Merger review priorities: predicting merger approvals

Introduction
​Coca-Cola/Huiyan merger
Move to Western antitrust standards
Comment

Introduction

China's merger control regime has long been a topic of discussion. Some commentators interpret Chinese merger control as being influenced by political factors – namely, authorities trying stop foreign competitors from flooding China's market, rather than just encouraging competition.⁽¹⁾ But is that really the case?

This article, which provides an overview of predicting merger approvals, is the third in a three-part series on merger reviews in China. For the previous two instalments, please see:

• "Merger review priorities: introduction to Chinese regime"; and
• "Merger review priorities: maintaining domestic market competition".

Coca-Cola/Huiyan merger

It is common for the analysis that surrounds Chinese developments to be overly simplified, and merger control is no exception. This includes the unsubstantiated argument that Chinese merger control is a political exercise – an argument that was at its most intense after the failed acquisition of Huiyuan by Coca-Cola in 2009. In 2009, China's Ministry of Commerce (MOFCOM, the predecessor to the State Administration for Market Regulation (SAMR)) blocked Coca-Cola's acquisition of Huiyuan, a popular Chinese fruit juice producer. The decision was made quickly and as a result, The Economist ran an article titled "Coca-Cola in China — Squeezed Out", which quoted Coca-Cola as describing the MOFCOM's decision as "protectionist". The Economist bemoaned the outcome as "unfortunate … in an industry that has no economic or national-security significance". This decision ignited tremendous controversy that the 2008 Anti-Monopoly Law (AML) was introduced to protect Chinese companies from overseas competition. One theory, the so-called "Huiyuan test", emerged to describe what foreigners could expect when acquiring targets in China's market.

The Huiyuan test posited that foreigners are:

• permitted to purchase small Chinese companies where the government is too busy to be concerned with their management;
• permitted to purchase large Chinese companies that are suffering from financial problems, provided that the foreign purchaser will restructure the company and assume the company's obligations to workers and creditors;
• permitted to acquire a minority interest in large and successful Chinese companies, provided such investment will provide collateral benefits in the form of technology transfer or access to new markets; and
• not permitted under any circumstances to purchase a majority interest in a large and successful Chinese company.

However, the Huiyuan merger occurred while China's anti-monopoly regime was still in its infancy. The test, while illustrative of the controversy, wariness and disappointment among foreign investors in response to the decision, is not particularly helpful to predict or understand which mergers will ultimately receive approval.

One insight from Huiyuan is that in order to better understand and predict merger results in China, adopting a European competition policy approach may be more helpful than a US one. The MOFCOM had explained that Coca-Cola's acquisition of Huiyuan failed merger review on three major grounds:

• After the completion of the concentration, Coca-Cola would be able to transfer its dominant position in the carbonated soft drinks market to the juice drinks market, which would exclude and restrict competition of existing juice drinks enterprises and thus harm the legitimate rights and interests of beverage consumers.
• As the Coca-Cola brand is widely recognised in the beverage market, the company would have control of Juice Source and Huiyuan, two well-known juice brands, which would significantly enhance its control of the juice market, in addition to its dominant position in the carbonated beverage market. Ultimately, such a concentration would make it harder for competitors to enter the market.
• The concentration would take up market space from small and medium domestic juice companies, which would prevent such enterprises from independently innovating and participating in the juice market. This would not be conducive to the sustainable and healthy development of China's juice industry.

According to a case study on the Huiyuan merger, two of these reasons mirror the portfolio effects theory that the European Commission employs when intervening in conglomerate merger cases (ie, the Tetra Laval/Sidel and Guinness/Grand Metropolitan cases). The third reason strongly resembles another approach, which is also used in EU cases, to maintain a competitive market structure.(2) It is, therefore, more likely that the Huiyuan decision reflected a divergence between US and EU approaches (with the MOFCOM preferring the latter, at least during the AML's early years) rather than a divergence between Chinese and Western approaches. With the benefit of hindsight, commentators increasingly consider the concerns relevant to Huiyuan to have been unjustified.(3)

Move to Western antitrust standards

Due to China's increasing antitrust enforcement experience since the introduction of the AML in 2008, published decisions present specialised economic and antitrust analysis that is much closer to Western standards. For example, on 22 December 2021, the SAMR published a decision that conditionally cleared the acquisition by SK Hynix of the NAND memory and storage business of Intel. In the decision, the SAMR used the Herfindahl-Hirschman Index (HHI) to analyse the concentration level in the relevant market and the market power of the merged entity post-deal.

Another example of a Chinese antitrust authority that used economic tools in its decision is a 2021 penalty that was imposed against Sherpa (a food delivery app that is popular among foreigners in Shanghai) for abuse of dominance on 12 April 2021. In that case, the Shanghai Administration for Market Regulation published detailed reasons applying the small but significant non-transitory increase in prices (SSNIP) test to define the relevant market and explained how the SSNIP test was applied within its monopoly theory.

Chinese merger review authorities understand that Chinese corporate champions are forged in the crucible of healthy, fair and transparent domestic competition. In fact, the "regulatory windstorm" of 2021 against Chinese tech companies was a powerful statement to this effect. That windstorm was almost entirely directed against homegrown tech champions, particularly in the platform economy, rather than foreign investors. Allegations of protectionism against the application of competition law are common when those on the receiving end of a regulatory decision are unhappy with the result. However, the differences between Chinese merger control regulation and the US approach (which is influenced more by the Chicago School of Antitrust Analysis)(4) do not amount to a protectionist agenda. Overseas investors in China who spend the time and resources that are necessary to become more familiar with China's regulatory concerns typically see returns on their efforts.

Comment

Like the European Union and the United States, Chinese merger control regulation is used to ensure a well-functioning market and to benefit consumers. In order to analyse and decide whether a concentration raises concerns of eliminating or limiting competition, numerous factors may be involved, such as:

• market share;
• market concentration;
• market competition structure;
• potential unilateral and coordinated effects;
• foreclosure and conglomerate effects; and
• the maturity of the relevant industry.

Similarly to other jurisdictions, when a foreign transaction or cross-border investment raises competition concerns within the relevant market, it may be blocked or approved subject to conditions. For foreign companies that are running merger deals in China, it is necessary to retain counsel with an in-depth understanding of Chinese merger control and to consider the potential market impacts that may result from the transaction.

For further information on this topic please contact Hao Zhan or Ying Song at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected] or [email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.

Endnotes

(1) Angela Huyue Zhang, "Problems in Following EU Competition Law: A Case Study of Coca-Cola/Huiyuan", 3 PekingUJ LegStudies (2011) 96 at 97. Foreign multinationals were also concerned that they would be the primary targets under the AML.

(2) Angela Huyue Zhang, "Problems in Following EU Competition Law: A Case Study of Coca-Cola/Huiyuan", 3 PekingUJ LegStudies (2011) 96 at 101.

(3) In addition to ibid, see Sandra Marco Colino, "The Internationalization of China's Foreign Direct Investment Laws", 45:2 Fordham Intl L J 275 at 285–6 (who noted that while the decision may not have "encapsulated the sophisticated theories of harm expected of well-established competition agencies", many foreign concerns that emerged from Huiyuan were not justified).

(4) See Richard A Posner, "The Chicago School of Antitrust Analysis" (1979) 127(4) U Penn Law Review 925; Peter MGerhart, "The Supreme Court and Antitrust Analysis: the Near Triumph of the Chicago School" (1982) Supreme Court Rev 319; Sandra Marco Colino, "The Internationalization of China's Foreign Direct Investment Laws", 45:2 Fordham Intl L J 275 at 287.