The Chinese Ministry of Commerce ("MOFCOM") has published two conditional approvals of proposed transactions under China's Anti-Monopoly Law ("AML"). These two decisions reflect China's view of the the broad reach of the AML's merger provisions and the lengthy procedure that merging parties can expect.
Since the AML entered into force in 2008, MOFCOM has published only ten decisions, as it makes public only decisions that prohibit transactions or allow them subject to remedies. From 2008 to 2010, MOFCOM concluded 214 reviews of concentrations under the AML. The first eight months of 2011 saw 142 filings submitted, and the year-end number is expected to exceed 200.
Decision on Alpha V Acquisition
The first decision allows the acquisition by a French private equity fund, Alpha Private Equity Fund V ("Alpha V"), of the Italian textile factory machinery manufacturer Savio Macchine Tessili S.P.A. ("Savio"). MOFCOM required Alpha V to divest its 27.9% stake in Savio's sole competitor, the Switzerland's Uster Technology Co ("Uster").
Alpha V's initial merger filing was submitted on July 14, 2011. On September 5, MOFCOM confirmed the filing, as supplemented, to be complete. On October 31, well within the 90-days phase 2 period, MOFCOM issued the decision to approve the transaction subject to conditions.
MOFCOM determined that the product market relevant to the proposed acquisition was electronic yarn clearers for automatic winders. Alpha V already had an interest in Savio. Uster and Savio are the only two manufacturers electronic yarn clearers for automatic winders in the world.
In its competition analysis, MOFCOM discussed the high market concentration in the market of electronic yarn clearers for automatic winders, where Uster and Loepfe each owns roughly half of the market. Having considered evidence including Uster's shareholding structure and the composition, voting mechanism and attendance records of Uster's shareholder meeting and board of directors, MOFCOM found it was possible for Alpha V to participate in or influence the operations of Uster. Therefore, MOFCOM concluded that the acquisition was likely to adversely affect competition, because Uster and Leopfe could coordinate through Alpha V, or Alpha V could influence Uster and Leopfe, to restrict and eliminate competition.
MOFCOM also concluded entry was unlikely. Intellectual property rights are critical to the research and development of electronic yarn clearers for automatic winders and constitute high barriers to entry. MOFCOM noted that there has been no successful entrant into the business during the past three years.
MOFCOM conditioned its approval of the acquisition on Alpha V's performance on four related obligations, each intended to mitigate the adverse effects of restricted competition in the relevant market:
- Alpha V shall divest its interest in Uster to an independent third party within six months from the date of the decision,
- Alpha V shall report to MOFCOM the identity of the transferee, the price and date of the divestiture transaction, to ensure that such transfer will not give rise to new competitive concerns,
- Alpha V must not participate in or influence the operations and management of Uster prior to completion of the transfer,
- Alpha V shall appoint an independent trustee to supervise the equity transfer in accordance with the Provisional Regulations regarding Divesture of Assets or Businesses in connection with Concentrations among Undertakings (MOFCOM Announcement (2010) No.41).
Decision on Shenhua JV
The second decision cleared the way for a joint venture ("JV") between Shenhua Group Corporation Limited ("Shenhua"), a large State-owned coal-based integrated energy enterprise, and another firm, to develop technology for coal-water slurry gasification (CWSG). MOFCOM imposed the requirement that Shenhua may not condition the supply of coal for CWSG projects on using the JV's CWSG technology.
The parties' initial filing was submitted on April 13, 2011. On May 16, MOFCOM confirmed the filing to be complete. On November 11, shortly before the expiration of the 60-day phase 3 period, MOFCOM granted conditional approval.
The proposed JV was set up to provide technology licensing and engineering services of CWSG to industrial and electric power projects. MOFCOM found that the relevant product market is the licensing of CWSG technology, which is significantly different from other coal gasification technologies. MOFCOM also determined that the relevant geographic market is China, as the proposed JV only operates in China and the customers of CWSG only choose technology suppliers from inside China.
MOFCOM concluded that the licensing market of CWSG technology in China is highly concentrated among three major competing players. Shenhua is the largest supplier of the raw material coal essential for CWSG projects and had relatively low transportation costs.
MOFCOM also examined entry into the licensing market of CWSG technology. It found that the market has very high entry barriers because of the patent protection of core technologies and the long terms for R&D and application of CWSG technology.
Based on the above analysis, MOFCOM concluded that the transaction could enable Shenhua to restrict the competition in the licensing market of CWSG technology through its control over the supply of the raw material coal.
MOFCOM imposed a behavioral condition on Shenhua, preventing it from requiring that purchasers of coal for CWSG projects also use the JV's technology or otherwise raising customers' costs of using alternative technologies.
Broad reach of the AML's merger review provisions. These decisions illustrate the broad reach of the AML's merger control provisions. First, as regards the Alpha V decision, it appears that the transaction was not filed in any other country, including the countries in which the parties are located, that is, France (Alpha V), Italy (Savio), or Switzerland (Uster). The AML has relatively low filing thresholds: each of two undertakings in the transaction must have at least RMB 400 millions (USD 62 million) of sales in China, and the combined turnover of the parties must be at least RMB 10 billion (USD 1.5 billion) at the worldwide level or RMB 2 billion (USD 314 million) at the China level. Therefore, many transactions must be filed in China, even if they otherwise escape merger control requirements elsewhere the world.
In fact, many foreign-to-foreign transaction are caught by the merger control provisions under the AML if two or more parties have substantial operations or sales in China, even if the transaction itself has nothing to do with China.
The Shenshua decision is the first to concern JVs. There is no provision in the AML confirming that JVs are concentrations subject to the AML's merger control. Nevertheless, MOFCOM's practice has been to consider any form of JV (including what Europeans would call non-full-function JVs) as a concentration.
- Aggressive stance towards PE funds. It is not uncommon for antitrust enforcers to take a hard look at concentrations involving PE funds and to require that those funds divest other investments they may have in companies that compete (or that are in a vertical relationship) with the acquisition targets.
However, in this case it seems that Alpha V did not seem to have any "special rights" enabling it to veto certain decisions of Uster (a listed company). Nevertheless, MOFCOM seems to have concluded that, given the attendance at shareholders meetings, Alpha V was in a position to influence Uster's business.
In the future, PE funds holding minority stakes in companies competing with their intended acquisitions will need to demonstrate that their minority stake in fact does not enable them to influence decisions, which is likely to be a very high threshold.
- Extensive review period. The period of review of the Alpha V decision lasted eight weeks, shorter than the average of published conditional approvals and similar to the average for all merger reviews. Nevertheless, the period during which MOFCOM requested supplemental materials prior to commencing the official review process was almost as long (seven weeks). M&A participants must plan for the unpredictable and often lengthy timeframe required to obtain antitrust clearance in China, to avoid delays in closing their transactions.
The review process of the Shenshua decision went into phase 3 and took in total seven months.
- Enforcement against SOEs. Shenshua was the first published case involving a state-owned enterprise. Together with the recent price-discrimination investigation by National Development and Reform Commission of China Telecom and China Unicom, this decision confirms that the regulators will enforce the AML against SOEs.