Increasingly, China's antitrust reviews of global transactions have resulted in long investigations delaying the closing of many deals. This article outlines the Chinese merger review process and summarizes some of China's merger decisions.
China's Anti-Monopoly Law (“AML”) took effect on August 1, 2008. Three agencies enforce the AML. The Ministry of Commerce (“MOFCOM”) reviews mergers and acquisitions. Non-merger cases are split between the National Development and Reform Commission (“NDRC”) and the State Administration for Industry and Commerce (“SAIC”). The NDRC handles price-related violations and SAIC the non-price related violations.
Under the AML, the standard of review for mergers is similar to the standard in the United States and Europe. The factors to consider when analyzing a combination include: market shares, ability to control the market, degree of market concentration, effects on market access and technological progress, and effects on consumers. One major difference from U.S. and European reviews, however, is that MOFCOM must also consider the effect of concentration on the development of the national economy and the “socialist market”. Moreover, MOFCOM reports to the State Council. Accordingly, China's merger review has a political element as part of its framework for reviewing mergers.
That being said, China has taken a very cooperative approach to global merger reviews. The Chinese antitrust authorities signed Memoranda of Understandings (“MOU”) with both the UK Office of Fair Trading (January and March 2011) and with the U.S. Department of Justice (“DOJ”) and U.S. Federal Trade Commission ( “FTC”) (July 2011) with regard to developing competition policy and enforcement. The MOU with the U.S. antitrust agencies was followed up in November with guidelines for cooperation between MOFCOM/DOJ/FTC with respect to merger filings. Under the guidelines, information can be shared relating to the timing of their respective investigations, technical aspects such as market definition, evaluation of competitive effects, theories of competitive harm, economic analysis and remedies.
What is the procedure and timing of merger reviews?
Antitrust investigations in China have proven to be time-consuming. Some antitrust reviews take up to six months or more. The merger review process includes four phases. Like the EU's pre-notification phase, MOFCOM has a pre-acceptance phase whereby it works with the merging parties for about a month before the parties actually file their notification forms. After acceptance, the statutory period for the initial review is 30 calendar days; second phase is 90 calendar days; and the third phase is an additional 60 days. The third phase which is an extension of up to 60 days is only if the parties consent, if the materials submitted by the parties are “inaccurate,” or if there are significant changes of circumstances.
In practice, most transactions are not cleared in Phase 1 rather most are cleared in Phase 2 even when there are no significant competition issues. Transactions that present competitive problems may go into Phase 3. However, in situations where the deal is unlikely to be cleared in Phase 2, MOFCOM has encouraged some merger parties to withdraw their filings before the end of Phase 2 and then re-submit the filing. This pull and refile strategy is used to start the process all over again in an effort to avoid a Phase 3. Most transactions without competitive issues are completed within two to five months of the initial filing.
What is China's merger enforcement record?
While MOFCOM investigations may be burdensome and time consuming for the merging parties, the good news for deal makers is that the Chinese government has not unreasonably blocked mergers. MOFCOM has reviewed over 392 merger filings and only one transaction has been blocked. In most cases, mergers are cleared without conditions. China has cleared thirteen transactions with conditions since it started reviewing mergers in 2008. Notably, all of the transactions that resulted in settlements involved foreign companies.
In 2012, Google/Motorola Mobility, Western Digital/Hitachi's HDD business, UTC/Goodrich; Wal-Mart/Niuhai Holding, and Henkel Hong Kong/Tiande JV were cleared with conditions. Through August of 2012, no transactions have been blocked.
In 2011, one hundred sixty (160) transactions were notified and investigated. No transactions were blocked, however, four of those transactions were cleared with conditions. The transactions that were cleared with conditions included Seagate/Samsung's HDD business, GE/Shenhua JV, Alpha V/Savio, and Uralkali/Silvinit.
In 2010, one hundred twenty seven (127) transactions were notified. Of those transactions, none were blocked and one was cleared with conditions. The transaction conditionally cleared was Novartis' acquisition of Alcon.
In 2009, eighty (80) transactions were notified, four transactions were cleared with conditions, and one transactions was blocked. The four transactions conditionally cleared were Panasonic/Sanyo, Pfizer/Wyeth, General Motors/Delphi Car Parts business, and Mitsubishi Rayon/Lucite. In March of 2009, MOFCOM blocked Coca-Cola's acquisition of Huiyaun.
In 2008, twenty five (25) transactions were notified and no transactions were blocked. InBev's acquisition of Busch was conditionally cleared.
The bottom line is that China has only blocked one deal and has only required conditions in thirteen out of approximately 400 transactions.
Why did MOFCOM block Coca-Cola's proposed acquisition of Huiyuan?
