From the moment China enacted its landmark Anti-Monopoly Law (AML) in August 2008, and assumed its place as one of the world’s three key merger-clearance jurisdictions (after the United States and Europe), foreign businesses have voiced concerns that Chinese antitrust authorities would use the new law as a pretext for favouring local industries to the detriment of foreign participants. The concern stems in part from the text of the law itself. China’s Ministry of Commerce (Mofcom), the government agency charged with the merger-clearance authority under the AML, has clear authority under Article 27 of the AML to prohibit mergers and acquisitions in the interest of “national economic development” or, as some fear, for other purely protectionist reasons.
On the one hand, Mofcom seems to have gone to great lengths to settle these concerns. As discussed more fully below, the regulator has consulted widely with the international business and legal community and has swiftly issued guidance in an effort to implement its fledgling regime in a manner that is transparent, consistent with international norms and rooted in sound economic policy. The majority of filings reviewed to date have involved foreign to foreign transactions rather than involving domestic companies, and have been approved. On the other hand, Mofcoms first two key decisions that involved foreign acquisitions of stakes in domestic companies seem to abandon accepted norms in favour of local protectionism. Although these mixed messages have left many competition practitioners scratching their heads, the sub-text is clear. China’s merger-clearance regime will likely operate on accepted international principles - unless, that is, the proposed transaction appears to threaten a domestic industry.
Since the enactment of the AML, Mofcom has reportedly approved unconditionally approximately 23 transactions. Roughly the same number of applications are still under review. In recent weeks, Mofcom has circulated no fewer than five draft sets of new implementing rules for international pubic comment, including measures relating to market definition, investigations of unreported concentrations, and the collection of evidence for suspected illegal concentrations that do not meet the reporting thresholds. During this same time period, Mofcom’s Anti-Monopoly Bureau has circulated four new sets of guidelines covering detailed filing procedures and requirements. Both the draft measures and final guidelines are, for the most part, aligned with international norms. Additionally, throughout the process, Mofcom has continued to reach out to international competition law experts, foreign enforcement officials, and organizations such as the American Bar Association, the American Chamber of Commerce and the International Chamber of Commerce. (As one example, Mofcom held a three day private workshop discussing international ‘best practices’ in merger enforcement and analysis in December 2008 involving top Mofcom officials and a small team of U.S. antitrust merger experts, including one of the authors, Ted Henneberry).
Taken at face value, this flurry of regulatory activity and consultation represents a laudable step in adopting international best practices and improving the predictability of China’s merger-clearance regime. Yet, the regulator’s two key decisions under the new law: the conditional approval of InBev’s acquisition of Anheuser Busch; and the prohibition of Coca-Cola’s proposed acquisition of Huiyuan Juice represents a step in the opposite direction.
InBev/Anheuser-Busch
On November 18 2008, Mofcom issued its first merger approval with conditions, which was its first public announcement under the AML. Although Mofcom approved global beer company InBev’s US$52 billion acquisition of the US beer conglomerate Anheuser-Busch it imposed remedies requiring that the combined entity may not, without prior Mofcom approval, increase its current 27% ownership interest in the domestic Tsingtao Brewery, change its controlling shareholders or the shareholders of the controlling shareholders, nor increase its current 28.56% shareholding in the domestic Zhujiang Brewery. The regulator also forbade the merged entity from acquiring shares in two unrelated domestic breweries, CR Snow Brewery and Yanjing Brewery.
One of the bedrock principles of best practices in international merger enforcement is that any remedies or conditions imposed on approval of a merger should be targeted solely at identifying competitive harm to the market arising from the transaction under review, and not for any other societal purpose. In the InBev/Anheuser-Busch case, Mofcom specifically found that the transaction did not inhibit or eliminate competition in the Chinese beer market. Yet it proceeded to impose conditions on future stake holdings in domestic breweries apparently for no other reason than the size of the combined firm. The InBev decision made no reference at all to perceived competitive harms that it was trying to address. Standing alone, the decision could be read as simply providing a mechanism for insuring notice of acquisitions or increases by other stake holdings that did not meet the filing thresholds under the AML, although the ruling made no such reference. Nevertheless, most international observers noted approvingly that the deal was allowed to proceed, and that Mofcom appeared willing to discuss and impose remedies to resolve whatever concerns it had, even if those concerns were not completely transparent. In effect, foreign observers greeted the decision as a case in which the ‘glass was half full, not half empty’.
