On 1 August 2012, China’s Anti-monopoly Law entered its fourth year. The Ministry of Commerce, or MOFCOM, has been active particularly in enforcing the merger control regime. MOFCOM’s enforcement efforts are most visible, with a total of 15 intervention decisions to date including no less than seven in the last 12 months. MOFCOM’s approach and its ability to conduct antitrust analysis has matured in the last 12 months.
Recent experience has been that while much of MOFCOM’s enforcement approach is becoming more convergent with international antitrust norms, PRC antitrust merger control still retains some Chinese-specific features both on the substantive and the procedural issues. It is oftentimes the lack of due consideration of such features that could lead to surprises in managing the antitrust clearance process in China. In this briefing we summarise recent trends and consider their effect on future global transactions that require a China merger control filing.
PRC merger control – an overview
The PRC antitrust merger control regime has been in effect for four years, and MOFCOM’s enforcement efforts are clear. It has handled 15 interventions and over 450 cases to date, with the last seven cases were taken in the last year alone. This is striking, given the small team at MOFCOM.
MOFCOM has been prolific in publishing enforcement guidance, which covers both substantive analysis and procedural matters. It has always been open to dialogue with competition agencies outside China, and this has resulted in several key bilateral cooperation agreements, including ones with the US antitrust authorities and the UK Office of Fair Trading.
MOFCOM has gained a lot of enforcement experience as an authority over the last four years. Its approach has converged with international norms, although there remain some China-specific features. MOFCOM’s enforcement trends are detailed below.
Increasing sophistication in analysing transactions – more convergence with international norms, but still lacking in some detail
MOFCOM has shown it is more sophisticated in analysing difficult, substantive issues. A good example is MOFCOM’s intervention decision in Google/Motorola Mobility. This attracted international attention because of the antitrust investigations Google is embroiled in globally and because the US Department of Justice and the European Commission reviewed the same transaction.
The transaction entailed a ‘vertical’ merger where Google, a leader in online search and advertising and the owner of the Android operating system for smart mobile devices, bought Motorola Mobility, an original equipment manufacturer (OEM) for smart mobile devices and an owner of significant standard essential patents.
In finding the transaction was anticompetitive, MOFCOM was concerned about Google’s presence in the upstream market of smart mobile device operating systems, in which Google’s Android had a market share of 73.99 per cent in China. MOFCOM held that post-transaction Google would be able – and incentivised – both to favour Motorola’s handsets and to offer Motorola’s extensive patent portfolio only at unreasonable royalty conditions to third parties. So it imposed behavioural remedies to address these concerns.
The theory of harm that MOFCOM used is in line with international norms. The case was interesting, though, because despite MOFCOM’s ability to identify this theory, the decision did not elaborate on the facts relied on nor MOFCOM’s analysis in deciding there would be sufficient incentive for Google to favour Motorola over competing OEMs. This contrasted the other authorities (including the EU) that examined the transaction, and this is increasingly the trend of MOFCOM decisions, which tend not to provide much detail on the factors they relies on.
Because MOFCOM tends not to share these details, it is more challenging for future transaction parties to know how much weight MOFCOM is likely to accord factors before it. There is, therefore, a lower degree of predictability of MOFCOM’s reviews than is the case in other more established jurisdictions, despite MOFCOM’s increasing sophistication as an antitrust authority.
Unique Chinese features of MOFCOM’s enforcement and review
Despite a move towards internationally recognised antitrust theories, some features remain unique to China, as outlined below.
A more cautious approach than other antitrust agencies
MOFCOM is more cautious than other authorities. This has resulted in several instances where global transactions notified elsewhere have resulted in remedies (or more extensive remedies) being imposed only by MOFCOM.
An example is the recent cases involving the global hard disk drive market of Seagate/ Samsung and Western Digital/Hitachi. These two transactions were also notified elsewhere, including in the EU and the US. In the case of Seagate/Samsung, both agencies cleared the transaction without condition, and in the Western Digital/Hitachi case, it was cleared with a divestment remedy.
In contrast, MOFCOM went further than the EU and the US agencies on both occasions. It required behavioural remedies in Seagate/ Samsung and both behavioural and structural remedies in Western Digital/ Hitachi, even though the markets they examined were the same. Importantly, MOFCOM regards its remedies as relevant beyond China where the products or services markets are global.
It is, therefore, imperative that parties to global transactions are mindful of the Chinese review process potentially yielding a more restrictive outcome, even where the parties believe the transaction does not raise issues elsewhere.
Apparent willingness to be flexible about remedies – for how much longer?
As a general rule, most antitrust authorities are not inclined to impose and administer behavioural remedies, given the likely time and ongoing resources needed to monitor compliance and the greater uncertainty about their effectiveness in eliminating anticompetitive effects.
MOFCOM’s approach differs from that of other authorities: to date it has imposed behavioural remedies in eight out of 15 decisions since the AML came into force. The trend has not abated in the past 12 months, with MOFCOM imposing behavioural remedies in five out of seven decisions in the past year.
