On August 1, 2008, China's Anti-Monopoly Law (AML) became effective. Since that date, the Chinese authorities have moved quickly to put a merger-control regime in place, issuing both formal filing guidelines and draft filing rules that set forth the basic procedures of the Chinese merger-filing regime and provide practitioners and businesses with guidance on how proposed transactions will be analyzed under this regime. The formal filing guidelines have been officially issued and were effective upon issuance, while the draft filing rules are subject to further amendments. The business world has followed this process carefully, concerned about the potential burdens associated with Chinese merger filings as well as the possibility that Chinese antitrust authorities may require remedies beyond the scope of the transaction at issue. At this point, the report on Chinese merger review is one of tempered optimism — while the filing procedures are comparable to those of other jurisdictions, ambiguities in these procedures, substantive analysis and the scope of remedies remain. The significance of these issues became concrete on March 18, when the proposed Coca-Cola Co./Huiyuan Juice Group transaction was barred under the AML — the first transaction to be prohibited.
Ministry of Commerce is in charge of merger control
The AML places the responsibility for antitrust enforcement with the Anti-Monopoly Commission (AMC) under China's State Council and the anti-monopoly enforcement authorities (AMEA) designated by the State Council. The AMC supervises the AMEA. The AMEA involves a three-way split of authority among the Ministry of Commerce (MOFCOM), the National Development and Reform Commission and the State Administration of Industry and Commerce. MOFCOM, through its Anti-Monopoly Bureau (AMB), is solely in charge of merger control.
Many of the particulars for premerger filing remain unknown. As a general rule, parties involved in a merger, or in the acquisition of direct or indirect control of another entity, must file a premerger filing if at least two of the parties to the transaction each had a minimum turnover in China during the previous fiscal year. As set forth in draft filing rules, turnover would encompass the revenue of the entity involved in the transaction as well as those entities with which it has a controlling relationship. The documents and materials required in the filing are similar to those required in other jurisdictions, particularly in the European Union. Original documents in a foreign language must be accompanied by a Chinese translation. None of the filing guidelines and draft filing rules impose timing requirements.
Chinese draft filing rules give MOFCOM a fair amount of leeway to determine whether the filing submitted is sufficient, a fact that has already posed compliance challenges for several transactions. For example, in the Coca-Cola/Huiyuan transaction, Coca-Cola submitted its initial filings to the AMB, and supplementary materials in the fall of 2008. The filing was officially accepted on Nov. 20. Given the ambiguity of certain key terms in the filing requirements and the uncertainty as to the scope of documents required to be attached, other parties are likely to face a similar predicament.
Like many jurisdictions, MOFCOM has adopted a two-stage review: the first stage is to be completed 30 days from the date of the official acceptance of the filing, while the second stage runs an additional 90 days and can be extended for a further 60 days in certain circumstances. Both stages may involve written objections and defenses as well as hearings. While the draft filing rules state that MOFCOM may invite industry representatives to participate, there is not yet any clear method through which market participants can lodge complaints regarding a proposed transaction.
To the extent MOFCOM makes a determination about the effect on competition, it may impose restrictive conditions or even block the transaction. The restrictive conditions may be structural, such as divestitures of assets or businesses; behavioral, such as establishing the infrastructure of online networks and platforms or licensing key technologies; or comprehensive, i.e., conditions that have both structural and behavioral aspects. The draft filing rules provide that the parties postmerger must periodically report to MOFCOM on the fulfillment of these remedies.
There has been some concern in the business community regarding potential overreaching by Chinese antitrust authorities in imposing merger remedies, specifically that antitrust requirements may be used as a justification to restructure a particular industry to disadvantage non-Chinese owned businesses. To date the InBev S.A./Anheiser-Busch Cos. (AB) transaction is the only one known to be subject to restrictive conditions as a result of Chinese merger review.
Under the remedies imposed, the combined entity may not implement any of the following without MOFCOM's prior approval: an increase in AB's current 27% shareholding in Tsingtao Brewery; a change in InBev's controlling shareholders or shareholders of the controlling shareholders; an increase in InBev's current 28.56% shareholding in Zhujiang Brewery; and an acquisition of shares in two unrelated breweries, CR Snow Brewery or Yanjing Brewery.
The business community can take some comfort from the InBev experience. On the one hand, the review appears to have been clearly focused on the relevant industry (beer) and conducted in a relatively quick time frame. On the other hand, at least one of the conditions imposed on the InBev/AB transaction — the prohibition of an acquisition of shares in CR Snow Brewery or Yanjing Brewery — is far beyond the scope of the transaction at issue, and all of the remaining conditions, while relevant to the competitive aspects of the InBev/AB transaction, deal with other potential acquisitions rather than issues posed by the pending deal. MOFCOM's decision regarding the Cocal-Cola/Huiyuan transaction, which it blocked on March 18, appears to have been focused on the specific transaction. MOFCOM stated that it determined that the proposed acquisition would have the effect of eliminating or restricting competition in China's fruit juice market and would impede the development of the fruit juice industry. MOFCOM also expressed concern that
Coca Cola's dominant position in the market for carbonated soft drinks, if combined with a strong position in the juice industry, would significantly raise the bar for potential competitors to enter the juice market. While MOFCOM stated that it considered possible remedies, it noted only that the parties failed to offer any feasible proposal to reduce the adverse competitive effects. The specifics of these proposals are unknown.The Coca-Cola/Huiyuan transaction is also the first transaction known to have entered MOFCOM's second-stage investigation. Although many of the substantive issues considered by MOFCOM in a second-stage investigation remain unclear, the announcement did discuss some of the issues reviewed, which should help businesses better evaluate MOFCOM's review process. One of the outstanding issues is the geographical scope of the review. Presumably, MOFCOM will concentrate on competition in China, as it appears to have done in the Coca Cola transaction, although such a restriction is not specified. Hopefully in such a secondstage investigation the authorities will remain focused on the transaction and industry at issue and not inquire into other Chinese operations held by the parties, but this too is unknown. Time will tell.
The law allows the AMB to investigate transactions that do not meet the filing thresholds but that may eliminate or restrict competition. Two sets of draft filing rules set up the framework to review transactions that fail to meet the filing criteria. One set, known as the Draft Evidence Collection Measures, primarily focuses on evidence collection before a formal investigation is initiated. The other set, the Draft Investigation Measures, address how MOFCOM must conduct the investigation and handle the suspected transaction after the investigation.
Implications of recent cases and legislative initiatives
Much remains unknown regarding Chinese merger review. MOFCOM officials have stated that 29 filings have been reviewed, 24 of which have been approved. The rulings on the InBev/AB and Coca-Cola/Huiyuan transactions are the only two publicly announced decisions on transactions requiring the AMB's review post implementation of the AML. The two transactions provide practitioners and the business community with some guidance regarding merger review and insight into possible remedies, but no information as to the substantive analysis that drove the outcome. The only substantive information available to parties is draft guidance regarding the AMB's intention to use the relevant market as the basis for antitrust analysis and the factors relevant to reviewing nonreportable transactions
In comparison to prior rules, the new filing guidelines, and the draft filing rules, include helpful changes, such as formalizing filing procedures, providing detailed documentation requirements and clarifying certain practical issues concerning filing and review. At the same time, the lack of analytical standards, and the fact that much guidance is only in draft form, raises practical difficulties, particularly given the lack of experience in China with comprehensive and sophisticated premerger review procedures. Additional guidance, both through regulations and in cases, will be welcome.