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Merger Control under Chinese Antitrust Law

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Merger Control under Chinese Antitrust Law

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    1. Merger Control under Chinese Antitrust Law Prof. Dr. Wang Xiaoye Institute of Law Chinese Academy of Social Sciences wangxiaoye88@yahoo.com.cn

    2. 1. M&A Activities in Chinese Markets The year of 2006 was regarded as Explosion Year for M&A Activities in Chinese Market. 2005, the number of M&A cases conducted by the enterprises within China territory is as high as 1786 in total. The accumulated volume of transactions reached USD 61.8 billion. 2006, the number of M&A cases conducted by the enterprises within China territory is as high as 2263 in total, the accumulated volume of all the transactions reached USD 103.8 billion, increased by 68% compared with that in 2005. M&A activities were conducted in almost all sectors in China. Acquisition of China Paradise Electronics Retail (????)by Gome Electrical Appliances Holding (????)was regarded as one of the highlights for 2006 M&A Activities in Distribution Sector. In 2007, the current momentum for M&A activity within Chines territory will not be changed.

    3. 2.Causes of M&A in Chinese Market A. Market Strengthening of Competitiveness; Big-Scale Increase of Shares Mechanism: Economic Efficiency; Prices in Stock Market. B. Industry Policies of Chinese Government, for example: The 10th Five-Year Development Plan for Chinese Automobile Industry: Enhance Concentration Degree of Auto Industry to Develop a New Industry Structure Dominated by 3 Key Car Makers: FAW,DFM and SAIC. In 2002,FAW bought 50.98% of the equity of Tianjin Xiali Auto Limited Company. In 2002, 9 Civil Aviation Companies were restructured into 3 Group Corporations: Air China, China Eastern and China Southern. In December 2006, China Communications Construction Company (CCCC) succeeded in initial public offering of USD 2.1 billion in Hong Kong Stock Exchange. CCCC was created by merger of 2 big state-owned enterprises in construction sector. The number of the enterprises owned by the Central Government decreased from 196 in 2003 to 159 in 2006. By 2010, the number will be decreased to about 100.

    4. 3. M&A by Foreign Enterprises in Chinas Market According to the statistics by Dealogic, the accumulated volume of the M&A by foreign enterprises within China territory in 2006 was as high as USD 31 billion while the volume of same kind was only USD 1 billion in 1999. Xuzhou Construction Machinery (XCM) v US Carlyle Group. The latter spent RMB 3 billion to purchase an 85% stake in XCM, a subsidiary company of Xuzhou Construction Group (XCMG) in 2005. In October 2006, the buyout plan was revised and the percentage of stake by Carlyle Group was decreased to 50%. In March 2007 when the buyout plan was finally approved by MOFCOM, the percentage of the stake was decreased to 45%, amounting to RMB 1.8 billion. SUPOR COOKWARE v SEB International. In 2006, SEB spent RMB 2.4 Billion to acquire 52.7% to 61% stake in SUPOR whose total turnover 2005 amounted to RMB 1.5 Billion and market share accounted for 40%. This transaction became the first case going through antitrust review. MOFCOM initiated a antitrust hearing because of strong opposition by Supors competitors. In April 2007, SEB received the approval from MOFCOM to acquire 52.7% to 61% stake in SUPOR, the leading Chinese cookware maker after a lengthy controversy. XCM v Carlyle caused a strong public sentiment. Some accused this transaction as Selling XCM means selling national dignity. This reaction was also the backlash of the blockade of Unocal by CNOOC for political reasons. 2006, a special regulation targeting M&A of Chinese enterprises by foreign investors was enacted; antitrust review is an important chapter in this regulation.

    5. 4. Antitrust Review on M&A of Domestic Enterprises by Foreign Investors Notification : (a) the business revenues of a party exceeds RMB1.5 billion in China marker; (b) aggregate number of domestic enterprises being merged in one year exceeds 10; (c) the market share in China has reached 20%; or (d) market share of a party reaches 25% as a result of such merger; (e) where request is made by competitors, the relevant departments or industrial associations.. Review Duration: 90 days. Prohibition: excessive market concentration, harm to completion or damage to consumer interests. Extraterritorial application : (a) a party owns assets in China of RMB 3 billion; (b) business revenues of a party in China is over RMB1.5 billion; (c) the market share in China of a party reaches 25% as a result of such merger;(d) the market share of one party in China may reach 25%; (e) the number of foreign-invested enterprises in same domestic industry by a party excesses 15. Exemption: (a) improve conditions for competition; (b) restructure failing companies and ensure employment; (c) introduce advanced technology, management and increase international competitiveness; (d) improve the environment.

