In the past two years, there have been several major antimonopoly merger filings with the Ministry of Commerce of China (MOFCOM), including pre-merger notifications filed under the new Anti-Monopoly Law (AML). The AML went into effect in August 2008 for the purpose of preventing and stopping monopolistic acts. Specifically, the AML prohibits certain types of horizontal and vertical agreements (Chapter 2), prohibits certain behaviors classified as abuse of dominant market position (Chapter 3), establishes a merger review scheme (Chapter 4) and prohibits abuse of government administrative powers restraining competition (Chapter 5).
MOFCOM's expanded merger review powers under the AML underscore the need for advance planning with respect to Chinese pre-merger notification requirements in connection with any transaction that has significant effects on the Chinese market, irrespective of whether the parties to such transactions have physical operations in China.
Recent Pre-Merger Cases
Major transactions scrutinized under Chinese anti-monopoly laws in 2007 and 2008 include the following:
ARCELORMITTAL’S ACQUISITION OF THE SHARES OF CHINA ORIENTAL GROUP COMPANY LIMITED
China Oriental, incorporated in Bermuda and listed on the Hong Kong Stock Exchange, is a controlling shareholder of Hebei Jinxi Iron and Steel Company Limited, a major manufacturer of H-shaped steel products in China. On November 9, 2007, ArcelorMittal entered into certain shareholders agreements to purchase the shares of China Oriental from its major shareholders. On December 12, 2007, ArcelorMittal filed the pre-merger anti-monopoly filing with MOFCOM. On May 13, 2008, an announcement at the Hong Kong Stock Exchange disclosed that both ArcelorMittal and China are still awaiting anti-monopoly clearance, the Anti- Monopoly Condition has not been satisfied and the Shareholders? Agreement has not become unconditional. Accordingly, it has ceased to be of any effect.? The mere fact of awaiting clearance does not necessarily mean ArcelorMittal did not pass antitrust review. However, the ArcelorMittal/China Oriental case is the first case that did not pass anti-monopoly clearance of MOFCOM on a de facto basis.
INBEV N.V./S.A.’S $52 BILLION ACQUISITION OF ANHEUSER BUSCH
On July 13, 2008, InBev announced its of Anheuser Busch. The acquisition, filed with the Anti-Monopoly Bureau (AMB) of MOFCOM on September 10, 2008, was the first major transaction notified to the AMB under the new AML. AMB officially accepted the filing on October 27, 2008. On November 18, 2008, MOFCOM released the 2008 No. 95 Announcement to declare the approval of the acquisition, subject to four restrictive conditions. The four restrictive conditions were as follows:
- Anheuser Busch's current 27 percent shareholding percentage in Tsingtao Brewery could not be increased.
- InBev would need to notify MOFCOM in a timely manner of change(s) to the controlling shareholder of InBev, or to the shareholder(s) of the controlling shareholder.
- InBev could not increase its current 28.56 percent shareholding in Zhujiang Brewery (a Chinese brewer).
- The post-merger company could not seek to acquire shares of China Resources Snow Brewery or Beijing Yanjing Brewery (two Chinese brewers).
The InBev/Anheuser Busch case is the first case to pass the antimonopoly clearance under the AML with conditions attached and the second instance of having public hearings before clearance was granted.
BHP BILLITON LTD.’S FORMAL TAKEOVER BID FOR RIO TINTO LTD.
In conjunction with its February 6, 2008, formal takeover bid, BHP made anti-monopoly filings with the competition regulators of the European Union, the United States, Australia, Canada, South Africa and China. The filing transaction was cleared in the United States and Australia, but the clearance process was suspended in the European Union. In China, filing materials were filed with MOFCOM in June 2008. However, on November 25, 2008, the very date that MOFCOM formally accepted the case to begin its review process, BHP withdrew the bid for Rio.
COCA-COLA’S ANNOUNCEMENT THAT IT WOULD ACQUIRE THE SHARES OF CHINA HUIYUAN JUICE GROUP LTD.
