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Asia Legal Business Interviews AnJie Partner Michael GU on China’s new antitrust regulations

Source:Asia Legal Business 浏览次数: Jul 1,2013

China’s antitrust authorities have acted as the last obstacle on the planet to Glencore's $30 billion takeover of miner Xstrata.

As the primary merger reviewer in China’s three-ministry antitrust enforcement structure - namely, the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC, in charge of price fixing) and the State Administration for Industry and Commerce (SAIC, in charge of non-price allegations) - the MOFCOM had stood in the way of the world’s biggest ever takeover in the mining industry until the commodities trader agreed to sell a $5.2 billion mining project to ease its grip on copper. The 14-month deal consummated two weeks later.

In its conditional approval issued in April, the Anti-Monopoly Bureau (AMB) of MOFCOM demanded Xstrata's Las Bambas mine in Peru to be sold by June 2015. Glencore is also requested to fulfill an eight-year commitment of providing a minimum of 900,000 tonnes of copper to Chinese clients per year. The price for at least 200,000 tonnes will be decided in accordance with the benchmark level. It also ordered the supply of zinc and lead concentrates on "fair and reasonable" terms between 2013 and 2020.

The case was joined a few days later by another conditional clearance made by the AMB.  Japanese trader Marubeni Corp was finally given the green light to acquire U.S. grain merchant Gavilon at $5.6 billion, a deal which was originally scheduled to close in September 2012 but was pushed back repeatedly.

After holding up the merger for months, the AMB in its announcement said Gavilon and Marubeni would be required to maintain separate, independent trading units when selling soybeans to China, with strict firewalls to prevent any exchange of market information. Marubeni would have to buy beans from Gavilon's vast U.S. network at an arm's length.

China’s antitrust regulator, being probably the newest of the world’s major economies, is also viewed as the toughest as well as the least predictable.

"It's to the point where China is one of the key concerns that global companies now have when doing merger clearance deals," said Shanghai-based antitrust expert Peter Wang, a partner with Jones Day.

Industrial weapon?

The delayed approvals and strict requirements have drawn attention to the growing power of China’s antitrust authority followed by criticism.

 “What we’re seeing in China is protracted pre-filing contacts and lengthy reviews … significantly delaying deals which have already been through EU and U.S. review,” says Catriona Hatton, partner at Brussels-based law firm Baker Botts.

Some complain that China is using the antitrust regime as an industrial policy tool. For instance, in 2009, MOFCOM turned down Coca-Cola’s proposed purchase of Chinese juice maker Huiyuan, the only case it has rejected so far. It might be coincidence that both the latest deals mentioned above took place within the commodities sector. But due to Beijing’s increased concern over the supply of vital raw materials, these two deals were scrutinised closely and at length, and were each given remedies addressing the “concern about security of supply for an essential input” suggests Yee Wah Chin, New York-based antitrust lawyer at Ingram, Yuzek, Gainen, Carroll and Bertolotti.

Such frequently reported opinion is not agreed on by all, though. Gregory Puff, partner at and head of Akin Gump Strauss Hauer & Feld’s Hong Kong office, says this perception is popular with the press but it is not necessarily what insiders would say in terms of their own analyses.

 “There is plenty of noise about antitrust being a kind of secret weapon to block some transactions people don’t like … Normally, I would say that’s not the case,” says Puff.

Critics also claim authorities intervene less in the consolidation of Chinese companies, which was encouraged by state policy, while constraining multinationals. The U.S. Trade Representative says 90 percent of MOFCOM- registered deals since 2008 involved multinationals. But Shang Ming, director-general of AMB, denies the claim, saying it is “superficial” to conclude that the AMB had discriminated against foreign companies or their enforcement was biased. He adds that this was because multinationals are more likely to be big enough to reach the threshold of filing, and they have been very active in merger and acquisitions since the global financial crisis.

 “The reason we made restrictive or prohibitive decisions was that we found they have competition problems during our review. In most cases, it was due to the high market share they possess,” Shang told a press conference.

