The aim of this entry today is to complete the
excursus
on the characteristics of the Anti-monopoly Law. Having examined the main aspects, I would like to highlight the similarities between the European system and the Chinese system which regulate “merger control regime,” in fact the EU model has been taken as reference by the Chinese legislator to shape its own merger control regime.
In order to better understand the Chinese merger control regime it is necessary to have a brief look at the European Commission model because it has influenced the latter.
In the EU as M&A cases increase in number, size, and complexity, the European Commission must increasingly adhere to strict criteria and guidelines when treating these cases. The Commission is fully entitled to review all transactions between EU companies as well as mergers between non EU companies as long as their activities have an appreciable impact in the EU. (The European legal framework includes different pieces of legislation which are available at the following web-site:
http://ec.europa.eu/competition/mergers/legislation/regulations.html
).
It is now necessary to outline the European system on merger control to better understand the reasons why the Chinese legislator has used certain aspects of the European regime.
In the EU, the most relevant definition of M&A is contained in the Council Regulation 139/2004 (available at:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:024:0001:0022:en:PDF
and which has replaced Council Regulation 4064/89) on the control of concentration between undertakings (the EC Merger Regulation), Article 3(1) states that:
“A concentration shall be deemed to arise where a change of control on a lasting basis result from: (a) the merger of two or more previously independent undertakings or parts of undertakings, or, (b) the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of one or more other undertakings”.
It is also worth noting that Council Regulation 139/2004, establishes the exclusive competence of the
European Commission’s Competition Directorate,
which is responsible for reviewing mergers and acquisitions, looking into allegations of price-fixing and investigating companies charged with antitrust activities, with respect to the concentration having Community dimension. In case where the Regulation 139/2004 is not applicable because the transaction does not have “Community dimension”, the acquisition is capable of being reviewed under the competition law (and Authorities) of the single member state
European instruments dealing with M&A are focused on cross-border M&A. This kind of transactions in the EU can be problematic due to differences in national legislation and market cultures.
It is often disputed whether all M&A transactions should be allowed according to the free market principles or if a certain institutional body should have the competence to control them for the purpose of preserving the competition and protecting the consumers. The EU took this second path, in fact the EU’s choice for the latter originates from the EC Treaty (
http://europa.eu/eu-law/treaties/index_en.htm
) where it is worded that its main goal is not only free market development but also to promote social progress and high level of employment, along with all the others objectives mentioned in article 2 of the Treaty.
However, there are numerous legal issues that are still fairly unclear in the EU because it can be complicated to determine whether the European supranational bodies are competent to rule a matter or if it is up to Member states to regulate. The EC Merger Regulation seems to have solved most of the controversial issues as regards the M&A competition playing field, but there are still ongoing debates, and the European Commission has also launched a public consultation on the functioning of the EC Merger Regulation. “The purpose of the review is to evaluate how the rules on jurisdictional thresholds and referral mechanisms have worked in practice during the four years the Regulation has been applied”. The report has been presented on June, 18, 2009 (available at:
http://ec.europa.eu/competition/mergers/studies_reports/studies_reports.html
) and substantially confirms that the adjustments introduced proved to be effective in the assessment of EU concentrations.
Merger control in the EU has been built on the concept of dominance. Notified concentrations are appraised according to substantive test. Under the old Council Regulation (EEC) No. 4064/89 on the control of concentrations between undertakings the substantive test had as its cornerstone the creation or strengthening of a dominant position. Initially, this referred only to single dominant positions, but it soon became evident that there was a need to extend the scope to cover situations where two or more undertakings would engage in collusive market behavior, which enabled them to act independently of other market factors to considerable extents. This led to the introduction of the concept of collective dominance in the EC merger control. The above mentioned new Merger Regulation (EC Regulation 139/2004) changes the test for prohibition from ‘the creation or strengthening of a dominant position’ to a ‘significant impediment to effective competition’. In other words, the reform led to the rewording of the test of compatibility with the common market in Article 2(3). The new substantive test is supposed to cover more efficiently all anti-competitive effects of concentrations.
The development of the doctrine of “collective dominance” (by undertakings) has significantly strengthened the Commission’s competence to intervene in concentrations that are leading to noticeable threats to competitive environment. In the Chinese system, such a definition does not exist. The new Anti-monopoly Law is focused on the abuse of dominant position, and anti-competitive monopoly agreements, as it will be stressed in the next paragraphs. Maybe the European definition of collective dominance is too sophisticated, but, at the end, review of concentrations are based on the same concepts. The new Anti-monopoly Law, however, is supposed to increase predictability of the future appraisals of mergers in China and it has the same function of the Council Regulation 139/2004 in terms of
“merger control”
.
