The European Commission has cleared a joint venture between Electricité de France S.A. (EDF) and China General Nuclear Power Corporation (CGN) (Case M.7850). The JV was cleared without conditions, but the transaction raised an important jurisdictional issue: the treatment of state-owned enterprises (SOE) under the EU Merger Regulation. The question is whether for turnover calculation purposes the SOE should be treated like an autonomous entity or whether it is dependent on the State and linked with other SOEs.
In the case at hand, the Commission ruled that CGN, which on a stand-alone basis did not meet the EU thresholds, was not independent from China’s State-owned Asset Supervision and Administration Commission (SASAC). As a result, the Commission took the combined revenue of all Chinese state-owned enterprises active in the energy sector into account to determine whether it had jurisdiction to scrutinise the concentration. While the decision is limited to the facts of the case at hand, the underlying methodology will be applied in future cases.
In general, the European Commission only reviews concentrations if each of at least two parties exceeds certain global and EU turnover thresholds. While CGN, on its own, did not meet the relevant threshold, the concentration had to be notified because the Chinese energy SOEs, taken together, exceeded the EU jurisdictional thresholds.
The test ordinarily used is straightforward: For the calculation of turnover, an SOE will be considered on a stand-alone basis (i) where it can decide independently on its strategy, business plan and budget; provided (ii) that the state does not have the possibility to facilitating coordination among SOEs in the same industry.
The notifying parties advanced a number of constitutional arguments to establish the independence of CGN from SASAC. The 2008 PRC law on SOEs clearly establishes (i) a separation between government and business functions, (ii) it only gives SASAC limited powers of removal of management, and (iii) it implements a confidentiality policy that excludes the exchange of sensitive information between SOEs.
The Commission did not follow this view. When analysing the PRC law on SOEs, it found (i) quite sweeping powers to appoint and remove key management, and (ii) powers to reward or punish management based on annual performance. These powers apply to large-sized SOEs that have bearings on the national economy, security, important infrastructures and natural resources. Another provision of the 2008 PRC law on SOEs ensures SASAC’s participation in
profits and major decision-making. Finally, the 2008 PRC law on SOEs provides that the State shall increase the coordination of SOEs in vital industries. The absence of cross-directorships did not weigh sufficiently to lead to another conclusion.
For those reasons the Commission concluded that CGN was not able to independently decide on its strategy. As a consequence, the Commission ruled that the turnover of all companies controlled by SASAC “that are active in the energy industry” should be taken into account. (emphasis added).
While the independence issue is primarily relevant for jurisdictional purposes, it also has consequences for the substantive assessment of the transaction. For example, in the case at hand the Commission pointed out that “neither GCN nor the Chinese State currently own a potential new nuclear site in the UK.” (emphasis added).
CALL TO ACTION
This is the first time that the Commission took a position on the issue of Chinese SOE independence. While the criteria applied are not novel, the Commission did not have to rule on the issue in the past.
In all future matters involving Chinese SOEs, it will matter for both jurisdictional and substantive purposes whether the methodology used in the case at hand can be applied to them, which may be – to a certain extent – a question that depends on the sector.