Puff says any antitrust regulator would be unhappy to be labelled an extension of the political will of whichever government they serve.

 “My experience with antitrust regulators is that in China as well as elsewhere, they take their job seriously, and they have a specific mandate to address each case on its merits,” he adds.

Short of hands

AnJie Law Firm partner Michael Gu also believes the AMB makes decisions mainly based on professional judgement. The lengthy process of review, he says, is mainly because of the understaffing in the institution.

The AMB is reported to have only 10 to 12 case handlers, and all deals have to go through a pre-notification phase conducted by a department with just five people. Such a small team oversaw a total of 201 concentration filings, officially accepted 186 of them, and concluded 154 cases during the period between Jan. 1, 2012 and Dec. 26, 2012. A hundred and forty two of these cases were approved without any conditions, accounting for 92 percent of all concluded cases.

As a result, the six conditionally approved cases in 2012 all dragged on for more than 130 days, and some like the Google/Motorola and Walmart/Niuhai mergers even exhausted the time limit of 180 days.

In contrast, AMB’s U.S. counterpart - the Federal Trade Commission's Bureau of Competition has hundreds of employees and at least 150 lawyers and 80 economists handling case reviews. And the European Commission has 124 officials and external experts assessing mergers, plus a team of 25 economists who assist the overall antitrust division.

On the other hand, the Chinese anti-monopoly law sets up a relatively low threshold for a mandatory pre-merger filing, such as $63 million of revenues in China for each of at least two parties in China. This means any merger anywhere on the planet could easily stir up a MOFCOM action as long as the (foreign) companies have relatively small business in China. It inevitably results in the increasing amount of deals going to the thinly-manned AMB.

Another important factor prolonging the approval process is China’s three-phase review system of 30, 90 and 60 days, while the U.S. and the EU each have only two phases. The majority of cases are approved during phase 2. What’s more, there is a formal pre-filing intake process, during which the regulators question the filer after receiving a notification and decide whether to accept the filing at all and initiate phase 1. It took more than 50 days on an average for the AMB to accept a filing over the past two years.

In addition, Wang and his colleagues at Jones Day note that the need for time to gather inputs from other stakeholders including other government ministries, trade associations, competitors, supplier and clients also contributed to the lengthy procedure.

It is not as if the AMD hasn’t realised the lag in its approval process. To tackle the problem, it has recently released its draft regulation named Interim Provisions on Standards applied for Simple Cases of Concentration of Undertakings (Provisions on Simple Cases).

“We process many cases for more than 30 days, more than the average of other regions and countries. Therefore, we hope to change this by applying the ‘simple procedure,’” said Director-General Shang. 

Speeding up?

The draft of Provisions on Simple Cases, currently open for public suggestions, is expected to come into force in the second half of this year. Practitioners believe that it could speed up the merger review process. 

“Without a ‘fast track,’ all cases have to go through the standard programme, which would certainly be time consuming,” says Gu

The “simple cases” are those with little or no possibility to raise competitive concerns. Shang explains that normally it would not be a problem if the combined market share of the parties after the merger is lower than 10 percent. In fact, the draft Provisions employ the E.U. standards setting the bars at 15 percent post-merger share for horizontal mergers and 25 percent pre-merger share of each party for vertical mergers.

The AMB will also adopt HHI - Herfindahl-Hirshmann Index, ranging from zero to 10,000 in relation to the industry and an indicator of the amount of competition among them - as a key indicator to measure market concentration. Gu suggests when the market HHI is lower than 1,000 or 800, it usually indicates a low concentration degree and, therefore, a merger is unlikely to cause substantive harm to the market competition.

Such cases, under the Provisions, can get clearance more quickly since they’d need “less consultation and fewer documents,” according to Shang, who aims to clear the simple cases within 30 days, the duration of the phase 1 review. However, it is not yet entirely clear what consequences will flow from being identified as a “simple” case, as MOFCOM retains the power to withhold or revoke the classification, says partner Ronan Harty of Davis Polk & Wardwell.