The EU has a fairly efficient M&A legislation, which is constantly evolving in a way to better serve the people of Europe. The Merger Regulation 139/2004 is appraised as beneficial to competitors, consumers and the whole EU market. Whereas the EU system has to serve a Union of States, the Chinese legal tools regulating M&A is constructed both in order to serve the local market, and cross-border M&A transactions.
Reporting concentration in the EU: introduction
The European Commission (Competition Directorate) currently intervenes in M&A transactions in several situations. In fact, under article 1 Regulation 139/2004 a concentration has Community dimension and it is subject to prior mandatory filing with the European Commission if:
a) the combined worldwide turnover of all parties involved is more than EUR 5 billion, and
b) the EU turnover of each of at least two of the parties totals more than EUR 250 million .
If a merger does not fall into these thresholds, the European Commission may still become involved if:
a) the combined worldwide turnover of all parties exceeds more than EUR 2.500 (2.5 billion), and
b) in each of at least three Member States, the combined aggregate turnover of all undertakings concerned is more than EUR 100 million;
c) in each of at least three Member States included for the purpose of point (b), the aggregate turnover of each of at least two of the undertakings concerned is more than EUR 25 million; and
d) the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than EUR 100 million (See, Art. 1 (1) and (2) Council Regulation 139/2004).
As to the procedure, within 25 working days from the effective date of notification the European Commission must either authorize the acquisition or open the in-depth investigation phase (the initial review period may be extended to 35 working days if remedies are offered within 20 working days from the notification). If the European Commission decides, after the initial review, that the acquisition raises serious doubts as to whether it may give rise to a significant impediment to effective competition, it commences an in-depth Phase II investigation. The review period for a Phase II investigation is 90 working days (which may be extended to 105 working days if remedies are offered after the 55th day).
The submission of the filing is subject to a pre-notification phase with the Commission’s offices which may last 15 working days or more, depending upon the difficulty of the case and the amount of information to be provided. Usually, no final filing is submitted before the Commission gives its green light.
The implementation of the Transaction is suspended until clearance is issued.
If a transaction does not reach Community dimension under Article 1 ECMR but is subject to filing with the antitrust authorities of at least three EU Members States, the selected bidder(s) might decide to apply for referral to the European Commission under Article 4.5 of the ECMR before notifying to the competent national authorities.
The European Commission shall transmit the request to all EU Member States. Any Member State competent to examine the concentration under its national competition law may, within 15 working days, express its disagreement as regards the request to refer the case to the European Commission. Where at least one such Member State has expressed its disagreement, the case shall not be referred to the European Commission. Where no Member State has expressed its disagreement in accordance, the concentration shall be notified to the European Commission (as to the procedure, see (a) above); in such situations, no EU Member State shall apply to the transaction its national competition law to the concentration.
Though the Chinese system on merger control regime is similar to the European system, it seems there is a need to better define the merger control regime in China and to reduce the discretionary power of the different authorities when reviewing these transactions.]
The Anti-monopoly Law: summary
Implications of AML on Foreign Investors
Positive
1. AML may assist foreign investors by providing uniform and comprehensive guidelines on competition in Chinese market.
2. Addressing issues like administrative monopoly with law can help multinational companies compete fairly with local companies.
3. “Negative approval” mechanism for foreign M&A filing will be replaced by “written approval” mechanism under AML.
Negative
1. AML may restrict the existing business practices of multinational companies or even subject them to harsh penalties.
2. Special attention should be paid to the substantive and procedural provisions of the “national security” review.
3. Extraterritorial application effect of AML is important.
4. It is especially important to closely monitor the development of the AML and implementation rules and guidelines that follow.
The final text of the new AML provides ample room for PRC antitrust policy either to converge with prevailing best practices of foreign antitrust authorities or to diverge in pursuit of other policy goals. In some cases, missing elements of foreign doctrines might be restored through implementing measures or simply read into the law in specific cases. In other cases, however, the many open-ended “catch-all” clauses and “public interest” exceptions might be exploited to block pro-competitive conduct or to excuse gravely anti-competitive behavior.
Anti-monopoly review in the near future
When coming to any conclusions about China’s Anti-Monopoly law in the near future it first must be understood that it is still in the process of being developed. This development will be guided not only by state goals but also by China’s need to became more in-line with international standards and WTO requirements. Taking this into account, along with recent developments, there will be three main issues in regards to China’s Anti-Monopoly law in the near future.
