How to handle the intrusive merger control process in China?

Transcription

1 François Renard (Beijing, February 2013) How to handle the intrusive merger control process in China? Allen & Overy

2 Since August 2008 Notifiable concentrations must be filed to and approved by central MOFCOM (Anti-Monopoly Bureau, Beijing) if the notification thresholds are satisfied (Art 21 of the Anti-Monopoly Law) The number of cases have increased (catching up with the EU) MOFCOM DG COMP Clearance period has also increased An increase number of (intrusive) remedies have been imposed; but only one official prohibition (Coca-Cola/HuiYuan) from 1 month (2008) to 4-5 months (2013) from notification 16 remedy cases in total, including 10 during the last 1.5 year Allen & Overy

3 Overview On Paper Compulsory pre-closing approval Usual transactions (M&A) are notifiable Notification thresholds based on Parties turnover A simple form to complete The AMB is the only agency to rule on a concentration Dealing only with the Anti-Monopoly Bureau Dealing with officials at the AMB Clearance period split into Phase 1 and Phase 2 In line with Internationally accepted substantive tests (overlaps, vertical relationship, conglomerate effects, etc) Few prohibitions (x1) and remedies (x16) imposed so far in Reality but no sanctions imposed so far but also minority acquisition and non- full-function JVs (*) but not always easy to assess the relevant turnover (*) but many details to provide but many ministries, agencies, and associations are involved but MOFCOM Vice-Ministers give instructions but they use experts and economists but also Pre-acceptance Phase and possibly Phase 3 (difficult to predict) (*) but also the healthy development of the socialist market economy from a macro-perspective and a higher level (*) but increasing number of conditional clearances, and increasingly intrusive (*) (*) see slides below Allen & Overy

4 What are the notifiable concentrations? Merger between two companies Acquisition of shares giving control over an undertaking Acquisition of at least 50% of shares of a company Acquisition of assets giving control over an undertaking (i.e., acquisition of assets with economic activity/generating a turnover) Acquisition of control over an undertaking by contract or any other means or the ability to exercise decisive influence over a target, by any means Acquiring a minority shareholding can constitute a concentration (if majority at the board, veto rights/negative control on strategic commercial decisions, etc) Setting up a JV or entering into the shareholding of an existing company Even if the JV is not full function (e.g. does business exclusively with its parents) Joint-to-sole control is also notifiable Note If shareholder A has more than 50% of a targeted company, but the minority shareholder B had joint control by other means (see above) (Art 22i), the acquisition of full control over the targeted company by shareholder A is not required only if shareholder A already had absolute control (DG of the AMB) Allen & Overy

5 Turnover-based Thresholds Only those concentrations reaching the notification thresholds must be filed: Combined annual turnover of all undertakings concerned Individual annual turnover of at least two undertakings concerned Threshold 1 Global: RMB 10 billion In China: RMB 400 million Threshold 2 In China: RMB 2 billion In China: RMB 400 million Threshold 3 Below-threshold concentrations may also be reviewed, if facts and evidence show that it can potentially restrict competition Note: Each parent in a (existing) JV can meet the thresholds on their own. A filing may be required in China even if the existing JV has no sales in China Allen & Overy

6 Thresholds Undertakings concerned? In the case of a: Each merging party Situation post-concentration Each controlling party Selling party/ies Target / JV Merger Ö na na na Acquisition na Ö NO Ö JV Existing company JV was and will remain jointly controlled (with different parents) Parent exits; JV will be jointly controlled by other undertakings JV was solely controlled by post-concentration one Parent Parent remains a cocontrolling party na Ö NO Ö na Ö NO Ö na Ö (*) na NO Greenfield JV na Ö na NO (*) the JV s turnover is counted in the remaining parent s turnover Allen & Overy

7 Thresholds General rules Turnover of the entire group of the undertakings concerned must be taken into account "Turnover" means the revenues and incomes before taxes and surcharges generated by sales to independent customers Last Financial Year means based on audited accounts Turnover of acquired assets without external sales should be calculated based on seller s audited accounts and market price "Turnover in China" means sales made to customers located in China Þturnover is not allocated based on Þthe place of incorporation of the undertaking selling goods Þthe place where undertakings have their operational headquarter Þthe place where competition has taken place to win the customers Allen & Overy

8 Thresholds Rules for Insurance companies or Financial institutions Same thresholds apply BUT: For "financial institutions in the banking sector, securities companies, futures companies, fund management companies, insurance companies and other financial institutions, i.e.: financial institutions accepting public deposit, such as commercial banks, urban credit cooperatives, rural credit cooperatives and policy banks, financial asset management companies, trust companies, finance companies, financial leasing companies, automobile finance companies and currency brokers, as well as any other financial institutions established upon approval by the banking regulatory authority in China, i.e. CBRC Allen & Overy

