As Chinese State-Owned Enterprises ("SOEs") have become increasingly acquisitive in recent years, so has the European Commission ("Commission") become increasingly anxious to assert that its merger control jurisdiction may extend to cover such acquisitions.
There have been a number of Commission merger control decisions in the last few years involving Chinese SOEs where the Commission has gone to some lengths to discuss the relationship between SOEs and the Chinese State, and the extent to which this has a bearing on its merger control jurisdiction – these are discussed below and a full list of Commission decisions involving Chinese SOEs is provided at the end of this briefing. However, more recently the Commission appears to be attempting to raise the issue above its decisional practice, and to set global standards on transparency for SOEs, including relating to ownership and links between the Chinese State and its SOEs.
The Commission's recent decisional practice
In 2011, the Commission reviewed eight transactions involving Chinese SOEs under the EU Merger Regulation ("EUMR"). Of these, four qualified for full merger review and were cleared with a full reasoned decision (the other four were subject to a simplified procedure which did not result in a reasoned decision). Two of these decisions deal in detail with the issue of the application of EUMR jurisdiction to Chinese SOEs, and in particular the extent to which the relevant SOE involved is an independent economic entity, or whether it belongs to a wider economic group including other enterprises over which the Chinese State enjoys decisive influence. This assessment is relevant both in terms of the substantive issues raised by the merger, and jurisdiction – i.e. whether the turnover of other SOEs which fall under the aegis of the Chinese State need to be included when determining the turnover attributable to the relevant SOE.
The mechanism generally used by the Commission comprises a two-step approach. First, it analyses whether the SOE has an independent decision-making power. In the event that it does not, it identifies the ultimate state entity with an independent decision-making power; the turnover of that entity and all other undertakings controlled by that entity would then be included in the turnover calculations.
This issue was first raised in China National Bluestar/Elkem, a case notified to the Commission on 24 February 2011 (Case COMP/M.6082 China National Bluestar/Elkem). The case involved the acquisition of Elkem, a Norwegian company, by Bluestar, a subsidiary of China National Chemical Corporation ("ChemChina"). As with other large SOEs, ChemChina reports directly to the State-owned Assets Supervision and Administration Commission ("SASAC"), which is established under the State Council, China's highest executive organ. The parties argued that ChemChina and other SOEs in the market should not be treated as a single economic group, because ChemChina has power of decision-making which is independent from SASAC, and the level of State intervention in the industry sectors relevant to the transaction is very minor. Despite this, the Commission investigated in detail the extent to which Bluestar and ChemChina may make their business decisions independently from other SOEs in the same sector, and whether there were any other forms of coordination between SOEs in the relevant industry. Ultimately, the Commission did not reach a conclusion on this issue, as it determined that, even if ChemChina and other SOEs operating in the markets concerned were regarded as one economic group, the proposed transaction would not give rise to any substantive competition concerns.
The Commission revisited the same issue in detail less than two months later in DSM/Sinochem/JV, a joint venture between Sinochem Group ("Sinochem"), a wholly state-owned SOE and Koninklijke DSM N.V. ("DSM"), a Dutch company (Case COMP/M.6113 DSM/Sinochem/JV). As in China National Bluestar/Elkem, the parties submitted that Sinochem is an economic unit that enjoys decision-making power independent from the Chinese state. The Commission was not convinced - it pointed to the core legislation and the associated information outlined on SASAC's website, which contain a number of provisions that could be read as suggesting that SASAC does in practice have certain powers to influence Sinochem's strategic commercial behaviour. Moreover, the Commission identified a number of external sources which suggested that the commercial decisions of SOEs could be influenced by the Chinese State. Again, the question was ultimately left open, as the competitive assessment showed that, even if the market shares of all Chinese SOEs in the same sector were cumulated, the combined market shares would remain modest.
Two further fully reasoned decisions involving Chinese SOEs were published in 2011 in relation to: (i) the acquisition by Petrochina International (London) Company Limited, a company wholly owned by Petrochina Company Limited, in turn controlled by China National Petroleum Corporation, and Ineos AG, of joint control of the existing Ineos oil refining business (Case COMP/M.6151 Petrochina/Ineos/JV); and (ii) the proposed acquisition by China National Agrochemical Corporation ("CNAC"), a subsidiary of ChemChina, and Koor Industries ("Koor"), of Makhteshim Agan Industries ("MAI") (M.6141 China National Agrochemical Corporation/Koor Industries/Makhteshim Agan Industries). Whilst the decisions address the question of the relevant group of the SOE in less detail than the cases outlined above, and ultimately the Commission again concluded that it could leave the issue open in both cases, it is interesting to note that in China National Agrochemical Corporation/Koor Industries/Makhteshim Agan Industries, the Commission took as its starting point a worst case scenario in which all horizontal and vertical overlaps between MAI, Koor and all Chinese SOEs were taken into account, as if all the Chinese SOEs in the sectors concerned were part of a single economic unit with ChemChina and CNAC.
