Recent experience in obtaining approval for multinational mergers requiring approval from multiple global antitrust authorities has led to the Chinese Anti-Monopoly Enforcement Authority (MOFCOM), emerging as one of the three main bodies regulating global M&A transactions, in addition to the US Federal Trade Commission (FTC) and the European Commission (the Commission).
Since the 2008 enactment of China’s Anti-Monopoly Law, MOFCOM has quickly established itself as one of the world’s major competition authorities. In recognition of China’s increasing prominence, many other competition bodies have signed co-operation agreements with MOFCOM, including the FTC and other US agencies, the UK's Office of Fair Trading (now the Competition and Markets Authority) and notably, in 2012, the Commission.
These developments increased the level of collaboration between the authorities in assessing market overlaps and in agreeing to suitable remedies. For example, the recent mergers involving Baxter / Gambro and Thermo Fisher / Life Technologies have broken new ground in EU-Sino anti-monopoly relations. The Baxter decision, which was cleared by MOFCOM in August 2013, announced the approval of the merger three weeks after EU clearance, and MOFCOM adopted remedies that largely mirrored those imposed by the EU, subject to local conditions that were not apparent in the EU. Similarly, the Thermo Fisher decision, which was cleared by MOFCOM in January 2014, was a milestone in the sharing of information and interaction between the EU and MOFCOM.
These international links are expected to strengthen in years to come. As MOFCOM grows increasingly confident in dealing with high profile mergers, however, it also will continue to conduct its own analyses to create China-specific precedents. Its importance therefore cannot be underestimated, and board executives must be attuned to regulatory nuances in China before making any strategic decisions on acquisitions that have implications worldwide, and particularly in China. These differences include the following.
First, MOFCOM’s process is significantly different to the Commission’s. The EU merger process is divided into a 25 working day Phase I review process and a more in-depth four to five month Phase II review for problematic transactions. Practically though, most mergers, even many requiring remedies to mitigate market concerns, are cleared without the need for a Phase II analysis. In 2013, only five, or approximately 2 per cent of mergers notified, went into Phase II in the EU.
China, on the other hand, is unique in that it adopts a three-phased review process that can last up to six months, and there is less certainty as to when a transaction, especially a complicated merger requiring remedies, will be cleared. In 2013, only 13 per cent of cases in China were cleared in “Phase I”, while 81 per cent of cases went into an extended review period (“Phase II”). The remaining 6 per cent went into an advanced “Phase III” period. These phases exclude a pre-notification and pre-filing period, which can add several additional months to the approval process. In the Baxter merger, which underwent a “Phase III” review, MOFCOM’s decision took over five months to clear from the initial filing.
Second, the Commission is bound by strict procedural deadlines within its Phase I period. For example, there are deadlines for the Commission to hold an official “state of play” meeting with the merging parties in order to identify key concerns, and there is another deadline for the parties to submit proposed remedies for the Commission’s consideration. MOFCOM’s interactions with the notifying parties are not bound by these strict deadlines and, as such, they can be less predictable. However, MOFCOM has made significant steps to shorten its procedures. According to MOFCOM, the average case review time in 2013 decreased by ten days. It also recently published draft implementing rules (discussed in detail in this issue) that attempt to streamline simple merger filings and provide clarity on how it will impose restrictive conditions on a merger.
Third, China today has a rapidly growing consumer market, and local market conditions may require different remedies for China compared to the US and EU. This was apparent in the 2011 Samsung/Seagate merger, where MOFCOM imposed extensive and far-reaching behavioural remedies that were radically different to the EU’s clearance of the merger without any conditions. Despite the cross-national cooperation in the Thermo Fisher merger, MOFCOM did not shy away from raising new competition concerns and requiring additional remedies in product markets where neither the US nor EU authorities found an issue. MOFCOM’s willingness to reach such different conclusions and undergo a far more detailed analysis indicates its confidence on the world stage.
Fourth, Chinese government ministries’ and other stakeholders’ influence in a particular industry may affect the length and extent of a merger review, especially if the merging parties are involved in markets that affect China’s national interests, such as food security or natural resources.
As MOFCOM continues to establish itself as one of the three major authorities for clearing global transactions, the next few years of merger review analysis will lead to further multi-lateral cooperation and information sharing. This may increase the predictability of MOFCOM’s decisions and reduce the risk of regulatory delays. Increased cooperation and communication should accrue to the benefit of businesses and enforcers alike. However, economic dynamics unique to China cannot be underestimated as part of a multi-jurisdictional filing. Recent trends show that MOFCOM may challenge or delay the execution of a global transaction if it is not satisfied that all of its concerns are addressed to its satisfaction.
Companies need to take into account the extended time periods required under Chinese law when negotiating the closing of their transactions, and acquirers should be prepared to offer remedies that address all competition concerns in China, or they risk delaying the closing of a transaction.