“The consequences could be access to a short-form merger filing as in the EU, or other procedures for more efficient decision making on transactions that do not raise concerns with MOFCOM, including a shorter time period for the review of simple cases,” he says.

Gu adds that the current version of the draft does not address any procedural issues with respect to the “fast track,” such as the precise requirements for submission of documents, short-form decisions, and review timeline, and so on.

“These specific issues may need to be clarified either in draft provisions or by a separate regulation,” he said.

Nevertheless, the Provisions on Simple Cases signify that MOFCOM is willing to lighten some of the AMB’s workload and allow it to focus its limited resources on the more important cases with real competition concerns.

 Remedies

Another draft provision MOFCOM has issued for public comment is the Provisions on Imposing Restrictive Conditions of Concentration of Undertaking (Provisions on Conditions). The 38-article amendment is expected to replace, and obviously improve, the current 13-article version of Interim Provisions of the Ministry of Commerce on Implementing Assets or Business Divestment Related to Concentration of Undertakings effective since 2010.

China’s merger remedies sometimes lead to controversy. In the Glencore/Xstrata deal mentioned above, Beijing’s demand that the Las Bambas copper mine be sold was reported as intended in favour of its own national champions, as two companies linked to Chinese state-backed groups are weighing rival bids for the $5 billion-plus project.

“Sometimes, the remedies have nothing to do with antitrust concerns,” states Daniel Sokol, professor of law at the University of Florida's Levin College of Law.

However, the newly amended draft Provisions on Conditions are “encouraging” in the sense “it will improve the transparency of MOFCOM’s enforcement,” suggests Gu.

The new draft further clarifies the criteria and procedure for amendment and repeal of restrictive conditions. It permits the parties to propose their own remedies and similar to the process in the U.S. and the EU, MOFCOM may finalise its decision on remedies in consultation with other agencies, third-party businesses, and/or consumers. It also details procedures as to the proposal, assessment, implementation, and supervision of restrictive conditions and liabilities for non-compliance.

In particular, the proposed Provisions address the issue of structural remedies and behavioural remedies, which are not covered in the current interim provisions. It is important because in recent years, China has demonstrated its willingness to impose behavioural remedies in both horizontal and vertical transactions, according to Miranda So, Hong Kong-based Davis Polk partner.

Structural remedies, such as divestiture of assets, are commonly used in the U.S. and Europe. The new regulations provide detailed guidance on how the divestitures should be accomplished. In the meantime, behavioural remedies including mandate access requirement and non-discrimination provisions are preferred by Chinese antitrust authorities. Although neither the Provisions nor the officials have declared this, the fact is in practice - MOFCOM seems to use more behavioural remedies than structural remedies when imposing conditions, as displayed by statistics related to MOFCOM’s decisions.

AnJie’s Gu notes that such a tendency has been “a visible phenomenon” since the implementation of China’s Anti-Monopoly Law. Clifford Chance’s Beijing-based antitrust lawyer Ninette Dodoo also observes that the track record seemed clear - that the vast majority of remedies have been “non-structural.”

However, the effectiveness of the remedies should be judged case by case, cautions Gu.
“Sometimes, behavioural remedies are easier to accept for both parties, as structural remedies, such as divesting certain assets, sometimes affects the transaction,” says Gu. “If the divestiture involves overseas assets, there are also difficulties in enforcement and supervision.” 

He suggests that requirements such as independent internal management or information firewalling are probably convenient means to do so for both parties.

So, meanwhile, believes China has demonstrated its willingness to impose behavioural remedies in both horizontal and vertical transactions.

“The draft rules may signal that these recent remedies are not isolated events, but part of a comprehensive regulatory programme that will encompass behavioural remedies going forward,” she says.

Gu, meanwhile, suggests the draft include more detailed provisions on supervisory trustees and their responsibility for supervising behavioural conditions before it comes into force to address public concerns on the supervision over the implementation of behavioural conditions. He also points out that the default 10-year implementation period for the behavioural conditions might impose undue burden on the parties, and should be more realistic and limited.

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