Diversity & Inclusion
Over the last two years, China has emerged as one of the most significant jurisdictions worldwide for antitrust and competition matters. Now more than ever, firms doing business in China or participating in major transactions impacting China’s interests must carefully plan and prepare to take account of Chinese competition policy. Chinese competition agencies now increasingly alter the timing to clear global mergers and acquisitions and can materially affect the day-to-day business practices of international firms in China. In addition, China has joined the ranks of competition regulators taking an active interest in international cartels, while domestic civil litigation has also begun to develop into a viable means of redress for private complaints.
As discussed in more detail below:
These activities will only increase in 2014, heightening the importance of careful planning and preparation, both for global mergers and acquisitions and for companies’ domestic Chinese operations.
The Anti-Monopoly Law (AML) — the first comprehensive law of its kind in China — has only been in effect for five years. Nevertheless, the three Anti-Monopoly Enforcement Agencies (AMEAs) have quickly hit their stride, showing confidence and independence seldom seen in such young regimes. MOFCOM administers China’s merger control review and evaluated approximately 200 transactions in 2013. MOFCOM still clears most deals unconditionally, but even routine transactions often spend several more months under review in China than they would in other jurisdictions, while particularly sensitive transactions can spend more than a year in review, with MOFCOM sometimes imposing significant remedies in deals cleared unconditionally by the U.S. and EU.
China’s two other AMEAs are the Anti-Monopoly Bureaus of the National Development Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC). The NDRC is primarily responsible for enforcing the AML with regards to any price-related anticompetitive conduct, such as price-fixing and retail price maintenance, while the SAIC enforces the AML’s provisions on non-price-related conduct, such as tying and bundling. The AMEAs have not clarified how this distinction between price- and non-price-related conduct is applied in practice, however, resulting in a certain amount of overlap in the agencies’ activities.
In the AML’s first five years, MOFCOM has approved an overwhelming majority of transactions unconditionally. Indeed, in reviewing some 700 transactions, MOFCOM has prohibited only one deal (the proposed 2009 Coca-Cola/Huiyuan acquisition) and imposed remedies in 20 decisions. However, fully half of these conditional decisions have come down in the past two years, demonstrating MOFCOM’s increased confidence in fashioning and imposing conditions. Moreover, as MOFCOM review typically takes into account comments and input not only from important state ministries (such as the NDRC and the Ministry of Industry and Information Technology) but also from Chinese stakeholders (including customers, suppliers and even competitors), the time required for review has increased while outcomes have become less predictable in recent years. The duration of MOFCOM review for conditional approvals, which already averaged 8.4 months per transaction in 2012, increased to 11.1 months in 2013.
The last two years have also seen the creation and propagation of a type of condition unique to China — the so-called “hold separate” remedy. In four cases since late 2011, MOFCOM has conditionally approved the transaction, permitting closing while nevertheless freezing the ability of the merging firms to integrate their assets or business operations for a minimum review period (usually one to three years) before the firms can apply for “reconsideration” and lifting of the condition. During the review period, the acquirer and target operations must be held separate, generally on a worldwide basis, while an appointed trustee monitors contracts, pricing, customer relations and other business practices, sending reports back to MOFCOM on a semi-annual or quarterly basis. In addition to the moratorium on integration, these decisions often include conditions such as information firewalls and strict limitations on the exercise of shareholder rights for the acquirers.
None of the four transactions have involved Chinese firms, and three of the four — Samsung/Seagate, Western Digital/Hitachi and MediaTek/MStar — have occurred in high-tech industries (hard disk drives and LCD TV control chips) where Chinese manufacturing customers or suppliers stood to be particularly affected. The first “reconsideration” application is currently before by MOFCOM, making it difficult to predict whether these remedies will be easily lifted following the prescribed review period.
