China has long faced criticism for the lack of transparency in its merger review process. The June 17, 2014 decision by the Ministry of Commerce’s (MOFCOM) Antimonopoly Bureau—China’s antitrust enforcer for merger clearance—to block a three-way shipping company alliance epitomizes the uncertainty businesses face under China’s Anti-Monopoly Law (AML).
MOFCOM’s decision to block the so-called P3 alliance is only the second time it has fully blocked a merger under the AML, though it is the first such decision involving an entirely foreign transaction. MOFCOM’s other full denial involved Coca-Cola’s planned acquisition of China Huiyuan, a Chinese juice company.
As is the case under United States law, the AML only requires MOFCOM to publish decisions that block or conditionally approve a merger or acquisition. The agency’s minimal disclosure of its analyses in those situations, however, has exposed MOFCOM to criticism that its decision-making is insufficiently transparent. The P3 alliance decision—though it leaves significant questions concerning MOFCOM’s merger analysis unanswered—reflects an increasing level of transparency that began at the end of 2012, when Chinese merger reviewers decided to voluntarily disclose all unconditional approvals. MOFCOM has also begun issuing more detailed explanations of its decisions to block or conditionally approve deals since that time.
Introduction of Underlying Legal Principles. As compared to mergers in other major jurisdictions, the market concentration threshold that triggers filing requirements under China’s AML is relatively low. MOFCOM has required businesses to file regardless of whether the merger directly relates to China or is likely to affect the Chinese economy. The threshold is met where:
- worldwide business turnover of all companies involved in the concentration exceeded ¥10 billion (approximately U.S. $1.6 billion) in the last fiscal year, and the business turnover in China of at least two of the companies exceeded ¥400 million (approximately $65 million) in the last fiscal year; or
- the China-based business turnover of all companies involved in the concentration exceeded ¥2 billion (approximately $320 million) in the last fiscal year, and the China-based business turnover of at least two of the companies exceeded ¥400 million in the last fiscal year.1
Failure to comply with this requirement may result in revocation of a consummated transaction and a fine of up to ¥500,000 (approximately $81 million).
To date, MOFCOM has unconditionally approved the vast majority of the more than 800 mergers it has reviewed since the AML was enacted in 2008, an encouraging record for those seeking to invest in China and do deals that have a Chinese nexus. Prior to its P3 alliance decision, MOFCOM prohibited only the proposed Coca-Cola/Huiyuan acquisition, while imposing restrictive conditions on 22 other transactions.
Notably, those 23 transactions involved at least one foreign company, and 20 involved mergers exclusively between foreign companies. Such a disparate impact on foreign deals raises the question whether MOFCOM’s merger review process is part of Chinese industrial policies that favor domestic firms. Regulatory outcomes that avoid these perceptions and improve predictability will be more likely to generate foreign investment and technology transfers. This result, however, depends upon the agency’s consistent and transparent application of the AML.
P3 Alliance Review in China and Other Jurisdictions. On June 18, 2013, A.P. Moller-Maersk of Denmark announced its plan to create an alliance with CMA-CGM of France and Mediterranean Shipping Co. of Switzerland. If successfully consummated, the alliance was estimated to account for approximately 43% of the Asia-to-Europe container-shipping market, approximately 41% of the trans-Atlantic market and approximately 24% of the trans-Pacific market.2(MOFCOM’s market-share calculation was slightly higher for the Asia-to-Europe route, at just under 47%.)
On September 18, 2013, MOFCOM received the declaration of concentration of undertakings for the companies. The proposed P3 alliance also underwent review in the U.S. and Europe. In December 2013, the U.S. Federal Maritime Commission (FMC) convened a global summit where EU, U.S., and Chinese regulators exchanged their views on the proposed alliance. In March 2014, the FMC cleared the deal after an extensive review. As a condition of approval, the FMC imposed a specifically tailored monitoring program on the three companies. On June 4, 2014, the European Commission indicated that it would not raise antitrust concerns with the deal.
On June 17, 2014, MOFCOM blocked the deal. In doing so, it presented its own competition analysis. MOFCOM viewed the P3 alliance as a “tight joint venture” because a single “network center” would be adopted in this case to combine parties’ shipping capacity on global routes.