Coca-Cola announced on September 3, 2008, that it would acquire the shares of China Huiyuan Juice Group Ltd, a leading Chinese soft drink company. On December 2, 2008, Coca-Cola and Huiyuan jointly announced that they had submitted the pre-merger anti-monopoly filing. The Coca-Cola/Huiyuan case is still being reviewed by MOFCOM. The Coca-Cola/Huiyuan case triggered discussion as to whether or not Coca-Cola should be allowed to purchase the ?national brand? of Huiyuan, thereby raising the important question of the extent to which MOFCOM will take industrial policy and other non-competition considerations into account in the merger review process.argued a decision on a motion for injunctive relief that the merger documentation revealed a lack of sound business reasons and that the majority shareholder had clearly approved and caused the merger for the sole purpose of obtaining the delisting.
These recent pre-merger anti-monopoly cases provide important lessons for companies contemplating anti-monopoly filings in China. These cases, as well as recent pronouncements by MOFCOM, demonstrate that MOFCOM is increasingly active in pre-merger review. Further, MOFCOM?s level of review will undoubtedly increase even more under the new AML. This enforcement climate and the new pre-merger notification regime ushered in by the AML have important ramifications for companies contemplating transactions that have any significant nexus with the Chinese marketplace. Key planning considerations include the following:
EARLY PREPARATION OF PRE-MERGER FILINGS
There are several reasons for early preparation of pre-merger filings. First, an anti-monopoly filing in China requires significant substantive information and a high level of business and market analysis in a narrative format, including details regarding the relevant market, the parties? positions in the market, the competitive landscape, rationale for the transaction and public-interest considerations. A typical pre-merger report (including attachments) will run more than 100 pages. For more complex cases, a report can run 300 pages or more.
Such information must also be confirmed with a series of final guidelines regarding merger -notification procedures (Notification Guidelines) and draft guidelines regarding the relevant market definition (Draft Relevant Market Guidelines) under the AML. The Notification Guidelines were published by MOFCOM during the first week of 2009, offering MOFCOM?s first clarification to the merger notification process under the AML.
Second, it may take a much longer time to collect market information in China than in other jurisdictions. Unlike some western countries, market-information services in both the public and private sectors are relatively unsophisticated in China. That said, MOFCOM places great importance on these marketinformation resources and the reliability of such resources. Thus, while statistical data from internal studies are useful, a wellbalanced report should also include sufficient data from reliable external resources.
Third, a buffer period must be factored into the timeline for antimonopoly clearance. For example, the first stage of review has a 30-day period that does not commence until MOFCOM deems a report as complete. Thus, the actual timing of anti-monopoly clearance depends on the nature of the additional information or documents that might be required by MOFCOM before it formally deems that report as complete, which can range from one to several weeks. In addition, the report and most of its appendices must be submitted in Chinese. Therefore, additional time should be allocated to translate the report. Finally, as further detailed below, evaluating the need for pre-notification consultation with relevant Chinese administrative agencies should be taken into account in connection with the notification and review process.
PRE-NOTIFICATION CONSULTATION WITH MOFCOM AND/OR THE NATIONAL DEVELOPMENT AND REFORM COMMISSION
Although not required, a pre-notification consultation with MOFCOM may be quite important, especially for market players in certain sensitive industries (e.g., the steel industry). Compare, for example, the positive result achieved in InBev/Anheuser Busch (where pre-notification consultation was undertaken) with the unsuccessful outcome in ArcelorMittal/China Oriental (where pre-notification consultation did not occur?although other factors undoubtedly also contributed to that result). Indeed, in some instances, it may be prudent to consult with MOFCOM even before the definitive agreement is concluded and/or publicly announced.
Issues to be covered in a pre-notification consultation with MOFCOM must be assessed on a case-by-case basis. As a general proposition, however, the parties should be prepared to provide MOFCOM with a full briefing with respect to the proposed transaction and any anticipated competitive effects it may have on the Chinese market. In those instances in which there may be possible competitive concerns, the pre-notification consultation may also include discussion of restrictive conditions or other undertakings that might be required to obtain anti-monopoly clearance.