In the 2013 Glencore/Xstrata transaction, MOFCOM imposed a structural remedy surprising for its requirement that Glencore divest its interests in a Peruvian mine, confirming that MOFCOM clearly considers it has the power to impose remedies outside of China. Press reports now indicate a strong likelihood that the mine will ultimately be acquired by one of China’s state-owned mining conglomerates, specifically MMG Limited — the Hong Kong-listed offshore arm of China Minmetals Corporation.
The past year also marked significant new steps in antitrust enforcement by the NDRC and SAIC with regard to international cartels as well as pricing activities in Chinese domestic markets.
In January 2013, China joined the EU, U.S. and other jurisdictions in levying fines against six LCD panel manufacturers for price-fixing activities between 2001 and 2006. The NDRC led the investigation, which related to conduct pre-dating the passage of the AML and thus was conducted under an older Chinese statute (the Price Law) that contains price-fixing prohibitions similar to those found in the AML. The investigation marks the first fines ever handed down by Chinese regulators for international cartel activity, an importance belied by the comparatively small size of the fines (¥353 million, approximately US$56 million) compared to those of the U.S. (US$1.4 billion to date, with criminal charges brought against 22 executives) and EU (€648 million, approximately US$890 million).
Little clarity resulted from the investigation with regard to issues of leniency or immunity, however, given that the Price Law (unlike the AML) makes no formal provision for leniency. While the AML establishes in principle that leniency should be available for cartel participants, the statute leaves its availability entirely to the discretion of the NDRC or SAIC.1 Moreover the respective NDRC and SAIC guidelines relating to leniency have inconsistent provisions, particularly with regard to the eligibility of applicants who are not first in time and the eligibility of so-called “ringleaders” for leniency. Future guidance and action by the NDRC and SAIC will hopefully bring more clarity to Chinese cartel enforcement practice.
The NDRC has also become very active in recent months in conducting investigations into the pricing activities of international firms in China, ostensibly under the AML. Historically, the NDRC has had responsibility under the Price Law to regulate directly pricing of commodities and goods in Chinese markets. Thus, while such regulation would be considered anathema to competition regulators in the U.S., EU and other jurisdictions, it is far more accepted in China.2
In July, however, a division chief at the NDRC held a closed-door meeting with senior in-house counsel from approximately 30 international firms billed as a training session for multinationals to mark the fifth anniversary of the AML. At the meeting, the official reportedly indicated that at least half of the firms were or had been under investigation by the NDRC for pricing issues and reportedly suggested that providing admissions of guilt and “self-criticisms” rather than hiring experienced legal counsel could result in more favorable treatment during the course of the investigation.
While more senior NDRC officials have subsequently disavowed these comments in public, indicating that the NDRC does not seek to curb the legal rights of companies under investigation, the NDRC has also subsequently announced significant penalties for pricing activities. For example, six infant milk formula manufacturers, including Mead Johnson and Danone, were fined a total of ¥667.7 million (approximately US$110 million) for allegedly restricting competition, setting curbs on minimum prices for distributors, and, again, disrupting market order. None of the firms are contesting the penalties.
In addition, the NDRC has announced that it is presently investigating approximately 60 firms in the pharmaceutical industry, while in November Qualcomm — the world’s largest maker of chips for smartphones — announced that it is the subject of an AML-related NDRC investigation. The NDRC has also announced that the telecommunications, banking, petroleum and automobile sectors are now under “close” watch as potential targets of future investigations. These investigations appear to be part of wider initiative undertaken by new President Xi Jinping attempting to prevent rising consumer prices, notwithstanding the lack of any obvious anticompetitive behavior by the firms in question.
The AML also provides a mechanism for civil litigation to resolve private antitrust complaints in China. While this system has been evolving slowly, 2013 brought some important developments. The most closely watched case has been a resale price maintenance action brought against Johnson & Johnson Medical by its Chinese distributor, Rainbow Medical.
* * *
1 AML, Art. 46.
2 For example, in May 2011, the NDRC fined Unilever ¥2 million (approximately US$330,000) under the Price Law on the grounds that it disturbed market order by spreading news of a price increase of household products.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.