In March of 2009, China blocked Coca-Cola's proposed acquisition of a famous Chinese juice manufacturer, China Huiyuan Juice Group Limited (“Huiyuan”), after conducting a seven month review. MOFCOM concluded after its investigation that the transaction would have an adverse effect on competition. Reportedly, Coca-Cola proposed remedies to address MOFCOM's concerns, but MOFCOM concluded that the remedies were insufficient to address its concerns. News reports indicated that MOFCOM sought the divesture of the famous “Huiyuan” brand and Coca-Cola refused. MOFCOM outlined three reasons for blocking the transaction. First, it concluded that the Huiyuan acquisition would enable Coca-Cola to leverage its dominance in the carbonated soft drinks market into the juice beverage market. Second, MOFCOM found that Coca-Cola's control over the juice beverage market would be strengthened by controlling two well-known juice brands, the “Minute Maid” brand already owned by Coca-Cola and “Huiyuan.” MOFCOM basically took the view that the combination would raise barriers against any potential competitor seeking to enter the juice beverage market. Third, MOFCOM determined that the transaction would squeeze out smaller juice manufacturers in China, restrain local manufacturers from participating in the juice beverage market, and diminish their innovation, which would harm competition in the Chinese juice beverage market.
What were some of the circumstances that led to clearances w1ith conditions?
Most recently, MOFCOM conditionally approved Google's acquisition of Motorola Mobility, Western Digital's acquisition of Hitachi's HDD business, and Seagate's acquisition of Samsung's HDD business in 2011. The Google and Samsung clearances are noteworthy because the U.S. antitrust agencies and the EU cleared the transactions without any conditions. All three clearances included behavioral remedies.
Even though the market may be global, MOFCOM will focus on the impact on the Chinese market, allowing it to protect industries such as the automobile, agriculture and computer sectors. As such, MOFCOM has set conditions specific to the Chinese market, for example, by requiring an auto parts supplier to continue to supply other customers in the Chinese market (GM/Delphi merger); by requiring Russian potash producers to continue to sell to Chinese customers just as they had pre-transaction (Uralkali/Silvinit merger); and more recently, by not allowing the purchaser to exercise control over the target for a period of time (Seagate/Samsung and Western Digital/Hitachi).
In the Seagate/Samsung merger, MOFCOM required Seagate to establish an independent subsidiary to produce, price and market Samsung products and to build a firewall to prevent information from being exchanged between Seagate and the Samsung subsidiary. A waiver can be requested after a year. In the Western Digital/Hitachi merger, MOFCOM required the parties to maintain Hitachi's subsidiary as an independent competitor that would market and develop the products and to build a firewall to prevent the exchange of information between the two parties. Western Digital could request a waiver of this requirement after two years, depending on the competitive conditions. MOFCOM imposed these requirements despite the fact that the U.S. and EU authorities had already cleared the Seagate/Samsung merger without conditions and cleared the Western Digital/Hitachi merger with structural remedies. MOFCOM's concern was that China had the greatest number of consumers who bought computers and it was these end-users who suffered the most from price increases of the components. The rationale for the requirements is that the current state of the market is preserved. Essentially, MOFCOM wanted to maintain the five players in the global HDD market (Seagate, Western Digital, Hitachi, Toshiba and Samsung). The conditions are noteworthy because they require the parties to maintain their independent, pre-merger situation for a given period of time until the conditions could be removed at some future time.
On May 19, 2012, MOFCOM approved Google's acquisition of Motorola Mobility with conditions. MOFCOM identified several reasons for concern including Android's dominance in China; the resultant dependence of Original Equipment Manufacturers (“OEMs”), developers of Android-compatible software (i.e., “apps”) and end-users on Android's ecosystem; high barriers to entry into the market; and (4) the likelihood that Android will retain its market dominance for the foreseeable future. MOFCOM was concerned that Google would favor Motorola devices over other smart mobile device OEMs by providing it with advance access to Android software updates; and (2) licensing Motorola-owned patents to competitors on unfair terms. While neither the DOJ nor the EC reached these conclusions, MOFCOM required Google to: continue to license Android in a free and open source manner (does not apply to apps); treat all OEMs in a nondiscriminatory manner (this condition does not apply to apps or to OEMs that modify the Android platform); honor Motorola's existing current fair, reasonable and nondiscriminatory (“FRAND”) obligations with respect Motorola's patents; and appoint an independent trustee charged with monitoring adherence to the above conditions, and submit reports every six months to the trustee and MOFCOM. Conditions 1, 2 and 4 apply for five years, though Google may request that 1 and 2 be modified or rescinded if market conditions change.
First, merging parties involved in a global transaction that requires MOFCOM approval must pay particular attention to the Chinese antitrust review even if the relevant markets are global, the merging parties are both U.S. based companies, and the United States or European antitrust agencies do not require any conditions. At least three times, MOFCOM required conditions on transactions (GM/Delphi, Seagate/Samsung, and Google/Motorola) that were unconditionally approved by U.S. and EU antitrust regulators. MOFCOM imposed more stringent conditions on these transactions. Second, MOFCOM merger reviews are taking longer in the pre-acceptance phase and many deals that do not raise antitrust issues are going into Phase 2. Third, behavioral remedies are very common. Fourth, MOFCOM is cooperative with other antitrust authorities. While some of MOFCOM's behavioral conditions diverge from other jurisdictions' decisions, MOFCOM continues to consult other jurisdictions and its competitive analysis and decisions have not completely departed from U.S. and EU decisions.