China’s merger control regime requires the compulsory notification of mergers. In the context of a large global merger, it is typically understood that approvals in China will be required. However, approvals may also be needed in transactions that are smaller and unlikely to be thought of as “global”. For example, two Australian companies considering a merger in Australia may be required to notify in China if they also export products to the Chinese market (and if the thresholds are met). Understanding the issues and risks associated with the merger process in China is therefore important for all Australian companies doing business in China – and particularly key for those considering a potential merger.
The basics – Who needs to notify? Who reviews the merger? How long does it take?
The authority responsible for reviewing mergers in China (ie, the ACCC equivalent) is the Ministry of Commerce People’s Republic of China (MOFCOM). They are responsible for enforcing China’s Anti-Monopoly Laws (AML).
Under the AML, mergers and other acquisitions must be reported to MOFCOM if, for the last fiscal year:
- either the aggregate global turnover of all the merging parties exceeds RMB10 billion (approximately AUD1.597 billion), or their aggregate turnover within China exceeds RMB2 billion (approximately AUD319 million); and
- at least two of the merging parties each have a turnover of RMB400 million (approximately AUD6.390 million) or more within China.
The turnover thresholds are relatively low, and are easily met if an Australian company with business in China merges with a large global corporation. The parties to the merger need not own or operate any productive assets in China – just exporting sales above the threshold will be enough. There is no exemption for merging parties who have minimal or no association with China, or on the basis that the merger will have no impact in China.
The merger clearance process is notoriously slow. Indeed, it is not rare for MOFCOM to be the last regulator to approve a merger (long after approvals are obtained in any other jurisdictions). Strictly speaking, the process involves 3 phases: Phase 1 (30 days), Phase 2 (90 days) and Phase 3 (60 days). Simpler mergers are typically approved in Phase 2, and can take 4 to 6 months to be approved. More complex mergers progress to Phase 3 and typically take upwards of 6 months (with a recent case, Glencore/Xstrata – discussed below – taking just over a year).
The question of timing is particularly important in a context where a merger cannot be completed anywhere in the world until MOFCOM approval has been obtained.
If a merger needs to be notified in China, it is therefore key to commence the clearance process as early as possible. If a merger requires filing in several jurisdictions, it makes sense to try to file in China first.
What is the process for simple mergers?
Until now, MOFCOM has applied the same review process to all mergers (ie, regardless of whether the merger is likely to have a very significant competition impact or very little impact at all). This will continue to be the case in the immediate future, but MOFCOM has recently published Draft Interim Regulations on Standards for Simple Cases of Concentrations of Business Operators (the "Draft Regulation on Simple Cases").
The Draft Regulation on Simple Cases sets out criteria for distinguishing simple cases from those cases that are likely to raise more complex competition issues. Although the draft stops short from offering any commitment that simple cases will be reviewed in a period of time shorter than those that are considered complex, the expectation is that MOFCOM will, over time, develop a more formalised (and hopefully shorter) review process for simple cases.
What happens if the merger is complex or if problems arise?
The obstacles that may arise in a complex merger in China are best illustrated in two of MOFCOM’s most recent decisions: Glencore/Xstrata and Marubeni/Gavilon, discussed below.
Glencore is the world’s leading metals and coal miner and trader, and Xstrata is a major global metals and mining group. The parties first announced their intention to merge in February 2012. The initial application for clearance was filed on 1 April 2012, and final approval was granted over a year later (on 16 April 2013). (By way of contrast, the ACCC took three and a half months to clear the merger without any remedies.)
The merger was approved subject to conditions (discussed below), as MOFCOM concluded that the merger was likely to restrain competition in China for copper, zinc and lead concentrates, as well as increasing vertical integration which may have a negative impact on China’s ability to secure long term supply of these products. What is notable about this decision is the fact that MOFCOM reached these conclusions in a context where the merging parties’ combined market shares in each market were not high. For example, the parties’ combined share in the copper concentrate market in 2011 was only 17.8%.
