The Australian Competition and Consumer Commission (ACCC) seems to be taking an aggressive approach to considering the competitive impact of acquisitions by Chinese State Owned Enterprises (SOEs) in Australia. The ACCC's recent decision in the proposed acquisition by Chinalco of an interest in Rio Tinto companies may have a significant impact in regulatory reviews of acquisitions by SOEs.
On 12 February 2009, Rio Tinto Limited and Rio Tinto plc announced a strategic partnership with the Aluminium Corporation of China (Chinalco), under which Chinalco proposes to invest US$19.5 billion in Rio Tinto. Under the proposed transaction, Chinalco will invest US$12.3 billion in Rio Tinto copper, aluminium and iron ore joint ventures and a further US$7.5 billion in convertible bonds, which if converted would increase Chinalco's shareholdings in Rio Tinto Limited and Rio Tinto plc to 15% and 19% respectively.
This acquisition was unlikely to present competition issues, so the ACCC's decision does not come as a surprise. However, in its review the ACCC took a broad approach to ownership and control considerations, which could have wider import. The ACCC's working assumption was that "Chinalco and various Chinese steel makers could be treated as subsidiaries of the same parent entity (i.e., the Chinese Government) and therefore may have common commercial interests," although it did not come to a conclusive view on the issue. If followed in future merger reviews, this approach could have a significant impact on future antitrust clearances for SOEs.
The ACCC's role in the transaction
Section 50 of the Trade Practices Act 1974 (the Act) prohibits a merger if it results in a substantial lessening of competition in a market in Australia. In the Chinalco/Rio Tinto matter, the primary focus of the ACCC's reasoning concerned the competitive effect of the proposed acquisition, and in particular the effect of the vertical integration of Chinalco and Rio Tinto on iron ore prices. The ACCC ultimately concluded that Rio Tinto would not have the ability to unilaterally influence global iron ore prices to a significant extent.
During the course of reaching this conclusion the ACCC stated that it will effectively treat all Chinese SOEs in the same market as a single entity. The ACCC takes a pragmatic approach to control issues, as set out in Appendix 2 of the Merger Guidelines – November 2008. For instance, when considering whether control may arise on the acquisition of a minority interest, the ACCC does not set strict numeric guidelines, but rather will delve behind the corporate structure as it may appear "on paper” to obtain an understanding of the practical consequences. For instance the ACCC may assess such matters as the distribution of the remaining voting rights, whether the remaining shareholders are passive or active participants and the rights, and the influence of significant debt holders.
The ACCC's decision and its implications for antitrust law – and beyond
It was a working assumption in the ACCC's Chinalco/Rio Tinto competition law analysis that Chinalco and various Chinese steel makers should be treated as subsidiaries of the same parent entity and therefore would have common commercial interests. Any SOE considering considering investment in Australia should carefully consider whether the ACCC may treat SOE interests in multiple companies as indicating common control, which will require reviewing what other SOEs compete in the Australian market and therefore may affect the acquisition structures used to make the investment. Given the level of competition in the supply of resource commodities, the effects of this decision may be felt most sharply should an SOE seek to acquire an interest downstream, such as an acquisition of infrastructure assets.
The reasoning of the ACCC also may have significant repercussions should the approach be adopted by other jurisdictions or regulatory areas.. In particular, it would not be a significant reach for regulators to treat SOEs as affiliates for the purposes of securities laws, resulting in quicker breach of takeover thresholds or the triggering of mandatory bid requirements.
Read more on the Chinalco matter at the ACCC's website.