings (the conditional clearances and the rejection), five of which dealt with transactions purely between foreign parties. (According to Article 2 of the AML, China has extraterritorial authority over offshore transactions if monopolistic conduct occurs and such conduct eliminates or restricts competition in China’s domestic market.
In its first few published merger transition cases, MOFCOM focused on companies’ operations in China and imposed restrictions on parties’ expansion, manufacturing capacity, supply, and procurement. But MOFCOM may be beginning to assert its extraterritorial jurisdiction over offshore merger transactions more aggressively. For example, in the Panasonic Corp.-Sanyo Electric Co. transaction, MOFCOM’s major focus shifted to parties’ offshore capacities, and Panasonic was required to divest businesses in Japan.
MOFCOM has indicated that it will actively supervise the divesture of business inside and outside China after merger decisions are made. In several of its published cases, MOFCOM imposed divesture deadlines, after which it would appoint a trustee to dispose of the business if the companies had not yet done so. In the Pfizer Inc.-Wyeth corp. and Panasonic-Sanyo transactions, MOFCOM even asserted the right to approve the purchaser of the business.
According to the published cases and MOFCOM’s 2009 Measures on the Review of Concentrations between Undertakings (review measures), MOFCOM may conditionally approve an undertaking and apply any of the following conditions:
China’s first few published antitrust cases have been covered thoroughly in the press. MOFCOM published its first merger decision under the AML—regarding the proposed acquisition of Anheuser-Busch Cos., Inc. by InBev NV/SA—in November 2008. MOFCOM approved this transaction with restrictive conditions, including that inBev would need prior MOFCOM approval for future expansion. In its second published ruling, MOFCOM blocked the Coca-Cola Co. from acquiring China Huiyuan Juice Group Ltd. in March 2009, declaring that the merger would harm competition in China’s juice market. In its third published ruling, MOFCOM in April 2009 approved Mitsubishi Rayon Co. Ltd.’s acquisition of Lucite International Group Ltd. with restrictive conditions, which required Mitsubishi to divest a significant portion of its production capacity in China.
As MOFCOM publishes more cases, analysts can learn more about its decisionmaking processes. Recent published rulings, detailed below, show that MOFCOM’s review process is becoming increasingly sophisticated, though there is still room for improvement.
General Motors’ acquisition of Delphi
In 2009, General Motors Corp. (GM) applied for regulatory approval to acquire Delphi corp., a leading US auto parts manufacturer. Delphi, which was spun off from GM in 1999, supplies auto parts to various vehicle manufacturers in China. US and EU courts and the European Commission had approved the GM-Delphi transaction by August 2009, and GM filed a merger review application with MOFCOM on August 18. MOFCOM conditionally approved the transaction on September 28.
In its ruling, MOFCOM stated that there was no horizontal overlap in the parties’ products and services, noting that the parties had a vertical (supply) relationship. But given GM’s and Delphi’s leading positions and trends in China’s auto parts market, MOFCOM was concerned that the transaction could restrict domestic competition and thus negotiated the following restrictive conditions with the parties:
MOFCOM on September 29, 2009 announced its conditional clearance of Pfizer’s acquisition of Wyeth. Headquartered in the United States, Wyeth and Pfizer are international pharmaceutical companies. MOFCOM considered several products to determine whether the merger would create unfair competition and noted two major concerns: the concentration between Pfizer and Wyeth could restrict or eliminate competition in the swine mycoplasma pneumonia vaccine market; and the parties’ market share in China would reach 49.4 percent, a much higher percentage than the second-largest player’s 18.35 percent market share, allowing the merged entities to control the market price and limit market access.
After extensive consultation with various government offices, industrial organizations, and companies—and discussions with Pfizer—MOFCOM approved the acquisition with the following conditions:
MOFCOM on October 31, 2009 announced its conditional approval of Panasonic’s acquisition of Sanyo—two Japanese electronics firms with global operations. For the first time, MOFCOM imposed conditions on operations located outside China’s borders. Sanyo is the leading global supplier of rechargeable batteries for various equipment and machines, and Panasonic jointly develops batteries for hybrid and electric cars with Toyota Motor Co. The merger was expected to boost Panasonic’s access to the green-energy storage and production market of Sanyo by combining their expertise in solar and fuel cells.
Through a prolonged, nine-month review process, MOFCOM determined that the concentration will restrict or eliminate competition in the market for three products:
Marking the first time MOFCOM has required companies to divest operations outside of China, the ministry approved the transaction with the following conditions:
If the divestitures regarding these three products are not completed within six months, MOFCOM will appoint an independent trustee to transfer the business to an independent third party. Before completing the divestiture, Panasonic’s and Sanyo’s relevant entities must operate independently and may not disclose relevant pricing, client, and other competitive information to the other parties, unless required under legal obligations. Furthermore, the above measures cannot be amended for three years, and MOFCOM must approve any termination of the measures.
