With this entry today we return to my favourite theme, namely M&A. In particular today I am going to introduce the delicate subject of
merger control regime
in China.
China has introduced a new merger control regime in 2008 with the adoption of the Anti-monopoly law (hereinafter indicated as AML, available at: www.
http://www.china.org.cn/government/laws/2009-02/10/content_17254169.htm
), which went into effect at the beginning of August 2008, and which has added an additional level of complexity to acquisitions.
In fact, to be more precise a merger control regime is also contained in the M&A Regulations 2006, however the Anti-monopoly has refined these rules.
The AML applies to both foreign and domestic parties. The new AML introduces the concept of
concentration
to describe transactions which may be subject to
merger control
. “Concentration”
is defined in the AML as: (i) a merger between business operators; (ii) acquisition of control over other business operator by way of equity or asset acquisition; (iii) acquisition of control over other business operator or of the ability to wield a decisive influence over other business operator by way of contract or other means (in this sense, Art. 20 of the AML,
http://www.wipo.int/wipolex/en/details.jsp?id=6543
).
Pursuant to the law, notice filings are required for acquisitions meeting certain statutory guidelines. The proposed transaction cannot be completed until the notice period and any additional review period have concluded. The filing requirements extend to both equity and asset acquisitions, as well as other forms of arrangement that shift control of business operations. The anti-monopoly measures are being developed in a manner consistent with international practice.
MOFCOM has reviewed over 450 deals since 2008 with more than 95% of them being unconditionally approved. As of [August 1 2012], fourteen transactions were cleared subject to “restrictive conditions” and one transaction (Coca-Cola’s proposed acquisition of Huiyuan) was prohibited.
It is also worth to remember that recently (less than one year ago) the Supreme People’s Court issued Regulation on Several Issues Concerning the Application of Law in the Trial of Civil Cases arising from Monopolistic Conducts (
Full Text of Judicial Interpretation on Anti-Monopoly Law of China Supreme Court
) which represents an important piece of the legislative puzze when analysing concentrations in China.
Features of the AML
The AML can be seen as the ‘constitution for the market economy’ because of its importance in promoting an environment of fair competition. It is regarded by investors and legal experts as a landmark law in China’s transition to market economy and further opening up. Foreign investors should take it as a positive sign for their future investment in China. Concentrations that may “exclude or restrict competition” are to be blocked or approved under restrictive conditions (such as requiring parties to sell off assets to third parties to avoid concentration in areas of competitive overlap), unless the parties demonstrate that the pro-competitive effects outweigh the anti-competitive effects or that “the concentration is in the public interest.”
The AML aims to protect fair competition and it targets three types of “monopolistic conduct”:
(i)
Anti-competitive “ monopoly agreements,”
(ii)
Abuses of dominant market position, and
(iii) Concentration that are “likely to eliminate or restrict competition”.
It must be underlined that the AML also prohibits certain anti-competitive
monopolistic agreements
among multiple firms. Several types of horizontal agreements among competitors, such as price-fixing cartels and agreements to divide markets, and certain vertical agreements limiting the prices at which purchasers may resell products to their downstream customers are expressly prohibited. “Catch-all” provisions allow authorities to prohibit other unspecified anti-competitive agreements, likely based on a balancing of pro-competitive and anti-competitive effects. Moreover, otherwise-prohibited agreements may be exempted if they aim to achieve certain beneficial goals (such as the development of technical product standards, environmental protection, and the promotion of small and medium-sized enterprise competitiveness), consumers can share “fairly” in the resulting benefits, and competition is not wholly eliminated in the relevant markets. It must be noted that
“Concentration of operators”
covers more than M&A. In other words, besides M&A of equity and assets, which are also provided in the 2006 M&A Regulations, a concentration may arise where a company obtains the right of control or a decisive influence on other business operators through contractual or other means under the AML. So that the AML can more effectively protect against monopolistic concentrations, it may deem even the establishment of a joint venture as concentration and subject to notification and examination procedures if it possibly eliminates or restricts competition.
The Anti-Monopoly Bureau (which is a subordinated department of MofCOM), assisted by the
Ministry of Commerce,
the
State Administration for Industry and Commerce,
and the
National Development and Reform Commission,
is in charge of market concentration review for foreign acquisitions and investments. The Anti-Monopoly Bureau not only meets with the parties involved with the acquisition, but may also meet with competitors of the target company and the relevant industry associations to determine the market’s reaction to the proposed acquisition. Noteworthy the new AML does not oppose
dominant market positions
of any company but is against the
abusive use of the dominant position
. From this perspective (it is a common opinion expressed by many experts ), companies will not be accused of
anti-trust
simply because they take up a major share of the market.
This is just an introduction, with the next entries we will examine more in details the characteristics of the merger control regime in China.
Cristiano Rizzi