Anti-Monopoly Law and Mergers in China: An Early Report Card on Procedural and Substantive Issues

Abstract

The Anti-Monopoly Law of the People’s Republic of China (“AML”) prohibits mergers and acquisitions (“concentrations”) which lessen competition. This article examines the relationship between the AML merger provisions and China’s industrial policy. It also examines MOFCOM (Ministry of Commerce) merger determinations to date in relation to market definition and assessment of competitive impact. The article concludes that the interpretation of the AML and the intentions of the regulator remain unclear in a number of respects. At a procedural level, MOFCOM’s determinations contain insufficient information and analysis to draw the conclusion that MOFCOM is applying standard competition analysis.

The political and economic environment of China is complex. The legal system has been developing swiftly since its renaissance in the early 1990s. China’s first comprehensive competition law, theAnti-Monopoly Law, was passed on 30 August 2007 by the NationalPeople’s Congress and came into effect on 1 August 2008. The AML includes prohibitions on mergers and acquisitions, known as“concentrations”, which lessen competition. It applies to acquisitions by both foreign and domestic corporations. Notification is mandatory over specified turnover thresholds. A number of Guidelines and draft guidelines have been issued by the Ministry of Commerce (“MOFCOM”), the nominated regulator, to aid in the operation and interpretation of the AML provisions.

This paper examines the new regime in the context of its commercial, political and legislative background to examine two main issues. The first is the relationship between the merger provisions of the AML and China’s strong industrial policy, particularly the way in which the AML is applied to State-Owned Enterprises (“SOEs”). The AML contains a number of provisions which provide flexibility and discretion in enforcing the law against government bodies and SOEs, as well as a number of provisions which recognize various dimensions of industrial policy and its interaction with competition law. The relationship between industrial policy and competition will be critical to the success of the AML as a comprehensive competition law, and continuing examination of this issue is important. The six determinations in which MOFCOM gave conditional merger approval discussed below all involved offshore foreign transactions, while the one prohibition also discussed below, involved the acquisition of a prominent Chinese company by a foreign company. No merger involving purely Chinese interests has been made subject to conditions or prohibited. It has, however, been suggested that delay by MOFCOM in determining the Sina Corp acquisition of Focus Media FMNC.O, involving two State Owned Corporations (and possibly arising from reluctance to approve the deal), was the reason for the demise of the deal. During the same time period, many concentrations of SOEs (several of which are noted below) have occurred without apparent notification.

The second part of the paper reviews the written merger determinations issued by MOFCOM in respect of mergers to date. It considers MOFCOM’s approach to market definition, and MOFCOM’s analysis of the effect of the proposed mergers on competition, to determine whether MOFCOM has complied with the AML, with its own guidelines and with international competition law practice.

The paper concludes that while there has been some progress by the regulator in implementing the new rules governing mergers, there are a number of areas in which both the interpretation of the AML and the intentions of the regulator remain unclear. There is a lack of procedural clarity in the application of the provisions at two levels. At the policy level, it is too early to see any real trends on the issue of the relationship between competition policy and industrial policy, although there is significant flexibility in the AML and indications provide some evidence of less than equal application to government and SOEs compared to foreign companies. At the procedural level, MOFCOM’s determinations contain insufficient information and analysis to allow for proper critical analysis of the regulator’s approach to important issues, so it is difficult to understand whether standard competition analysis has been applied.

These are very important issues for companies wishing to participate in markets in China. More information from MOFCOM in its determinations and guidance on the relationship between industrial policy and competition policy would significantly increase the level of confidence of foreign corporations investing in China and carrying on business there.