A recently published decision of the European Commission has potentially far-reaching implications for how transactions involving state-owned enterprises (SOEs) should be assessed for the purposes of European (and potentially third-country) merger control review. When assessing a planned joint venture between China General Nuclear Power Corporation (CGN) and EDF, the commission controversially considered that the activities and turnover of other SOEs active in the same business sectors (ie, energy and nuclear sectors) controlled by the Chinese Central Chinese Assets Supervision and Administrative Commission (SASAC) were attributable to CGN for the purposes of its review.
The decision does not create a binding precedent, but it does suggest how the commission will treat transactions involving SOEs.
For transactions in the energy sector in particular, Chinese SOEs should, at an early stage, assess the extent to which their transactions may meet the thresholds for notification in the European Union on the basis of the other party's turnover (ie, assuming that all SASAC revenues would be aggregated with those of the SOE). In practice, the risks are higher when the target or counterparty has significant sales in the European Union. The commission has the jurisdiction to review transactions where:
- the parties' combined global turnover is over €5 billion and the aggregate EU-wide turnover of each of at least two of the parties is more than €250 million; or
- the parties' combined global turnover is at least €2.5 billion and each party has a turnover of at least €100 million in the European Union (and parties have a combined turnover of over €100 million in at least three EU members states in which they individually have over €25 million).
Chinese SOEs should also assess whether the activities of other SOEs in markets connected to the transaction raise substantive concerns. In many cases, Chinese SOEs are still comparatively small players on European markets (making such substantive concerns unlikely), but this will change as Chinese businesses (including SOEs) expand internationally. Even if the commission ultimately concludes that an SOE is independent of the SASAC and other SOEs, it will still routinely ask for this information during pre-notification discussions. Obtaining information on the revenues and market shares of other SOEs is often burdensome, particularly where these businesses are operationally independent or subject to confidentiality firewalls.
Chinese SOEs must be prepared to continue to present robust and concrete evidence to support their independent status from the SASAC and other Chinese SOEs. There are some positive indications that this decision is confined to the specific facts prevailing in the energy and nuclear sector. In previous cases, the commission's typical approach has been:
- not to assert jurisdiction over transactions where the thresholds for notification would not be met based on the SOE party's turnover alone (unprecedented in this case); or
- where an SOE is involved, to request information about the activities of other SOEs in related markets.
When assessing an acquisition or joint venture, the commission, like most other authorities (including the Ministry of Commerce of the Government of China), is interested in the activities of the entire corporate group to which the acquirer or joint venture parent belongs when assessing whether:
- the revenue thresholds are triggered, considering the revenues of the entire corporate group; and
- the transaction raises substantive competition concerns (eg, because of high combined market shares), considering the activities of the entire group.
The logic is that the entire corporate group forms a single economic undertaking for competition law purposes. SOEs do not have a corporate group as they are ultimately owned by the state. The question from a merger control perspective is which entities, beyond the direct party to the transaction, should be included in the single economic undertaking for the purposes of the merger review. The answer can have implications on both whether a filing is required and the extent of any substantive issues – if the activities of other SOEs besides the direct party to the transaction must be taken into account, it is more likely that the transaction will meet the revenue thresholds in the European Union (and other jurisdictions) and the number of overlap markets may be greater.
The approach taken in the European Union is that, where an SOE has "independent power of decision",(1) and is therefore not subject to any coordination with other state-controlled holdings, it should be treated as independent for the purposes of assessing both whether the merger control thresholds are met, and also the extent of any competitive relationships with the target.
The commission will consider:
- the SOE's autonomy from the state in deciding its strategy, business plan and budget; and
- the possibility for the state to coordinate commercial conduct (among SOEs) – including through the existence of cross-directorships and the (absence of) safeguards preventing the disclosure of competitively sensitive information.
In practice, the commission will examine whether an SOE is truly independent of other SOEs operating in horizontally or vertically related markets. The pre-notification process affords the commission considerable flexibility to demand information and documents from the merging parties in order to obtain clearance.
In a number of previous cases the commission has asked Chinese SOE acquirers for information about the activities of other SOEs without concluding whether they are independent of the notifying SOE. For example, in CNRC/Pirelli(2) (which concerned the supply of vehicle tyres), the commission assessed whether the presence of other SOEs in downstream markets (eg, for passenger and commercial vehicles) raised foreclosure concerns and found that it did not. However, before CGN/EDF the commission had never explicitly decided that a Chinese SOE was not independent of the Chinese state.
The transaction at hand concerned the establishment of a joint venture between EDF and state-owned CGN to develop, build and operate three nuclear power plants in the United Kingdom.
The commission(3) assessed whether CGN should be treated as independent of any other Chinese SOEs. This was crucial to determining whether the commission had the power to review the deal since – on its own – CGN had insufficient turnover to meet the thresholds under the EU Merger Regulation.
The commission found that, contrary to the parties' arguments, CGN was not independent of the Central SASAC, which held a 90% shareholding in CGN.
First, the commission found that the Central SASAC participates in the major decision making of SOEs, the selection and supervision of their senior management(4) and can interfere with their investment decisions.(5) The parties' arguments that there were no cross-directorships (ie, CGN directors which were also directors of other SOEs) and that there was an internal confidentiality policy within the Central SASAC preventing the dissemination of sensitive information between SOEs (which could facilitate alignment and coordination) were dismissed.
Second, the commission identified that additional factors specific to the energy and nuclear sectors suggested an enhanced role for the state in coordinating the activities of SOEs. In particular, the commission noted:
- provisions of Chinese law on SOEs which require the state to take measures to promote the centralisation of state-owned capital within important industries and fields that have a bearing on the national economic lifeline;(6)
- that CGN and a number of other SOEs founded the China Nuclear Industry Alliance, which was a move directed by the Chinese government to achieve synergies and avoid "detrimental and unseemly competition in export markets"; and
- that CGN participated in joint ventures with other SOEs aimed at coordinating investment strategy.
The commission declined to conclude whether the activities of SOEs controlled by the provincial-level Guangdong SASAC were relevant. This is not altogether surprising. As a matter of Chinese law, regional SASACs are independent from the Central SASAC. Regional SASACs are integrated in the local municipal government and act primarily in their own interest. The Central SASAC has no power of appointment over administrative officers of regional SASACs.
This case does not create a binding precedent for future transactions involving SOEs. The commission must conduct a case-by-case assessment in respect of each transaction.
The commission's conclusions appear to rest on two aspects:
- the control exercisable by the SASAC under Chinese law on SOEs, which will generally apply to all sectors where the SASAC and SOEs are active; and
- certain factors specific to the energy and nuclear sector.
The reliance, at least in part, on sector-specific factors and the commission's past reluctance definitively to consider SOEs as being not independent suggests that the same conclusions may not be reached in transactions outside of the energy sector.
It is also unclear the extent to which other competition authorities would take a similar approach. Even where a transaction does not require notification at the EU level (ie, because the revenue thresholds are not met), it may still be notifiable at national level in any one of the 27 EU member states with merger control regimes.
For further information on this topic please contact Bill Batchelor or Tom Jenkins at Baker & McKenzie by telephone (+32 2 639 36 11) or email (firstname.lastname@example.org or email@example.com). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.
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