In most jurisdictions, where post transaction shares fall below 20%, there is very low risk that competition issues will arise. However, in this instance MOFCOM appears to have been heavily focused on the fact that imports of cooper, zinc and lead concentrates are of central importance to the Chinese economy, and the merger parties had relatively high market shares for the production and supply of these products globally (even if not in China itself).
Thus, in approving the merger, MOFCOM subjected Glencore to the following conditions:
- sale of Las Bambas copper project in Peru (to a MOFCOM approved purchaser); and
- for a period of eight years, supply to Chinese customers with a minimum volume of copper concentrate under a long-term contract. Glencore is also required to supply Chinese customers with zinc concentrate and lead concentrate through long-term contracts and spot contracts, on fair and reasonable terms.
If Glencore fails to divest the Las Bambas within the required time, MOFCOM will appoint a divestiture trustee empowered to sell (without a reserve price) Glencore’s interests in one of a number of copper mines around the world.
The full extent of Glencore’s “remedy commitment plans”, which includes the above conditions, was made public. This is a new development, consistent with the recent release of MOFCOM’s Draft Regulations on the Imposition of Restrictive Conditions on Concentrations of Business Operators (the "Draft Regulation on Restrictive Conditions"). Once the draft regulations are adopted, it is expected that MOFCOM will publish remedy commitment plans regularly.
On 22 April 2013, following over a 10 month review period, MOFCOM gave conditional approval to the acquisition of Gavilon by Marubeni. Marunbeni is a major trading house in Japan, selling soya, wheat and other food commodities. Gavilon, a trader in the global agricultural market, is a US-based company headquartered in Nebraska.
MOFCOM’s assessment focussed on China’s import market for soybean, corn, bean pulp and dry and course distiller’s grains. China is the world’s largest soybean importer – it consumed 60% of the total worldwide soybean trade in 2012, providing for 80% of domestic supply within China. In 2012, China imported 58.38 million tonnes of soybeans with Marubeni supplying 10.5 million tonnes (approximately 20%). In 2012, Gavilon sold 5.1 million tonnes of soybean into the global markets though it is unclear from MOFCOM’s decision how much was sold into China.
MOFCOM concluded that the acquisition would enhance Marubeni’s access to global soybean resources through the acquisition of Gavilon’s capacity for soybean procurement, warehousing and logistics in North America.1 As a result this would allow Marubeni to further strengthen its “control” of the soybean import market in China – a market characterised by high barriers to entry and weak countervailing buyer power. Thus MOFCOM granted conditional approval on the basis that Marubeni and Gavilon will maintain independent operations in relation to the export and sale of soybeans in China.2
MOFCOM’s decision remains silent as to how long the hold-separate provisions are to remain in place. However, Marubeni may apply to MOFCOM after 24 months to request release from its obligations. This is similar to MOFCOM’s approach in Seagate/Samsung and Western Digital/Hitachi where hold-separate remedies were imposed with review clauses of 18 month and 24 months, respectively.
Key lessons and recommendations
The Glencore/Xstrata and Marubeni/Gavilon decisions show that:
- where China’s access to key commodities is at issue, MOFCOM is willing to intervene and find market power even at relatively low market share levels. This is particularly so where China is heavily dependent on overseas supplies and where downstream Chinese purchasing power is comparatively weak;
- MOFCOM will seek remedies which go beyond those agreed in other jurisdictions or in circumstances where other regulators conclude there are no competition concerns, as China’s AML requires consideration of the impact of the merger on the national economy. This allows MOFCOM to consult with government agencies such as National Development and Reform Commission, industry associations and third parties;
- MOFCOM is willing to impose structural as well as behavioural remedies (including behavioural remedies that do not have a stipulated termination date3);
- to minimise the likelihood and impact of any delays, applications for clearance to MOFCOM should be commenced as early as it is commercially practicable; and
- parties should consider how the length of the clearance process may impact on the commercial deal. For example, it has been reported that Marubeni, which had aimed to close the deal by September 2012, may be forced to pay much more than it first anticipated in local currency, as the yen has weakened more than 25 per cent against the US dollar since the deal was first announced in May 2012.4