This might be positive news for notifying parties that wish to get the deal done and that are prepared to expend the time and resource in complying with such behavioural remedies. It remains to be seen whether MOFCOM may soon decide not to be as flexible in allowing behavioural remedies, given the likely challenges MOFCOM no doubt is facing in monitoring some of the complex behavioural remedies it has imposed.
Expressly empowered to consider noncompetition issues
A feature unique to the Chinese merger control regime is the express reference to consideration of non-competition factors as a matter of law. Under the AML, MOFCOM is empowered to take into account noncompetition factors in its merger review process. There have been instances where MOFCOM has acknowledged public policy factors to be at play in imposing remedies. The most notable example is its first remedies decision in Anheuser-Busch/InBev, where remedies addressed industrial policy concerns.
In later cases there has been a noticeable reticence to impose remedies on noncompetition grounds. Despite that, it would be still be prudent to assume that noncompetition factors still have a role in MOFCOM’s decision-making process. In fact, some commentators have suggested that intervention decisions such as the case of Uralkali/Silvinit were informed, at least partly, by industrial policy concerns. In that case the merged entity would have accounted for at least half China’s imported volume of potassium chloride, which is an important fertiliser and essential for the Chinese agriculture.
Therefore, it remains important for transaction parties with notifiable transactions in China to continue to explore what non-competition factors might influence MOFCOM’s analysis, to equip themselves with possible remedial measures to deal with any such concerns.
Expansive read of notion of control – potentially broad scope of review The notion of ‘control’ has not been clearly specified under the AML or its relevant guidance. However, the Alpha V/Savio decision shows that a shareholding interest as low as 27.9 per cent could potentially be characterised as a controlling stake.
Alpha V notified its agreement to buy Savio. Alpha V had a pre-existing 27.9 per cent minority shareholding in Uster Technologies, which was Savio’s biggest competitor, and together they accounted for roughly 100 per cent of the global market for automatic yarn clearing machinery. MOFCOM came to the view that Alpha V controlled Uster in which it had a 27.9 per cent stake, not because it positively found control to have existed, but simply because MOFCOM could not rule it out.
MOFCOM’s approach in the Alpha V/Savio decision serves as a reminder of MOFCOM’s extensive discretion in a large range of issues, including whether a transaction would give rise to an acquisition of control and hence be notifiable. The breadth of discretion MOFCOM means parties to minority acquisitions need to be mindful of MOFCOM potentially having jurisdiction, and that parties will need to either seek legal advice and take a view on whether the transaction would give rise to control, or seek to engage with MOFCOM on pre-notification consultation to gain clarity on this issue.
Despite some changes, Chinese merger control review remains challenging on the procedural front: the review period remains relatively long, but there are now signs of a streamlined approach, which has begun to reduce the review period of no-issues cases. Efforts at reducing review periods may be countered by the more burdensome notification form MOFCOM now orders notifying parties to use. Below is a summary of the key procedural trends.
Still a long process – with some positive indications of a streamlined review
The Chinese merger review process takes two stages: a phase I review that takes up to 30 calendar days, and a phase II review that takes up to 90 calendar days with a possible 60-day extension. In addition to these formal review periods, MOFCOM also reviews filed materials to vet for sufficiency and completeness of information and materials provided, for which no time limit is imposed.
Experience has been that MOFCOM’s review processes are considered lengthy compared with most other jurisdictions: cases that do not raise concerns routinely get cleared only in phase II. At a press conference last December, a MOFCOM spokesperson pledged to streamline the review processes to enable quicker clearance for no-issues cases.
Recent experiences have been quite positive, with speedier clearances of cases that do not raise significant issues. However, MOFCOM’s ability to adhere to its stated goals is to be tested in light of the unprecedented case load, staffing shortage and the more extensive information being required under the new notification form.
Likely delay due to the adoption of a new filing form
MOFCOM published a new notification form, which it requires all filing parties to use from 7 July 2012. The new form imposes additional burden on the filing parties because it requires more documentary and information evidence, with an emphasis on the Chinese activities of the parties. It means the filing parties would need to allow more time and resources for preparing of the China merger filing. It is also possible – if not likely – that this could slow down the MOFCOM review process in view of the more substantial amount of information and documentation that MOFCOM will need to review.
At the fourth anniversary of the AML coming into effect, it is interesting to take stock of MOFCOM. It is clear that as MOFCOM continues to gain enforcement experience, its analytical approach has also begun to converge with international norms. Nonetheless, China-specific features of the review remain, and they may from time to time result in more extensive scrutiny or restrictive terms of clearance. Procedurally, MOFCOM is still constrained by its internal resource issues, which have played a key part in its reviews taking relatively longer even for no-issues cases. This issue may be exacerbated by the new notification form, which mandates more extensive information and documentation. Transaction parties that need to notify to MOFCOM will need to continue to tread the review process fully aware of the features of the Chinese merger control regime.