Coca Cola/Huiyuan
Unfortunately, Mofcom’s second pronouncement has provided more weight to the criticism of its approach to acquisitions of controlling stakes in domestic firms. On March 18 2009, Mofcom announced that it had rejected the application by Coca-Cola in relation to its proposed US$2.4 billion acquisition of Huiyuan Juice, a domestic juice manufacturer. Had it been approved, the deal would have been the largest-ever foreign takeover of a Chinese company. According to reports, Huiyuan has a 42% share of the domestic market in pure fruit juices and is a nationally recognized brand. Coca Cola has over 50% of the market share in the carbonated drinks market and owns the Minute Maid brand in the juice market. Coca-Cola currently occupies just over 10% share of the fruit and vegetable juice market. In its written statement of the basis for the decision, Mofcom concluded that the concentration would have an anti-competitive effect on the market, because the proposed acquisition may have allowed Coca-Cola to abuse its dominance in the carbonated soft drinks market by possibly tying or bundling juice products to exclude competition in the juice market and forcing consumers to pay higher prices while limiting consumer choice. It highlighted issues of potential market foreclosure and shelf access by other juice manufacturers through the use of exclusivity or bundling, though, again, no evidence was cited. Moreover, there was an emphasis on the perceived impact on the development of small to medium juice companies. According to the decision, efforts were made by Mofcom to come to an agreement with Coca-Cola on conditions that would allow it to approve the acquisition, but these were not acceptable to Coca-Cola. (Mofcom did not identify the precise conditions.)
Again, most troubling, was the total lack of any evidence to suggest that Coca-Cola would have the ability to expand its so-called ‘dominance’ in soft drinks to the juice market: there were no particular sales or distribution practices cited to support the decision, there was no evidence of any ability to foreclose access or increase prices in the juice market, and no theory of competitive harm other than simply Coca-Cola’s size. The underlying inquiry that generally drives merger enforcement and analysis of the likely impact on consumer welfare is whether, based on market evidence, the merger will lead to higher consumer prices or lower quality in a relevant market. In this instance, the decision seems to ignore that principle, and instead improperly equate the impact on smaller – and possibly less efficient producers – with a potential impact on consumer welfare. The decision appears to assume, without citing to evidence, that legitimate success in one market, soft drinks, will somehow result in anti-competitive harm in another.
The efforts being undertaken by Mofcom to provide guidance and transparency to its process should be much applauded. Objective standards and requirements increase efficiency and certainty for both businesses and officials alike. And the willingness of Mofcom to engage in discussions to find suitable remedies or conditions to address competition concerns is very much in line with accepted practice. What is missing as illustrated by these two cases, however, is evidence of competitive harm to consumer welfare, leading in both instances to the suspicion that Mofcom is intent on protecting domestic industries and markets from foreign competition. Certainly, a final conclusion cannot be made on just two cases, and more experience may very well sharpen Mofcom’s analysis. Indeed, many western governments similarly engage in policies and programs to protect domestic firms, i.e. so-called ‘national champions’. The role of competition agencies, though, is to be the watchdog against such efforts, and to promote competition and consumer welfare, not specific domestic competitors.
By Ted Henneberry and Jonathan Palmer of Orrick Herrington & Sutcliffe
At a glance
Companies have feared that China may use its Anti-Monopoly Law to protect its domestic champions from foreign companies since the legislation’s introduction in August 2008.
Part of this fear comes from the law itself. The government has authority, under Article 27 of the law to prohibit mergers and acquisitions in the interest of “national economic development”.
But recent judgments have been even more worrying. Although Mofcom approved InBev’s acquisition of the US beer conglomerate Anheuser-Busch it imposed remedies requiring that the combined entity may not, without Mofcom approval, increase its interest in Tsingtao Brewery, change its controlling shareholders or the shareholders of the controlling shareholders, nor increase its current 28.56% shareholding in the domestic Zhujiang Brewery.
In March, Mofcom blocked Coca-Cola’s bid for Huiyuan juice. Most troubling, was the total lack of evidence to suggest that Coca-Cola would have the ability to expand its so-called dominance in soft drinks to the juice market: there were no particular sales or distribution practices cited to support the decision, there was no evidence of any ability to foreclose access or increase prices in the juice market.