Merger and acquisition (M&A) review activity picked up in the last few months of 2011. Recent regulatory changes and landmark cases have shed further light on how the PRC Ministry of Commerce (MOFCOM) will regulate and enforce M&A transactions going forward. Even though global economic conditions remain uncertain, and growth in China is slowing slightly, many analysts anticipate that M&A activity will remain robust in 2012 as companies look to expand through mergers rather than through organic growth. According to USCBC sources, MOFCOM’s limited resources in this field and the addition of some new regulations may lead to longer review times for M&A transactions in 2012.
MOFCOM’s year in review
MOFCOM, China’s merger review authority, saw its most active year to date in 2011. On December 27, two senior MOFCOM officials, Deputy Inspector General Fu Yan and Antimonopoly Bureau Director General Shang Ming, held a press conference to discuss the agency’s efforts to implement the PRC Antimonopoly Law (AML) in 2011. Shang stated that the agency received 194 applications for M&A transactions from January to mid-December, up 43 percent from the year before. According to ministry statistics, MOFCOM unconditionally approved 94 percent of the 160 cases they reviewed in 2011. (For a more complete review of MOFCOM’s M&A work in 2011, see Tables 1-3 below.)
MOFCOM officials have said that streamlining the M&A review process is a priority for 2012. The agency currently lacks an expedited procedure for mergers that have little or no impact on competition law, though Shang has stated that they hope to create a “fast-track” procedure for M&A reviews. MOFCOM’s low thresholds for mandatory notification also slow the process significantly. With caseloads expected to increase in 2012, MOFCOM will be under greater pressure to streamline their review process and increase resources for AML enforcement. In the press conference, Shang said that the PRC government has worked to educate local governments on AML enforcement, and MOFCOM hopes that local branches can help ease the central-level agency’s workload. However, Shang did not provide further details about how provincial and local branches of MOFCOM might assist, or whether there are plans to devolve some M&A authority to lower levels of government.
New regulations to improve enforcement
Several key regulations released by MOFCOM in the latter half of 2011 indicate a push to improve supervision and enforcement of M&A provisions. USCBC reported on MOFCOM’s M&A security review guidelines when they were released in September. While these guidelines appear to be aimed at Variable-Interest Entities (VIEs), the security review process can affect companies in a broad range of sectors by either restricting their transactions or slowing down their review process. Industries potentially affected by the security review guidelines include agriculture, infrastructure, energy and natural resources, equipment manufacturing, technology, and transportation services.
More recently, MOFCOM has shown its intent to crack down on companies that fail to file their M&A transactions. On December 30, MOFCOM published Interim Measures for Failure to Notify. The measures, which take effect February 1, lay out the process for monitoring and punishing companies who meet AML notification thresholds, but fail to file their cases with MOFCOM. Article 13 of the measures lists punishments for parties that fail to notify, which include fines of up to RMB 500,000 (,259) and the prohibition of the transaction. According to media reports, the interim measures are the first of three new regulations on merger control that are expected to be released by the end of 2012. The other two new laws are reported to deal with merger remedies and the investigation of transactions that are below reporting thresholds but still have an impact on competition.
Recent cases of interest
In the press conference, Shang denied that MOFCOM uses the AML to protect domestic industry. He referred to the high-profile case approvals of Yum! Brands, Inc.’s acquisition of Inner Mongolia Little Sheep Catering Chain and Nestle SA’s acquisition of two Chinese beverage companies in 2011. According to USCBC’s most recent member survey, however, nearly a quarter of respondents have stated that they are seeing signs of protectionism in M&A reviews and approvals. While the cases Shang referred to are examples of large foreign firms completing M&A deals in China, it is unclear how meaningful they are. For instance, in the case of Yum’s acquisition of Little Sheep, the transaction had very little influence over broader competition in China’s restaurant industry, as independent operators still account for 90 percent of China’s restaurant market even after the transaction was approved. Analysts say the fact that this case was not passed unconditionally may point to protective reflexes within MOFCOM. Conditions set on this transaction have yet to be disclosed.
Chinese regulatory agencies have also begun to review high-profile transactions regarding state-owned enterprises (SOEs) for the first time. MOFCOM published a conditional clearance on a proposed joint venture between General Electric Company (China) Ltd. and China Shenhua Coal to Liquid and Chemical Co., Ltd. on November 10. This case illustrates MOFCOM’s willingness to review SOE transactions, and the remedies they choose to implement show MOFCOM’s growing confidence as an independent decision-maker. MOFCOM issued a non-structural remedy, in which both GE and Shenhua agreed to “behavioral” restrictions, such as promising not to restrict supplies of coal to competitors. This remedy differs from preferred methods used by US or EU agencies, which tend to favor structural remedies, such as divestments. This case took more than seven months to finalize, further demonstrating the long time frames companies face for M&A reviews in China.