In light of the deal’s structure, MOFCOM attributed the capacity of each operator to the entire alliance. It indicated that the alliance would combine the first, second, and third-largest competitors with an aggregate 46.7% market share. The agency determined, based upon this, that the market would be highly concentrated post-transaction, and that scale economies would give P3 competitive advantages while also increasing barriers to entry and barriers to expansion by competing operators. MOFCOM’s analysis is comparable to a “unilateral effects” analysis used by other global merger reviewers. The agency concluded that the P3 alliance would acquire and be able to exercise market power over (downstream) shipping customers and (upstream) ports when negotiating rates, while also “squeezing” the space for expansion by competitors that might otherwise constrain the alliance’s ability to exercise market power.
Although the P3 alliance reportedly attempted to remedy MOFCOM’s concern with the “network center” structure, this does not appear to have been the sole reason for MOFCOM’s decision.
Transparency Concerns on Process. MOFCOM’s merger review process raises three major transparency concerns. First, it was unclear what factors MOFCOM took into consideration in its review process, and what weight it attributed to each factor. Increasingly, MOFCOM’s decisions appear to rely at least in part on traditional antitrust tools for assessing competitive effects. Questions remain, though, as to the role and weight of other factors, such as China’s economic development and—even more difficult to predictably weigh—the public-interest and policy objectives reflected in the AML.
These factors extraneous to competitive concerns seem to have played a significant role in MOFCOM’s reasoning in several of its past conditional approval decisions. This is in marked contrast with the competition analysis of antitrust agencies in Europe and North America. Neither the AML itself nor MOFCOM has ever defined the exact scope or weight of the “public interest” in the merger review context. While MOFCOM’s decision does not expressly reflect or cite to industrial policy considerations, it remains unclear whether Chinese national/industrial policy objectives played a role in the P3 alliance review.
The wide range of government institutions and competing stakeholders that MOFCOM consulted during the review process raise a second transparency concern. In U.S. merger review, for example, agency contacts are limited to industry participants, with the greatest weight placed on customer interviews and statements. Inter-agency contacts in the U.S. may occur between the Department of Justice or the Federal Trade Commission and the Department of Defense or Department of Transportation, but more in the context of those agencies’ roles as consumers of goods or services affected by the proposed merger. In contrast, MOFCOM often takes into account comments from other administrative ministries, such as the Ministry of Industry and Information Technology, the Ministry of Agriculture, and other relevant agencies in their policy-planning capacities. The purpose of these inter-agency contacts is to ensure that the specific deals best serve the so-called national interest and strategic industrial policy goal of China.
Additionally, MOFCOM will contact various Chinese stakeholders, including suppliers and competitors of the filing parties. The weight given to competitor comments vis-à-vis other stakeholders’ comments is not defined in the AML or in MOFCOM’s implementing regulations and guidance documents. In the P3 alliance decision, for example, MOFCOM disclosed that it consulted with relevant government agencies, industry associations, and related companies to reach its prohibition decision. MOFCOM stated that it relied on these third parties for information related to market definition, market structure, industry characteristics, anticipated market developments, and other unidentified aspects.
It is believed that MOFCOM found customer concerns to be persuasive. An association of customers, the China Shippers Association, was purportedly vocal in its opposition to the P3 alliance. Since MOFCOM’s decision, the association has issued a statement complaining about carrier surcharges and seeking greater regulation of pricing and carrier shipping volume.
MOFCOM also reportedly received a number of competitor complaints during the merger review process. Such broad-ranging inquiries and the reliance on stakeholders with a competitive interest in the outcome undermine the predictability of the review process, both in terms of the result and the time it may take for MOFCOM to rule.
Third, the filing companies often suffer from a lack of feedback from the reviewing staff during a pending merger review. MOFCOM does not effectively communicate with merging parties about the progress of its review or the agency’s potential concerns regarding their filings. Limited communication, coupled with the above-mentioned lack of clear criteria for review, creates fears of a “black box” merger review process that can lead to significant frustration for merging parties and investors. In the P3 alliance case, the shipping companies spent three months negotiating with MOFCOM. After that time, the companies reportedly proposed several rounds of remedies to MOFCOM. On June 4, a Wall Street Journal article essentially predicted that MOFCOM would approve the deal. MOFCOM’s rejection upended market expectations, a collateral impact that furthered foreign businesses’ perception of China’s merger review process as non-transparent and unpredictable.
Although North American and European enforcers are not free from these criticisms, these agencies have a longer tradition of explaining their analyses and continue to make steps toward improving agency transparency. From uncertainties introduced by the 2010 revision of the Horizontal Merger Guidelines used by the FTC and Department of Justice Antitrust Division to the role and weight of competitor statements relied upon by the European Commission, more could be done by these agencies to enhance the transparency of their merger review process too and, in doing so, reduce uncertainty.
