ôThe recently announced proposed acquisition by Coca-Cola of Huiyuan will be the first major test of how the new law will be implemented,ö says Campbell Davidson, a corporate/M&A partner in Allens Arthur RobinsonÆs Shanghai office. ôThis would be the largest foreign acquisition of a Chinese company and an acquisition of a company with a large share of the Chinese juice market. How the regulators deal with this acquisition will be closely watched.ö
ChinaÆs anti-monopoly law (AML) went into effect on August 1, but while the law is written, the interpretation, implementation and enforcement will unfold over time. Still, thereÆs no doubt that it will have a significant impact upon how business is conducted in China û and even on business that has an impact on Chinese markets.
The AML expressly prohibits certain conduct among competitors such as price fixing, restricting output and allocating markets and group boycotts. But other elements, such as prohibiting actions that restrict the purchase of new technology may be harder to regulate û or put another way, harder to determine how it will be regulated. The language of the AML is broad, which means it can be interpreted in a variety of ways.
What companies need to keep in mind, points out Daniel Savrin, a partner at Bingham who specialises in antitrust and trade regulation, is that the AML is designed to have a broad reach as it expressly governs both conduct within China and conduct outside China that either restricts or eliminates competition in any domestic market within China.
Lack of clarity
ôOne of the problems with the new law is that, as usual with mainland legislation, its terms are rather vague and leave much open to interpretation,ö explains Graeme Johnston, a partner at Herbert Smith law firm. ôImplementing regulations are therefore crucial to clarify how the law will operate in practice.ö
Unfortunately such regulations are largely lacking as yet. It was only in early August, as the law came into force, that the government put out its first implementing regulations. These related to merger control and were far briefer and more simplistic than the consultation draft published in March.
WhatÆs important about this is that initially a market share threshold had been proposed, but now the government is looking mainly at financial data. And, as Herbert SmithÆs Johnston points out, the addition of section four means that the government has given itself discretionary powers to intervene even where the financial thresholds are not met. It also appears that there will be separate rules for banking, securities and the insurance sector.
A further uncertainty with the new regulation is that it says nothing at all about the principles which will be applied in assessing mergers which fall within the financial thresholds, explains Herbert SmithÆs Johnston. This is in huge contrast to the European and US merger authorities which have detailed publications describing the rules and principles that they apply.
ôParties engaged in M&A activity in China should bear in mind that the new merger filing regime is, unlike the old one, backed by express penalties for non-compliance, and extensive powers to unwind transactions,ö adds Johnston.
So much for merger control. At least there is an implementing regulation of a basic nature in that area. The even more serious problem is that there is a complete lack of implementing material to explain how the provisions on restrictive agreements, abuse of market power and abuse of intellectual property will be interpreted and applied. This has left many companies deeply worried that they will be the target of allegations by competitors which cannot be defended effectively because of the lack of any clear rules as to what is, and is not, legitimate and lawful competition.
This has to be taken seriously since falling on the wrong side of the law opens companies up to huge fines and damages claims, explains Johnston.
To further complicate issues, since the AML came into force, there have been significant developments in the national security review, ChinaÆs regulatory structure, and the new merger control system. These developments, which are already having a significant impact on M&A activity, highlight the importance for firms with business in China or proposing to invest in China of closely monitoring the way in which the AML is implemented.
China has also formally enacted rules in relation to the national security review. A joint ministerial conference, formed by the Ministry of Commerce (MOFCOM), the National Development and Reform Commission and other relevant departments, will consider foreign acquisitions of Chinese domestic enterprises from a national security review perspective.
Such a review is to take place only once MOFCOM receives submissions for review, which may suggest that only transactions requiring antitrust approval or general business approval may be subject to a national security review, explains Martyn Huckerby, partner in Clifford ChanceÆs competition group based in Shanghai.
ôCompanies involved with M&A should be aware that the overall merger filing process is operating considerably slower at present than under the old system. Currently MOFCOM is exercising considerable discretion regarding when to formally accept notifications,ö says Huckerby. ôAs a result, in our experience pre-filing consultation is even more important under the AML than under the old system that was in place up until August 1.ö
Merger control regulations
Section 3: If a concentration of undertakings falls into any of the following categories, then the undertakings in question may not implement it without first notifying the relevant department of the State Council in charge of commerce:
(1) the turnover globally of all undertakings involved in the concentration was in excess of Rmb10 billion ($1.46 billion) in the previous financial year, and the turnover of each of at least two of them in China was in excess of Rmb400 million in such year; [or]
(2) the turnover in China of all undertakings involved in the concentration was in excess of Rmb2 billion in the previous financial year, and the turnover of each of at least two of them in China was in excess of Rmb400 million in such year.
The particular circumstances of special sectors, such as banking, insurance, securities and futures, shall be taken into account when calculating the turnover of the undertakings in these sectors. Detailed provisions for this will be drawn up by the relevant department of the State Council in charge of commerce, in consultation with other relevant authorities and departments under the State Council.
Section 4: The relevant department of the State Council in charge of commerce shall conduct an investigation in accordance with law if the facts and evidence collected under the applicable procedures demonstrate that a concentration of undertakings has or may have the effect of eliminating or restricting competition even though it does not meet the conditions for notification specified in Section 3 above.
This article first appeared in the M&A supplement that was published together with the November issue of FinanceAsia.