Effective 1 January 2010, MOFCOM Implements Strengthened Rules for Merger and Acquisition Reviews

Foreign companies contemplating offshore mergers and acquisitions that may potentially affect China should anticipate a more assertive review by MOFCOM—and prepare for a more robust and aggressive reincarnation of MOFCOM itself.

On 15 July 2009, the Chinese Ministry of Commerce (MOFCOM) enacted the Measures for the Notification of the Concentration of Business Operators (Notification Measures) and the Measures for the Examination of the Concentration of Business Operators (Examination Measures).  These procedural measures were made public on 27 November  2009 and will come into effect on 1 January  2010.  Both measures are pursuant to the Anti-Monopoly Law of the People’s Republic of China (AML) and the Regulations of the State Council on the Criteria for Notification of Concentrations of Business Operators (Regulations).

The Notification Measures set forth filing guidelines for corporations that wish to merge with or acquire other corporations.  The applicant corporation must submit a variety of legal and technical documents for review by MOFCOM, including notification letters, statements regarding the effects of the merger or acquisition on relevant markets and competitors, and the previous year’s financial statements, among other documents.

The Examination Measures delineate the procedure for MOFCOM’s investigation of the proposed concentration’s possible market and competitive effects.  If the combined revenue of the applicant corporation (or corporations) and target corporation (or corporations) exceeds a certain threshold, the case is examined by MOFCOM, regardless of the planned concentration’s market effects.  During the examination process, MOFCOM reviews the possible market and competitive effects of the concentration, analyses the defending arguments of the relevant corporations, and can solicit the opinions of invited outside experts or other governmental agencies. 

If the proposed concentration is not squarely rejected, MOFCOM can design restrictions that the applicant businesses must implement in order to gain regulatory approval.  Companies may be subject to both structural restrictions, including divestiture of businesses or other assets, and behavioral restrictions, such as licensing of key technologies and terminating exclusive agreements.  These restrictions are designed to eliminate the negative effect that the merger or acquisition has or may inflict upon market competitiveness.

Legal Implications

Over the course of drafting these measures, MOFCOM made several noteworthy changes to the method used to calculate the revenues of applicant firms.  These changes are likely to push revenues of business operators over the filing threshold and, as a result, may expand MOFCOM’s control over global mergers and acquisitions.

Firstly, MOFCOM expanded the immediate geographical area that falls under its jurisdiction.  The draft form of the Notification Measures did not include the turnover from Hong Kong, Macao and Taiwan in the aggregate turnover of assets held by business operators within China.  However, this provision was changed for the final version of these Measures to include the turnover from Hong Kong, Macao and Taiwan as part of the turnover for assets held in China.  This will increase the domestic turnover of business operators, therein making the filing threshold easier to reach.

In addition, MOFCOM increased the time-constraint regulations for revenue thresholds from one year to two years by ruling that multiple transactions implemented between the same business operators within a two-year period are in fact counted as a single transaction.  Once again, this will increase the number of transactions subject to MOFCOM’s review, because these transactions will more easily exceed the turnover threshold.

Practical Implications

These regulatory changes are indicative of larger changes in how MOFCOM views its role as a global regulatory body.  MOFCOM’s newfound willingness to assert itself via the use of controversial review factors and a more pronounced role on the global stage is easily demonstrated in two landmark cases:  The Coca-Cola Company’s proposed acquisition of China Huiyan Juice Group Ltd., and Panasonic Corp.’s conditional merger with SANYO Electronic Co., Ltd.  These cases not only illustrate MOFCOM’s intention to uphold anti-monopoly regulations, but also serve as a warning to foreign corporations contemplating offshore mergers or acquisitions that may affect China.  Such corporations should anticipate a more assertive review by MOFCOM, especially as MOFCOM expands its remedies and conditional policies to include greater protection of small to medium-sized enterprises worldwide, increased responses to domestic outcries over the loss of “national brands” and heightened jurisdiction of assets held outside of China. 

The Coca-Cola Company and China Huiyuan Juice Group Ltd.

In 2008, The Coca-Cola Company moved to expand its operations in the fast-growing Chinese beverage market with a US$2.5 billion bid for the major Chinese juice maker, China Huiyuan Juice Group Ltd.  With little explanation, MOFCOM denied the proposed acquisition, stating that it would negatively affect the development of the fruit juice industry in China by increasing barriers to entry for potential competitors and damaging consumer rights by way of the elimination and restraint of competition. 

MOFCOM also noted that “Coca-Cola has the ability to transmit its dominant power in the carbonated drink market to the juice drink market by tying and bundling the juice drink with the carbonated drink or attaching exclusive transaction conditions”.  This principle, known as the “conductivity principle”, was cited in Caijing’s March 2009 article “How the Coke-Huiyuan Deal Fizzled Out” as one of the prime reasons for the deal’s failure.  Put simply, this principle states that a company’s dominance in one market can be transmitted to a related market via leverage, “brute” financial force or brand-name recognition in the first market.  While this principle has been directly or indirectly cited in Australian, European and US anti-monopoly rulings, a strong consensus exists that this principle must be used prudently.