MOFCOM Signals Improvements in Transparency. Despite the shortcomings discussed above, MOFCOM has made considerable efforts to address the issue of transparency in the past year and a half. At the end of 2012, MOFCOM began publishing data on the total number of clearances without conditions and provided the names of the merging firms on a quarterly basis, even though it is not required to do either under the AML.3
Decisions in more complex merger cases reflect MOFCOM’s willingness to engage in more analytical review. Most notably, in its review of the acquisition of Life Technologies Corporation by Thermo Fisher, MOFCOM for the first time publicly clarified its heavy reliance on economic analysis when approving the deal with conditions. In its published March 2014 decision, MOFCOM detailed its market concentration analysis, which was based on the Herfindahl-Hirschman Index (“HHI”), as well as an estimation of the potential price increase through the Margin HHI regression and Indicative Price Rise tools. Agencies in western jurisdictions such as the U.S. and the United Kingdom widely utilize these same analytical devices, and MOFCOM’s use of them indicates that it is gradually conforming to global standards.
The analysis MOFCOM deployed in reviewing the P3 alliance is the latest reflection of China’s move toward global merger norms. MOFCOM concluded that, according to its analysis of market share and HHI, the P3 alliance would significantly restrain competition, specifically on the Asia-Europe shipping route. The alliance would allegedly control up to a 46.7 % share of the route, while the HHI also indicated a sharp jump from 890 to 2240, assuming the transaction were to proceed. A concentration level of 2240 is not necessarily high under current U.S. standards (which classify highly concentrated markets as having a HHI of more than 2500). However, it was only four years ago that the U.S. Horizontal Merger Guidelines classified a post-merger HHI above 1800 as resulting in a highly concentrated market.4
As noted previously, the only other merger MOFCOM prohibited was the Coca-Cola/Huiyuan deal in March 2009. MOFCOM rendered that decision only seven months after China’s Anti-monopoly Law went into effect. In its announcement of the decision to block Coca-Cola/Huiyuan, MOFCOM’s reasoning heavily relied on the deal’s anticompetitive impact on small and mid-size domestic Chinese beverage companies. Unlike in the P3 alliance case, the announcement failed to provide an economic analysis consistent with global standards.
Conclusion. Merging parties and third-party observers may find reason to criticize MOFCOM’s decisions to block mergers and the length of its non-simplified merger review process. They may disagree with the continued consideration of competing stakeholders’ interests. But MOFCOM’s use of accepted economic modeling tools and—just as importantly—its disclosure of its use of these tools are important steps toward greater understanding of the Chinese merger clearance process. MOFCOM is improving its review analysis and transforming into a more sophisticated antitrust watchdog. That said, China must continue improving the transparency of its process. Greater consistency in how MOFCOM’s Antimonopoly Bureau interprets and applies the AML would help to attract more foreign investment, as would increased clarity in the weight MOFCOM gives to policy or industrial planning factors in its “public interest” analysis.
MOFCOM’s substantive determinations, as well as its disclosure of clearances and information not required by the AML, may reflect a trend in China toward more predictability and certainty in the merger review process. If this trend toward increased transparency continues, companies and their counsel will no longer be able to claim with the same force that merger review is conducted entirely within the “black box” it once was.
Noah A. Brumfield is a partner in the Silicon Valley and Washington, D.C. offices of the law firm White & Case LLP. Yi Ying is an associate in the firm’s Washington, D.C. and Shanghai offices.
- See 3 of Provisions of the State Council on Thresholds for Prior Notification of Concentrations of Undertakings (2009), available at http://fldj.mofcom.gov.cn/article/c/200903/20090306071501.shtml.
- Joanne Chiu, Maersk Expects China’s Decision on P3 Alliance Next Month, Wall St. J., May 28, 2014, available at http://online.wsj.com/articles/maersk-line-expects-china-to-make-decision-in-june-on-p3-alliances-application-1401265566.
- See Art. 31 of AML. MOFCOM is only required to disclose all conditional approvals and prohibited cases.
- Merger reviews under the pre-2010 Horizontal Merger Guidelines typically would not turn on an HHI under 2000. But, then, the current Guidelines are also clear that there is no safe harbor for a merger that results in an HHI under 2000.