It is now just more than three years since China’s Anti-Monopoly Law (AML) was introduced. Compared with the well-established practices of US antitrust and EU competition authorities, AML enforcement is still in its infancy. However, China’s AML regulators, especially the authority in charge of merger control, the Ministry of Commerce (MOFCOM), has moved quickly to make its mark on international business. Now, most large, cross-border mergers, acquisitions and joint ventures must also successfully pass the rigors of review by MOFCOM as well as the European Commission and the US Department of Justice (DOJ) and/or Federal Trade Commission (FTC).

Significant Increase of Cases Reviewed

There has been a tremendous growth in the number and variety of “concentrations” (large mergers, acquisitions and joint ventures) that MOFCOM has reviewed. Equally, MOFCOM’s practices have developed significantly over the past three years. As can be seen from the following table, the number of cases reviewed by MOFCOM each year more than doubled from 2009 to 2011.

One of reasons for the significant increase in cases is that more and more corporations realise that merger control filing is necessary in China, particularly after MOFCOM put some effort into educating market players about the AML. Also, as was mentioned at a recent press conference by the director of the Anti-Monopoly Bureau of MOFCOM, Shang Ming, since enterprises are growing, the thresholds set for merger control notification are becoming easier to reach. The thresholds are (i) RMB 400 million (approximately US$ 63.5 million) revenue in China for each of two parties involved, and (ii) RMB 2 billion (approximately US$ 317.5 million) for all parties’ aggregate revenue in China or RMB 10 billion (approximately US$ 1.59 billion) for all parties’ aggregate worldwide revenue. So far, there has been no indication these thresholds will change, despite significant appreciation of the RMB (compared to the US dollar) over the last five years. 

MOFCOM’s Published Decisions

Up to the end of 2011, 12 decisions had been published by MOFCOM, one blocking an acquisition and ten transactions cleared with conditions, with an additional conditional approval published in February 2012. It can be seen from these published decisions that MOFCOM’s competition analysis/assessment is becoming much more elaborate and detailed. The first decision involved only a few sentences giving the reasons for the decision, while the most recent published decisions stretched to several pages. At the same time, it can also be said that MOFCOM is now less likely to be criticized by the international media and professionals for its decisions, particularly if compared to the barrage of criticism received after the blockage of Coca-Cola's US$ 2.4 billion acquisition of Huiyuan Juice.

Another notable recent development is that MOFCOM has now imposed various types of remedies (both behavioural and structural) in cases involving Chinese companies, including decisions affecting large, state-owned enterprises. The decision concerning GE’s joint venture with Shenhua is an example of this imposition of remedies.

At its annual press conference on 27 December 2011, MOFCOM emphasised that it does not discriminate between concentrations that involve foreign enterprises and those that involve only Chinese enterprises; and it does not treat enterprises differently based on the nature of the ownership of the parties involved in the concentration (e.g., private or publicly owned). Indeed, it can be concluded that MOFCOM’s clearance of Nestlé’s acquisition of Chinese candy firm Hsu Fu Chi is a sign that China may now be prepared to further open itself to multinational companies and the takeover of famous Chinese brands.

There are two other issues that have been clarified by recent merger control decisions. The first concerns joint ventures. In giving approval to GE China’s joint venture with Shenhua Coal, 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 AML (see our newsletter for more information). This policy has been reinforced in a more recent 2012 decision giving conditional approval to the formation of another joint venture.

The second issue that has been clarified, at least to some degree, is that MOFCOM will consider minority shareholdings in other competitors on the market as grounds for requiring divestiture or other remedies before giving approval to a transaction. While this was also an issue in much earlier cases, in its approval of Alpha V’s acquisition of Savio, MOFCOM made it clear it had closely scrutinized the potential influence of minority shareholdings of Alpha V in the only other competitor on the market before giving conditional approval (see our newsletter for more information).

Prospects for MOFCOM

There remain a number of challenges for China’s MOFCOM in its treatment of large mergers, acquisitions and joint ventures, particularly those that are also being reviewed by other jurisdictions, including the EU or the United States. A common criticism is that MOFCOM takes much longer to complete its review process than other merger control authorities. There are three phases to review of a concentration in China, with clearance possible in any phase. It has become normal practice, before clearance, for MOFCOM’s review of a notification to go into Phrase II. There are also complaints concerning the unpredictability and less-than-transparent way in which MOFCOM may use its discretion as to when and whether to formally accept a case. Experience suggests that it takes at least several weeks (and can occasionally take more than a month or even longer) for MOFCOM to accept a case for review under the merger control rules. In these circumstances, it is advisable for those planning a merger, acquisition or joint venture involving China to fully assess the frequently lengthy MOFCOM review process and make their filing as soon as practicable in order to meet any deadline for closing a transaction.

MOFCOM is aware of the concerns over approval delays in China. The director of the Anti-Monopoly Bureau of MOFCOM, Shang Ming, indicated at a recent press conference that MOFCOM acknowledges the comments concerning delays and is strengthening its communications with its counterparts in the United States and EU so that simple cases can be quickly singled out for a “fast-track” review. It can be expected then, that a faster approval process may soon be available in China that could be similar to the “Short Form” filing used in the EU.

Faster and more efficient procedures for merger control approval can be expected in the future also because of MOFCOM’s continuing cooperation with EU and U.S. regulators via various channels. These include the “China-EU Competition Policy Dialogue” and the Memorandum of Understanding on Anti-Monopoly and Antitrust Cooperation signed in 2011 with the Department of Justice and Foreign Trade Commission of the United States.

Priority Action in 2012 on Failure to Submit Concentrations to MOFCOM for Clearance

Companies should take particular note of MOFCOM’s clear statement at its annual end-of-year press conference in Beijing that, in 2012, one of its priorities will be to investigate and sanction parties to a concentration who, contrary to the AML, fail to properly submit notification of a concentration and to have it cleared by MOFCOM. As part of this priority action, MOFCOM has already introduced, in January 2012, new “Preliminary Regulations on Investigation and Treatment of Failure to Notify Business Operator Concentration” (see McDermott’s article for more information).

MOFCOM also announced that later in 2012 it will introduce new regulations on the investigation and treatment of concentrations suspected of having failed to be notified when they should have been notified and cleared by MOFCOM under the AML.

National Security Review

Another major development in 2011 was the introduction by China’s State Council of the “Notice of the General Office of the State Council on Launching the Security Review Mechanism for Mergers and Acquisition of Domestic Enterprise by Foreign Investors”. This Notice established a national security review system for merger and acquisition (M&A) transactions by foreign investors in China. In August 2011, after a trial implementation period of about six months of an interim regulation on the security review system, MOFCOM finalised and issued a “Regulation on Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors”. This national security review system could have a broad impact on prospective M&A transactions by foreign investors in China. This is because the scope of any national security review is still ambiguous and could be an option of last resort for the Chinese authorities to block a transaction at its discretion.

Because of the detailed information and justification required to be submitted to the merger control (and potentially also the national security) authorities, together with the increasingly sophisticated approach of MOFCOM, parties considering international M&A and investment in China will require experienced counsel to conduct pre-notification consultations and communications face-to-face with MOFCOM. Parties will also need to understand whether the intended transaction falls within the scope of review and to be able to put a convincing position directly and effectively to MOFCOM. McDermott is unique in its ability to provide such counsel—it is both an international law firm and can appear directly before MOFCOM and the Chinese courts without the intervention of an intermediary. This is because all lawyers at MWE China hold a current practising certificate in China.