    6. 5.Comments on Provisions on Antitrust Review Notification: the number of merged and acquired enterprises and the request by competitors should not be taken as cause for antitrust review, for instance SEB v SUPOR. Duration for Review: 90 days is too long when applied to the transactions without serious damaging effects on market competition. Substantive Provision: excessive concentration is too vague to operational in practice. Application on external M&A: the extraterritorial jurisdiction is too broad to be justified, for instance, assets of over RMB 30 billion owned by one party within the territory of China. Generally speaking, the merger control directed only to foreign investors suffers inconsistency with the principle of national treatment as required by the legal framework of WTO.

    7. 6. Provisions for Concentration of Undertakings in Draft 2006 Concentration of undertakings: merger; acquisition of certain percentage of voting shares or assets or controlling power. Standard for notification: total turnover of all parties worldwide reaches RMB 12 billion; turnover of a party in China exceeds RMB 800 million. Duration for review: 30 days for first review; 90 days for further review, subject to extension of another 60 days when justified. Factors for review: (a) market share and market power; (b) concentration of market; c. possibility of exclusion of or restriction on market competition; d. Impact on market access and technology advancement; e. damaging effects on consumers and other undertakings; f. effects on national economy and public Interest; g. others under special circumstances. Substantive provisions: reality or possibility of anticompetitive effects. Exemption: beneficial to Improvement on market competition; beneficial effects on competition outweigh harmful effects; in the public interest. Remedies: approval attached with restrictive requirements; other measures with administrative, civil and criminal responsibilities.

    8. 7. Definition of Concentration of Undertakings in Draft 2006 For the purpose of antitrust, M&A here should cover all activities conducted by market players which confer the possibility of exercising decisive influence on undertaking, having regard to all factual and legal circumstances. If two companies set up a joint venture which functions as an independent economic entity, the relevant market structure may be changed. Therefore, creation of a joint venture shall be regarded as a M&A. The 4th paragraph of Art. 3 of EU Merger Regulation and Art. 7 of Clayton Act share such a provision. Anticompetitive effects of a joint venture depends on the very purpose for its creation in the first place. If a joint venture is created for restriction on competition between parent companies, the effects will be probably anticompetitive; if a joint venture is created for the purpose of R&D, the effects will be probably pro-competitive.

    9. 8.Standards for M&A Notification of the Draft 2006 Merits: turnover is adopted as a standard for notification; different standards applicable in banking and insurance sectors; notification exemption for M&A in a concern, the standard may adjust in light of the economic development. a. Conflict between Art. 16 and 17: Art. 16 defines concentration of undertakings as acquisition of certain percentage of voting shares or assets while the latter takes turnover as a single standard for applicability of notification. b. The standards of RMB 12 Billion and 800 Million are not suitable because they will make transnational corporations too vulnerable for antitrust review on the one hand and will make Chinese antitrust authorities subject to excessive burdens. According to ICN Recommendations on Merger Notification Procedure, Jurisdiction of Antitrust review shall be exercised in following two situations: at lest two parties have business activities have, or merged party has business activities in the jurisdiction. The threshold of RMB 12 Billion and 800 Million is too high for notification of internal anticompetitive M&A. The transaction volume is not adopted as contributory factor for notification. Therefore, a M&A having not serious anticompetitive effects will be subject to notification. This is contrary to the very purpose of merger control.

    10. 9. Compared Standards for M&A Notification of the Draft (Art. 17) 2005 The transaction volume of M&A exceeds RMB 400 million; The asset or turnover of a party in China in the preceding year exceeds RMB 1.5 billion; The asset or turnover of any other party in China in the preceding year exceeds RMB 500 Million. The transaction volume of M&A within Chinese territory exceeds RMB 1.5 billion. Where no transaction volume of M&A is available or If any, where the volume does not qualify those defined above, the total assets of all M&A parties or their accumulated turnover within Chinese territory in the preceding year exceeds RMB 5 billion.