The first is the fact that some developed countries are worried that Chinese authorities will become a hindrance to mergers and acquisitions outside Chinese borders that don’t involve Chinese companies but affect global Chinese business. This worry came to a head in July of 2011 with an article in the Financial Times that brought up the issue that China is indirectly using its Anti-Monopoly laws to protect its domestic business from foreign competitors. While the Financial Times article elicited a response from Chinese commentators the real issue is the growing power of not just the Chinese economy but also its authorities. Some in the West are weary of this fact, hence the criticisms, but in the end Chinese Anti-Monopoly law will end up carry more weight globally as its economic and political power expand. China wants this to be recognized and respected. So while this may cause some issues in the short turn it will likely not have a substantial effect on the development of Anti-Monopoly policy in China as China as already signed memorandums of understanding with US antitrust authorities in the summer of 2011 and continues to modify its antitrust regime to be more inline with international standards.
The second issue is how China’s anti-monopoly law will be applied to large SOEs that in many cases have monopolistic positions. In the first few years after China implemented its first anti-monopoly law in 2008 Chinese regulatory authorities took no action against SOEs. While this might seem strange to outsiders who would clearly view many SOEs as state-run monopolies it is important to understand them under the historical development of business in China.
For many years China was a planned economy and competition against the state was a non-factor, however, as more aspects of a market economy began to take root in China the need to develop an anti-monopoly law became apparent to Chinese authorities. Even now, with new legal developments most SOEs still are not considered in such reviews of market competition because Chinese regulators have taken the position that their pricing and policy decisions are made by state directives rather than market principle. That is why these SOEs can be referred to as “administrative monopolies” because their market position is artificially created by government policies and protection. Through their policies Chinese authorities have split “administrative monopolies” into two main groups based on their importance to state development and security. The first group is referred to as “strategic” industries in which the states should keep complete control. There are seven “strategic” industries: defense, electric generation and distribution, petroleum and petrochemicals, telecoms, coal, civil aviation and waterway transport. The second group has been dubbed “basic or pillar” industries in which the state should should keep a strong influence. “Basic or pillar” industries include: machinery, automobiles, information technology, construction, steel, base metals and chemicals.
While foreign businesses have invested in some of these industries their investments are limited to the point where they have no input or say over the direction of the SOE. This situation has caused concern to many foreign companies and organizations like the World Bank who have tried to persuade China to open up such sectors to market forces. In particular, they want China to limit its protection of certain industries and create the circumstances for a more level playing field so private enterprises can enter those sectors. By doing so they are trying to convince China that private enterprise can help the Chinese themselves by making those sectors more efficient. However, at the same time are hoping to make China more integrated with international market principles. In regards to China’s anti-monopoly law there is a hope within many foreign groups that China’s regulatory regime will use their powers to break up certain “administrative monopolies”.
Chinese authorities and regulators realize the situation and are beginning to take action. However, the actions they take while influence by outside pressures, will not ultimately be determined by them. To begin with Chinese authorities realize that increased competition will help business in China become more competitive, however, suddenly opening up previously restricted sectors too quickly might cause a fragmentation that Chinese authorities fear will derail development policies.
But most importantly there is not a clearly defined legal mandate within the anti-monopoly law itself to allow regulators adequately take on the dominate positions that many SOEs hold. As mentioned above, according to present definitions “administrative monopolies” are beyond the scope of review because they are not governed by “market principles”. But what exactly represents “market principles” to Chinese regulators is not entirely clear. While Chinese authorities have made efforts to make definitions of “state control” and “market principles” more clear there is still work to be done if anti-monopoly review against SOEs is to have any real teeth.
Still some progress in the right direction is being made. This can be seen in the recent decision of Chinese antitrust authorities to probe large state-owned telecommunication companies China Unicom and China Telecom for monopolistic practices. Their current investigation into these giant telecoms comes down to the point that regulators believe that pricing structures and business decisions made by Chian Unicom and Telecom were determined by market principle rather than state directive. Therefore, their obvious concentrations should be regulated by anti-monopoly legislation. While the probe into China Unicom and China Telecom has no clear result (as of the writing of this section in March 2012) it is a step that shows Chinese regulators are now willing to address SOEs within the confines of the new anti-monopoly law.
Finally, it is important to remember when thinking about the development of Chinese anti-monopoly law in the near future that Chinese regulators are still going through what can best be described as growing pains. In all reality China’s anti-monopoly laws are just a few years old and its authorities are still gaining valuable experience on how to find the right balance. Substantially these growing pains, as mentioned previously in this chapter, have caused a number of issues and concerns including a more drawn out approval process and a lack of transparency. However, the problem that is sure to cause the most problems is the fact that China’s anti-monopoly regime is still incomplete. New regulations and review stipulations have and will continue to be added in the future. In particular, the current division of governmental bodies that enforce anti-monopoly law (Ministry of Commerce, NDRC and SAIC) is even confusing and worrisome to many Chinese regulators themselves. Hopefully, in the future, the law can be made clear and responsibilities merged to make enforcement more efficient.
Cristiano Rizzi