In giving approval to GE China’s joint venture with Shenhua Coal, China’s Ministry of Commerce (MOFCOM) has answered positively the recurring question of whether the formation of a joint venture falls within China’s merger control rules.  It is now clear that the formation of a joint venture can require clearance from MOFCOM under China’s Anti-Monopoly Law.

On 10 November 2011, China’s Ministry of Commerce (MOFCOM) publicly announced its conditional clearance of a proposed joint venture between GE and Shenhua for the licensing of technology for “gasification of liquefied coal slurry” and construction services.  The joint venture would combine GE’s expertise and Shenhua’s resources.  In China, Shenhua and is the largest supplier of coal used for gasification.

This case is significant as it confirms for the first time by public decision that the formation of a joint venture can be subject to MOFCOM’s antitrust review.  As provided in the Anti-Monopoly Law, a transaction is regarded as a “concentration” potentially subject to mandatory approval by MOFCOM if it is a merger of business operators; if a business operator gains control over another business operator through acquisition of shares or assets; or if a business operator gains control over other business operators or is able to exert a decisive influence on other business operators by contract or any other means. 

There has been some speculation as to whether a joint venture would fall within one or another of the above three requirements for a “concentration”, and therefore require clearance from MOFCOM.  With the publication of this decision on a high-profile joint venture, MOFCOM is making it clear that the formation of a joint venture can come within the meaning of a “concentration” and so be subject to MOFCOM’s approval.

There have been previous cases where MOFCOM indicated that clearance of a joint venture may be required; however, until now, no clear public decision has been published which dealt with the issue.  MWE China Law Offices has obtained clearance from MOFCOM for joint ventures in the past but, since they were cleared without conditions, the decisions were never publicly available.  In a prominent case in June 2009, when two giant iron ore suppliers proposed to set up a joint venture, MOFCOM made a statement that if the joint venture fell within the scope of the Anti-Monopoly Law and the Provisions on Thresholds for Declaring Concentration of Business Operators, the parties should formally notify the transaction.  However, the joint venture proposal was abandoned and (apparently) no notification was ever filed with MOFCOM.  Since that time there has been much speculation as to whether and in what circumstances a joint venture is required to be notified to MOFCOM.  This decision provides some useful guidance on the approach MOFCOM is taking to joint ventures.

The relevant market in this GE/Shenhua case is defined as the technology licensed by GE for “gasification of liquefied coal slurry” (JV Technology), which is distinguished from standard coal gasification techniques.  In China there are only three major technologies that compete on the market, and the JV Technology has the biggest market share.  The customers/licensees for technologies similar to the JV Technology must use a certain type of coal with specific characteristics.  Shenhua is the biggest supplier of coal in China with such characteristics.  Given the technical, financial and legal barriers to enter the market for technologies that compete with the JV Technology, MOFCOM had concerns that the joint venture partners, in establishing the Joint Venture, might use their position in the coal supply market and in the market for coal gasification technologies, to restrict competition in the market for technologies competing with the JV Technology. 

To reduce the possible risk of harm to competition in the market for competing coal gasification technologies, MOFCOM has imposed a behavioural condition that the joint venture partners, by establishing the joint venture, must not require customers to use only the JV Technology for coal gasification, or increase the cost of using competing technologies, by either (a) limiting the supply of coal suitable for gasification or (b) by imposing conditions concerning the supply of coal.