    11. 10.Procedure of M&A Review Advantages: two-phase for Review; Undertakings are entitled to conduct M&A if decision is not made by authority within valid duration as defined by the Law; in second phase, duration could be extended for another 60 days. Possible Improvement: for instance, the duration for the first phase is allowed to be extended for another 10 days so that the undertakings concerned are able to make adjustment for their M&A plan. In this phase, antitrust authority may accept commitments by the undertakings concerned and attach restrictive conditions to the approval. More transparency. For example: If the M&A review enters phase two, the Antitrust Authority should make explanation; any decision made by enforcement agency shall be published. Creation of an Internal mechanism to make the review process reasonable and impartial.

    12. 11.Substantive Provisions on M&A Control Art. 24: Where Concentration has or may have exclusive or restrictive effects on competition, antitrust authority shall make decision of prohibition. Comments: any M&A will strike some effect on competition. If such effect is not significant, they should be approved. Art. 23: factors for merger review: a. market share and market power; b. concentration of relevant market; c. possibility of excluding or restricting competition; d. impact on market access and technology advancement; e. damage on consumers and competitors; f. effect on national economy and public interest; g. others. Comments: for the purpose of maintenance on stability of the legal system, market share and market concentration shall be taken as key factors for consideration. According to provisions on abuse of dominant market position, when a M&A results in dominant position or its enhancement, market competition could be negatively effected. Therefore, the following provision on dominant position shall be added: any M&A with exclusive or serious restrictive impact on Competition, particularly when dominant position is created or enhanced, shall be forbidden. For the purpose of defining whether a M&A transaction is anticompetitive, the concept of HHI and Safety Harbor of Antitrust Law are recommended.

    13. 12.Exemption of M&A Factors for exemption consideration in Art. 23, 24: impact on market access; impact on technology advancement; impact on consumers and other business operators; impact on national economy and public Interest; Improvement on market competition consideration. Market access is close to potential competition. Technology advancement is close to economic efficiency Both consumer welfare and economic efficiency shall be considered. But the exemption due to economic efficiency shall be based on consumer welfare, and be given as exceptional instead of a general principle. National Economy and Public Interest. Since China has many large state-owned enterprises, exemption based upon industrial policy could not be exceptional. Improvement on competition conditions refers to improvement on market structure for competition. There is some overlapping with theory of economic efficiency. Problem: independence of antitrust authority could be compromised if it is simultaneously responsible for enforcement of both competition policy and industrial policy. Therefore, the exemption based upon national economy and public interest shall be exceptional.

    14. 13.Remedies of M&A For purpose of this Law, remedies are referred to the necessary measures adopted by the antitrust authority or court to mitigate the damages caused by the violation. Measures of prevention: imposition of fine ranging from 1 M to 5 M RMB; injunction for execution of concentration; order the undertakings to dispose shares or assets, transfer business and other necessary measures to Revert the market competition condition before the M&A. (Art. 47) Approval attached with restrictions. (Art. 24) If the undertakings concerned make commitment to amend the plan for M&A to mitigate negative effects on competition, antitrust authority should approve the M&A. To make sure the undertakings fulfill their commitments, the enforcement agency shall attach restrictive conditions with the approval. If attached restrictive conditions are not satisfied as required, the M&A shall not be regarded as approved. In this case, the Agency may take actions of divesture or recovery. Recommendation: measure of prevention shall cover the possibility of divesture.

    15. 14.Conclusions Compared With Provisions on the Takeover of Domestic Enterprises by Foreign Investors, the Improvements on both procedural and substantive provisions have been made in the Draft Antitrust Law. Nevertheless, further improvement are still expected in the following aspects: Standard for notification should be improved, particularly a minimum transaction volume within Chinese territory as a threshold for notification could be added. Further enhancement on transparency of review procedure to make sure the parties concerned have opportunity to make statements and defenses. Exclusion of and serious restriction on competition shall be adopted as two key substantive Standards; If a M&A results in dominant position or its enhancement, serious restriction on competition could be assumed. Economic analysis should be paid more attention while exemptions based upon industrial policy should be reduced. Competition agency should be only responsible for competition policy. When a conflict between competition policy and industry policy arises, the former should normally prevail. 5. Following with the legislative experiences from the US and EU, Guidelines or detailed regulation for merger control should be drafted as soon as possible in order to provide more indications for the undertakings.

    16. Thank You Very Much!

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