Since these decisions were published in 2011, the Commission has continued to review cases involving Chinese SOEs (at least another 4 cases between 2012 and June 2013). All of these cases were cleared unconditionally but only one (Mercuria/Sinopec) (Case COMP/M.6807) resulted in a fully reasoned decision, the rest being cleared under the simplified procedure. In Mercuria/Sinopec, the Commission again adopted an approach whereby it counted the market shares of other Chinese SOEs active in the same markets in a worst case scenario type of analysis.
It appears generally from the cases outlined above that the Commission is taking an approach that at least in principle considers that entities belonging to the Chinese state and in particular those under SASAC are likely to be considered as part of one group for EUMR purposes, or at least that the Commission will wish to review activities of all relevant SOEs as one group when analysing the strength of the parties in a merger case.
List of Commission decisions involving Chinese SOEs since 2011
- Case COMP/M.6111 - Huaneng/OTPPB/Intergen (simplified procedure - 11.02.2011)
- Case COMP/M.6120 - APMT/PSA/COSCO/DPPC/DPCT (simplified procedure - 21.03.2011)
- Case COMP/M.6142 - AVIC/Pacific Century Motors (simplified procedure - 21.03.2011)
- Case COMP/M.6082 - China National Bluestar/Elkem (31.03.2011)
- Case COMP/M.6151 - Petrochina/Ineos/JV (13.05.2011)
- Case COMP/M.6113 - DSM/Sinochem/JV (19.05.2011)
- Case COMP/M.6141 - China National Agrochemical Corporation/Koor Industries/Makhteshim Agan Industries (03.10.2011)
- Case COMP/M.6235 - Honeywell/Sinochem/JV (simplified procedure - 02.12.2011)
- Case COMP/M.6700 - Talisman/ Sinopec/JV CO (simplified procedure - 16.10.2012)
- Case COMP/M.6715 - CNOOC/NEXEN (simplified procedure - 12.11.2012)
- Case COMP/M.6807 - Mercuria Energy Asset Management/Sinomart KTS Development/Vesta Terminals (07.03.2013)
- Case COMP/M.6860 - VOLVO/Dongfeng Motor Group Company/JV (simplified procedure - 08.05.2013)
The Commission's apparent recent push for global transparency vis-à-vis SOEs
It has recently been reported that the Commission has put provisions for the application of antitrust and merger rules to SOEs on the agenda for the EU's trade talks with the US taking place in July 2013. In particular, the Commission appears to be keen to discuss how governments grant subsidies and other advantages to SOEs that could distort competition, and global standards for transparency vis-à-vis SOEs.
The decision to raise this matter at the talks has apparently come in the wake of continuing concerns within the Commission that, in some instances, SOEs (or enterprises which benefit from other forms of state influence and control, including companies who are granted special rights or privileges) may have an advantage over their competitors.
Greater transparency is regarded by the Commission as being a crucial first step towards meeting the Commission's aim that, absent objective justification, competing enterprises (whether private, state-owned or state-influenced) should be able to operate on a level playing field. In particular, the Commission is apparently (amongst other things) calling for rules aimed at fostering transparency on ownership and decision making structures, links with other companies, financial assistance received from the state and regulatory advantages such as exemptions and immunities.
One of the effects of such increased transparency would be to harmonise the rules on merger control in relation to SOEs, and in particular on the approach to determining the involvement of the Chinese State in respect of the relevant SOE.
The Commission's ultimate goal is reportedly to have a comprehensive global standard to manage state involvement and influence in private and public enterprises. By putting SOEs on the agenda at these trade talks with the US, the Commission seems to be making another move towards advancing its long-standing aim of including competition policy in future bilateral trade agreements, not just with the US but also with other countries.
It is perhaps unsurprising that the Commission is increasing its efforts to "catch" any acquisitions by Chinese SOEs and to place the issue firmly on the global negotiating table – this has been an issue that has clearly dogged the Commission for several years. The take-away point for SOEs generally, but in particular Chinese SOEs, is that the Commission's vigilance over, and appetite to review transactions involving, SOEs is unlikely to abate any time soon. Very good preparation is essential in deals involving SOEs in order to present information to the Commission satisfying it that the jurisdictional thresholds of the EUMR are or are not met and that the transaction ought to be cleared even on a worst case scenario looking at the activities of all relevant SOEs.