In a peculiarly similar case concerning Coca-Cola, the Australian Competition and Consumer Commission (ACCC) ruled that Coca-Cola Amatil Ltd.’s (CCA) proposed acquisition of Berri Ltd. would harm the Australian fruit juice market through the decrease in competitive forces via CCA’s dominant market share in the carbonated drink market.  ACCC supported its judgement by stating that CCA “would have the ability and incentive” to leverage its dominant position in the carbonated drink market to increase distribution of Berri’s fruit juices to the exclusion of rivals.  To achieve this leverage, CCA could utilise both its market dominance in carbonated drinks and its “unrivalled network” of in-store refrigeration equipment, upon which many retailers depend.

While the Coca-Cola/Huiyuan case is quite similar to the CCA/Berri case, the critical difference between the two concerns the leverage options available to Coca-Cola.  In the Australian case, CCA’s pre-eminence in in-store refrigeration equipment would allow CCA to actively leverage retailers by bundling or tying Berri products with CCA’s products, either through contractual agreements, discounts and rebates, or through restrictions on the use of in-store refrigeration units to the exclusion of rival products.  Additionally, ACCC’s assessment found that retailers would have natural incentives to bundle CCA’s and Berri’s products together in order to reduce transaction costs by purchasing from a single seller, to reduce logistics costs and to attain in-store refrigeration at a minimal cost.

MOFCOM did not publicise analytical information regarding the leverage scenario in the Coca-Cola/Huiyuan case.  While Coca-Cola could use its strong brand name to the disadvantage of competitors, concrete proof over the likelihood and practicality of this scenario is still lacking.  Taken together, MOFCOM’s apparent lack of factual support for the “leverage argument” and the “brand name power argument” leaves much to be desired and essentially makes this seemingly not-well-reasoned decision appear aggressive to firms looking into a possible merger or acquisition.

Additionally, MOFCOM’s inclination to protect small and medium-sized domestic enterprises for the “healthy development” of the fruit juice industry in China has been criticised as overly aggressive because of the lack of supporting facts and figures. 

Panasonic Corp. and SANYO Electronic Co., Ltd.

MOFCOM’s increasingly strict application of the AML to foreign companies is further supported by its October 2009 conditional approval of the merger between Panasonic Corp. and SANYO Electronic Co., Ltd.  This is the first time the Chinese competition authorities have compelled disposals outside of China in a transaction involving two non-Chinese businesses.  Since both Panasonic and Sanyo are global companies, the closing of this transaction was subject to certain conditions, including clearance by regulatory authorities around the world.  However, relative to other international regulatory bodies, MOFCOM imposed more severe approval conditions for the proposed merger.

After nine months of deliberation, MOFCOM explained that a merger between Panasonic and Sanyo would create an entity with significant market share in three key battery-product markets and that buyer-side power and the existing competitive dynamics in the industry would be unable to counter the anti-competitive impact of the merger.

MOFCOM’s ruling, in its most general form, stipulated that both Sanyo and Panasonic must divest some of their Japan-based battery businesses to a third-party buyer and that Panasonic must reduce its ownership interest in Panasonic EV Energy Co., Ltd. (PEVE, a joint venture with Toyota), in addition to waiving its right to appoint directors and vote in PEVE’s shareholder meetings.  The implementation of these regulations is subject to examination and approval by MOFCOM.

The Panasonic/Sanyo decision adds credence to the idea that MOFCOM is becoming more aggressive in asserting its jurisdiction and in enforcing the AML with respect to offshore transactions.  This case represents the first time that MOFCOM expanded its conditions and remedies to include parties’ overseas assets.  Both firms were required to divest overseas physical assets, and Panasonic was forced to reduce its ownership of an overseas entity.  Previous to this judgment, MOFCOM had focused only on a party’s assets and interests in China for clearance of offshore transactions. 

This ruling also demonstrated that MOFCOM is becoming more confident and sophisticated in administering offshore transactions that involve China.  Relative to earlier decisions, MOFCOM provided a very detailed report on the investigation of and reasoning behind its Panasonic/Sanyo ruling.

Advice to Businesses

In the future, foreign companies contemplating offshore mergers and acquisitions that may potentially affect China should anticipate a more assertive review by MOFCOM—and prepare for a more robust and aggressive reincarnation of MOFCOM itself.

Click here for an unofficial translation of the Measures for the Notification of Concentrations of Business Operators. 

Click here for an unofficial translation of the Measures for the Examination of Concentrations of Business Operators.