Working through China’s merger rules since the AML took effect has been a learning process for PRC government officials and the business community. When dealing with offshore transactions that may eliminate or restrict competition within China, PRC authorities are rendering more sophisticated, transparent, and detailed decisions that contain deeper analysis. MOFCOM has required some applicants to provide detailed descriptions of similar decisions made by foreign jurisdictions, suggesting that it may consider international standards during the review process.
In addition to the State Council Antimonopoly Commission’s May 2009 Guidelines on the Definition of Relevant Markets, MOFCOM issued rules in November 2009 to clarify and codify the conduct of merger review: the Measures on the Notification of Concentrations between Undertakings (notification measures) and the review measures mentioned earlier, both of which took effect January 1, 2010. The notification measures clarify the definition of business revenue and the calculation of business revenue when affiliates are concerned. The review measures formally set out the steps MOFCOM may take in the review process. For example, MOFCOM may solicit comments from government agencies, industry associations, companies, and consumers and may hold hearings with them and the company’s competitors, downstream and upstream players, and experts on the transaction.
While PRC authorities are bringing the merger review process more into line with international practices by providing greater detail, insight into analysis, and clearer terms, companies should monitor their corporate transactions inside and outside China more closely to identify antitrust issues and ensure compliance. They should plan their M&A transactions with MOFCOM merger reviews in mind and prepare restructuring alternatives in case MOFCOM requests changes to the deal structure. Companies should also consider comments from and relationships with the various players involved in merger reviews. Finally, companies should strive to maintain a positive image and good public relations.
Though PRC authorities have made great improvements in the merger review process, the merger review’s procedural transparency and predictability has yet to meet international standards.
For example, the AML allows a three-stage review process over a maximum of 180 days, but the Panasonic-Sanyo transaction took 282 days after the initial application, as 104 days were spent in pre-acceptance consultations with MOFCOM. (The review process generally takes much less time in US and EU jurisdictions.) Standards on the extent and detail of the information to be disclosed to MOFCOM remain unclear. Article 4 of the new review measures states that applicants are encouraged to contact MOFCOM and provide relevant documents and materials necessary to assist it with the review and decisionmaking process but does not elaborate on the extent and coverage of such documents and materials. Without detailed disclosure requirements, applicants will not know how to prepare satisfactory disclosures.
Furthermore, though MOFCOM’s decisions are becoming more detailed, many decisions still need more specific explanations. For example, the rejection of the Coca Cola-Huiyuan deal with little explanation caused observers to wonder whether MOFCOM was merely supporting local industry rather than preserving market competition. China’s merger review process must involve fair, diligently drafted decisions—free from local protectionism—for its rulings to meet international standards, build a respectable reputation within the international community, and provide sufficient guidance for future filers.
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All types of onshore and offshore mergers, equity and asset acquisitions, and other arrangements that involve companies acquiring control, including joint ventures, could be subject to merger reviews in China. In light of China’s antitrust regulatory regime and enforcement practices, companies should familiarize themselves with the PRC Antimonopoly Law (AML) and supplementary regulations.
First, investors should determine whether a transaction warrants a notice and consultation with the PRC Ministry of Commerce (MOFCOM). It is wise to notify and work with MOFCOM on potential concentration issues to avoid possible penalties for noncompliance. According to Article 48 of the AML, if MOFCOM finds a company conducting a merger or acquisition transaction that could lead to a concentration, MOFCOM may order the company to stop the transaction, dispose of shares or assets, transfer the business or adopt other measures to restore the market within a time limit, and impose a fine of up to ¥500,000 ($73,228).
Companies should also familiarize themselves with the thresholds under the AML to avoid submitting borderline cases that may not require MOFCOM review. According to the State Council’s 2008 Regulation on Notification Thresholds of Concentrations between Undertakings, parties must notify MOFCOM if in the previous accounting year
Second, investors need to determine the relevant market by ascertaining the affected market, its degree of concentration, and the major market players. Investors should also ask themselves questions such as “in a horizontal relationship, will the transaction result in a dominating market percentage?” or “in a vertical relationship, will the transaction result in a dominating position in the upstream market and block downstream players?” Any “yes” or “possibly” answers indicate that MOFCOM should be consulted.
Furthermore, according to MOFCOM’s 2009 Measures on the Notification of Concentrations between Undertakings, if the same parties conducted a series of merger and acquisition transactions over two years, the series of transactions will be considered one transaction. If the business revenue volume of the transactions reaches the thresholds provided in the AML, the series of transactions will be subject to a merger review. An investor should therefore pay attention to sequences of similar transactions with the same parties and notify MOFCOM if the transactions approach the threshold.
—Julia Kong[/box]
[author]Julia Kong is an associate at Jones Day in Shanghai.[/author]