China’s Ministry of Commerce (“MOFCOM”) has refused approval for the proposed P3 joint venture between shipping companies Maersk Line, Mediterranean Shipping Company (“MSC”) and CMA CGM (“the Companies”). The refusal is only the second ever by MOFCOM since China passed its Anti-Monopoly Law (AML) in 2008.
The proposed alliance had already been approved by the US and EU competition authorities when refusal came from MOFCOM on 17 June 2014. As a result of MOFCOM blocking the deal, the Companies have agreed to stop the preparatory work on the alliance and P3, as initially envisaged, will not come into existence.
The proposed joint venture
The Companies involved in P3 are the world’s 3 largest container shipping companies: Maersk registered in Denmark, MSC a Belgian company - registered and incorporated in Switzerland and CMA CGM registered in France. The proposed P3 network would have seen the Companies establish a long-term operational alliance on Asia-Europe, transatlantic and transpacific shipping lines.
The Companies had planned to pool around 250 vessels which would operate across 29 trade loops. The aim of the network was to improve efficiency and service quality by increasing the number of vessels and routes accessible to all 3 companies. The deal was to be structured in such a way as to maintain independence of pricing, sales, marketing and customer services functions. The proposal included the establishment of a shared control centre enabling the Companies to operate the combined fleet independently.
Notification of the joint venture to MOFCOM
Notification of the proposed alliance was received by MOFCOM on 18 September 2013. After a call for additional information, notification was accepted on 19 December 2013 and MOFCOM commenced their preliminary examination of the deal.
On 18 January 2014 MOFCOM implemented a further examination and on 18 April 2014 extended the examination period to 17 June 2014. Under Article 25 of the AML, MOFCOM is able to extend the examination period twice if the initial 30 day period following acceptance of notification is not sufficient. The first extension can be by 90 days and the further extension after that by 60 days. In this case therefore, MOFCOM made use of the maximum possible time frame for reaching a decision on the deal.
During the examination period, discussions were held between MOFCOM and the Companies after MOFCOM indicated that there was a likelihood the proposed alliance could have the effect of excluding or restricting competition. Several amended proposals were submitted by the Companies, with the final plan submitted on 9 June 2014.
The decision and reasons
In reaching its decision not to approve the proposed alliance, MOFCOM evaluated market shares, market power, market concentration, market entry and the potential impact on consumers and business operators. MOFCOM noted that the Companies are the 3 largest operators on liner shipping routes between Asia and Europe, each with a higher individual market share than their remaining competitors combined.
MOFCOM concluded that the alliance would lead to a joint market share of 46.7% on the Asia-Europe container shipping market. It said that the alliance would lead to a significant increase in the Companies’ market power and would change the structure of the market from competitive to highly concentrated. It said that the proposed arrangement would integrate the market power of the parties and consolidate their operating network, eliminating effective competition between major competitors and raising entry barriers to the market.
In explaining its decision, MOFCOM said that the P3 Network alliance would create a tight joint operation that would be different from traditional, loose-knit shipping alliances. Citing the huge investments and significant risks involved in the shipping industry, MOFCOM said that a certain degree of co-operation via vessel-sharing and slot-exchange agreements was required. However, the P3 Network proposal would differ from traditional alliances by integrating all capacity of the Companies on east-west routes globally. Traditionally co-operation in the shipping industry has been managed by committee, whereas the P3 Network proposal was for the establishment of a single network centre to oversee operations.
In March 2014 the proposed alliance was passed by the US Federal Maritime Commission and in June 2014 the European Commission announced that it would not conduct an investigation into the deal, although it did intend to monitor potential risks.
The only other deal to have been blocked outright by MOFCOM was the proposed acquisition by Coca-Cola of China’s largest juice manufacturer Huiyuan Juice in 2009. At the time, MOFCOM was criticised for taking a protectionist approach to the deal. Some commentators have again levied this criticism at MOFCOM’s treatment of the P3 Network, suggesting that China is looking to protect its own domestic shipping operators from the competition that the P3 Network would have presented.
Of note is the divergence between the way in which MOFCOM dealt with the proposed alliance, compared to US and EU competition authorities, especially in light of the deal being structured to ensure independent pricing, sales, marketing and customer service functions. There was some doubt over whether the alliance should have required notification at all, as it is not strictly a merger, but MOFCOM viewed the alliance as a joint venture rather than a cooperation agreement between independent entities.
The decision demonstrates that China is now a very important jurisdiction for parties considering international merger activity. Chinese approval should not be taken for granted and the P3 Network transaction illustrates the potential for severe delay where a Chinese filing is required. MOFCOM has the right to extend the examination phase for a further 90 days beyond the initial 60 day period, without having to satisfy any substantive threshold.
A significant portion of the delay in the Companies receiving an answer from MOFCOM in relation to the P3 Network proposal came at the beginning of the process. As in the UK, the clock for consideration of the transaction does not start on the date that MOFCOM receives notification documents from the parties but from when MOFCOM accepts the notification as complete. With regard to the P3 Network notification, this amounted to a delay of 3 months with MOFCOM making several requests for further information before accepting the filing as complete. Submitting as full a notification as possible could reduce the likelihood that MOFCOM will call for additional information before it is able to accept notification of the proposal.