Tuesday, October 27, 2009
Posted by Wentong Zheng
In my previous post on China’s Antimonopoly Law (“AML”) (see here), I provided a brief overview of the AML and the new developments that happened since the AML went into effect last year. Today I will focus on China’s new merger review regime under the AML.
Prior to the AML, an antitrust review process was in place for foreign acquisitions of Chinese companies. No comparable process existed for mergers and acquisitions among domestic companies. The framework for a new merger review regime is laid out in Chapter 4 of the AML. By not limiting its reach to foreign acquisitions, as the previous regulation governing merger reviews did, Chapter 4 of the AML brings within its purview mergers and acquisitions among domestic companies.
More importantly, Chapter 4 of the AML specifies a list of the substantive factors that will be considered in merger reviews: (1) the market share of the undertakings (meaning business operators or parties) involved in the relevant market and their ability to control the market; (2) the degree of market concentration in the relevant market; (3) the effect of the concentration on market entry and technological progress; (4) the effect of the concentration on consumers and other undertakings; (5) the effect of the concentration on national economic development; and (6) other factors affecting market competition as determined by the antimonopoly enforcement agency. In the meantime, Chapter 4 of the AML provides that a merger that otherwise would be prohibited may be allowed if it has competitive effects that outweigh its anticompetitive effects. In addition, a merger that otherwise would be prohibited may also be allowed if it is “in the social or public interest.”
Chapter 4 of the AML, however, only provides a sketch of the mechanics of the new merger regime. The details of the merger review regime are expected to be fleshed out in subsequent regulations. In March 2008, China’s State Council released a draft merger notification and review regulation for public comments, to which the ABA’s Antitrust Section and International Law Section responded with extensive comments (see here—you will need to scroll down to the middle of the document to see the comments in English). The regulation that was eventually promulgated in August 2008, however, was a stripped-down version containing only notification threshold provisions. Separately, in May 2009, the Antimonopoly Commission (the inter-agency body charged with antitrust policymaking under the AML) issued guidelines on market definition under the AML, after soliciting public comments (see ABA comments here). Four other regulations pertaining to the other aspects of the merger review regime (including merger notification procedures, merger review procedures, investigation of mergers not notified as required by law, and investigation of mergers not reaching the notification thresholds) are currently going through the rulemaking process.
What emerges from this hodgepodge of regulations or proposed regulations is a merger review regime that in some respects resembles those of Western countries and in some other respects does not. On one hand, China’s new merger review regime follows many of the common Western practices, such as the adoption of the SSNIP test for market definition and the utilization of notification thresholds based on the size of the parties to the transactions. On the other hand, the factors considered in merger reviews in China are apparently broader and less predictable than those considered in Western countries. The factors considered in China are broader because the merger authority can consider factors other than the effects of the merger on competition, including the effects of the merger on “other undertakings” (does it imply that China may want to protect the competitors, not the competition?) and the effects of the merger on “national economic development” (does that give industrial policies a role in merger reviews?). The factors considered in China are less predictable because the merger authority can consider any factor that it may determine affects market competition, and factors as amorphous as “social or public interest.”
As is true perhaps with every merger review regime, what is more important than the texts of the merger review laws and regulations is how merger reviews are actually conducted. The Antimonopoly Bureau of MOFCOM has assumed responsibility for merger reviews under the AML. As of now, MOFCOM has blocked one transaction (Coca-Cola/Huiyuan), and approved four transactions with conditions (InBev/Anheuser Busch, Mitsubishi Rayon/Lucite, Pfizer/Wyeth and GM/Delphi).
The five merger cases that MOFCOM has blocked or approved with conditions involve different types of merger: horizontal merger (InBev/AB, Mitsubishi Rayon/Lucite, and Pfizer/Wyeth), vertical merger (GM/Delphi), and conglomerate merger (Coca-Cola/Huiyuan). Unfortunately, the published decisions for those cases tend to be very cursory. And the decisions generally are focused more on remedies than on the evidence that would support a conclusion of competitive harms. For two analyses of MOFCOM’s decisions in InBev/AB, Mitsubishi Rayon/Lucite, and Coco-Cola/Huiyuan, see here and here. One thing that is clear from those cases is that MOFCOM has demonstrated its readiness to impose both structural remedies (such as the divestitures ordered in Mitsubishi Rayon/Lucite and Pfizer/Wyeth) and behavioral remedies (such as the restrictions on the acquisition of additional equity stakes in Chinese beer companies imposed in InBev/AB). But in terms of how MOFCOM would evaluate available evidence to draw inferences about competitive harms, I don’t believe that MOFCOM has arrived at—much less revealed—a pattern of thinking in the decisions it has published so far.
Well, some believe that there is a pattern—a pattern of using the merger review process as a protectionist tool against foreign investors. This argument is bolstered by MOFCOM’s decision to block the Coca-Cola/Huiyuan deal. You may also have noticed that all of the transactions blocked or conditionally approved by MOFCOM involve foreign investors. That surely smacks of protectionism—or does it? I will offer my takes on these issues in my next post.