The parties may also consider communicating with the National Development and Reform Commission (NDRC) as part of the pre-notification consultation process or in a parallel consultation process. As the watchdog of industrial policy of China, the NDRC plays a very important, though invisible, role in the antimonopoly clearance process. As a consequence, where industrial policy considerations (e.g., national champion/brands) may come into play, having the NDRC on board may be critical.
THE IMPORTANCE OF PUBLIC OPINION
It seems that MOFCOM attaches importance to public opinion of a proposed transaction, including the opinion of industry associations and other constituencies. However, the extent to which public opinion affects the anti-monopoly review process remains unclear. In the BHP/Rio case, for example, MOFCOM consulted the China Iron and Steel Association (CISA), and CISA publicly expressed its opposition to the proposed transaction.
The European Commission also consulted with CISA before taking its negative decision in BHP/Rio.
It is likely that public opinion will play an even greater role in the anti-monopoly clearance process under the new AML merger review process. The newly promulgated Notification Guidelines provide that a party (or parties) to the proposed transaction shall submit the opinion of the public, including local governments, governmental authorities in charge of the industry in which the merging parties belong, and the people of all walks of the communities involved in or affected by the proposed transaction. Apparently, MOFCOM will require a party to gather and submit to MOFCOM such public opinions related to the proposed transaction.
Although MOFCOM does not place the opinions of competitors and customers in the category of public opinion, the notification guidelines nonetheless requires a party to the proposed transaction to analyze potential impacts of a proposed transaction on competitors and customers.
It remains unresolved whether or not parties to the transaction may engage a public-relations company to collect opinions that are in favor of the proposed transaction. In any event, it is clear that parties to proposed transactions that have an effect on the Chinese market must give due regard to anticipated public reaction to the proposed transaction and, correspondingly, should implement an effective public-relations strategy in their planning process.
NON-REPORTABLE TRANSACTIONS MAY ALSO BE SUBJECT TO POSSIBLE INVESTIGATION AND CHALLENGE
In accordance with the Regulations of the State Council on the Criteria for Notification of Concentrations of Business Operators (Notification Criteria) that were issued on August 3, 2008, nonreportable transactions may also be subject to possible investigation and challenge. On January 19, 2009, MOFCOM issued the Interim Measures on the Evidence Collection for Suspected-of-Monopoly Concentrations of Business Operators Without Reaching the Notification Thresholds (draft) to implement the Notification Criteria. Thus, it seems clear that MOFCOM will actively monitor transactions that still have a nexus with China but fall below the AML?s pre-merger notification thresholds. On February 6, 2009, MOFCOM issued for public comment draft Interim Measures on the Investigation and Handling of Suspected-of-Monopoly Concentrations of Business Operators Without Reaching the Notification Thresholds. The deadline to submit comments is March 6, 2009. This draft rule provides some guidance as to how MOFCOM likely will enforce China?s Anti-Monopoly Law (AML) in connection with those transactions that do not meet the AML?s notification thresholds. Visit http://www.mwechinalaw.com/ news/2009/chinalawalert0209b.htm for more information about this draft rule.
The precise contours of MOFCOM's merger enforcement policies under the new AML are still developing. As reflected above, however, it is already clear that MOFCOM will have an active enforcement agenda and that it will be critical for companies to take this new enforcement climate into account whenever they consider transactions that will have an effect on the Chinese market. Under MOFCOM's new merger review procedures, advance planning and early consultation with counsel are essential to ensure compliance with the new notification procedures and to optimize the likelihood of positive and timely outcomes under the AML. Moreover, early consultation with counsel should also be undertaken even if the proposed transaction does not meet the AML's merger notification thresholds, particularly in cases in which the transaction involves a sensitive industry or may have a significant competitive impact in China, given MOFCOM?s broad authority to investigate and challenge transactions under the AML.