9 Thresholds Rules for Insurance companies or Financial institutions Specific Rule: only 10% of the income of financial and insurance institutions is counted for the purpose of PRC merger control What Counts as Turnover? Financial institutions in the banking sector: net income from interest, service fees and commissions, investment income, income from changes in fair value, income from foreign exchange conversion, etc Securities companies: net income from service fees, commissions and interest, investment income, income from foreign exchange conversion, etc; Futures companies: net income from service fees, commissions and interest; Fund management companies: management fees and commissions. Insurance companies: insurance premia (from the original insurance contract), to which relevant ceded-in premium should be added, and from which ceded-out premium should be subtracted. Each revenue item above is defined as a "Turnover Element". Calculation Formula For Financial institutions: Turnover =the sum of Turnover Elements - business tax and surcharges) 10% For insurance companies: Turnover =(Insurance Premium - business tax and surcharges) 10% Arguably, 100% turnover of corporate companies controlled by insurance companies or financial institutions must be computed (see the general rule above) Allen & Overy

10 MOFCOM Merger Filing Timeline Usual clearance period Month 1 Month 2 ~ ~ Preparation and Consultation(*) Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 ~ ~ Pre-acceptance Phase 1 Phase 2 Phase 3 Re-filing to save the deal? Filing Initiation May be longer; possibly shorter May be much longer; rarely shorter 30 days statutory 90 days statutory; used up in delicate cases 60 days; often when remedies (*) only recommended in case of doubt on admissibility of filing Allen & Overy

11 Merger Control influence Authority and Stakeholders PRC State Influence over the AMB s decision making Agencies MOFCOM Min. of Ind & Technology SAIC NDRC State owned Enterprises PRC Champions AMB Others? Parties Allen & Overy

12 Key substantive tests Purpose: Assessing if a transaction (acquisition, JV, etc) may restrict competition in China PRC test is broader than in other mature markets major differences include: No qualification to restriction (US: substantial lessening of competition ; EU: significantly impeded effective competition ) The law aims to promote the healthy development of the socialist market economy The impact of the transaction over national economic development Allen & Overy

13 Key substantive tests Usual tests: Overlaps between competitors and risk of coordination (in a market) Focus on market shares Including with small incremental market shares Importance of the number of competitors post-transaction Vertical Integration between (potential) suppliers/users Focus on the risk of discrimination with unrelated customers Risk of collusion between parents of a JV and of strong vertical relationship Parents/JV Conglomerate effect if parties (potentially) sell their products to the same customer groups Allen & Overy

14 Possible outcome Approval with Approval restrictive conditions Prohibition (1/~480) (16/~480; ~%3) Parties can close their transaction Parties can close their transaction, provided that they respect the conditions imposed in the approval decision The transaction is prohibited in China (only?) Allen & Overy

15 PRC Merger Control Rules (5) Approval with restrictive conditions Structural conditions Behavioral/ hybrid conditions Monitored by Monitoring Trustee E.g. plant divestments (WD/Hitachi Shenzhen 3.5 Plant) Footprint remedy (e.g. no more investments in the market for 5 years) Ring-fencing remedy (keep-itseparate) Status Quo remedy (e.g. same pricing mechanism) Good Citizen remedy (e.g. no abuse of dominance) Seagate/Samsung HDD minimum 1 year; separation on price, sales, operations WD/Hitachi minimum 2 years; total separation Concerns AMB officials take control over the company s business and reinvent themselves as business leaders Allen & Overy

16 Remedy Cases Inbev/Anheuser-Busch 18 November 2008 Phase 1 Mitsubishi Rayon/Lucite Int. 24 April 2009 Phase 2 General Motors/Delphi 28 September 2009 Phase 1 Pfizer/Wyeth 29 September 2009 Phase 2 Panasonic/Sanyo 30 October 2009 Phase 3 Remedy Rules 5 July 2010 Novartis/Alcon 13 August 2010 Phase 2 Uralkali/Silvinit 2 June 2011 Phase 2 Alpha V/Savio 31 October 2011 Phase 2 General Electric/Shenhua (JV) 11 November 2011 Phase 3 Seagate/Samsung 12 December 2011 Phase 3 Henkel/Tiande (JV) 9 February 2012 Phase 2 Western Digital/Hitachi 2 March 2012 Phase 5 (*) Google/Motorola 19 May 2012 Phase 3 ARM/G&D/Gemalto 6 June 2012 Phase 3 UTC/Goodrich 15 June 2012 Phase 3 Walmart/Newheight 13 August 2012 Phase 3 (*) Had to be re-filed at the 11th hour in Phase 3 to avoid prohibition; was cleared in Phase 2 Allen & Overy

17 PRC Clearance Period Evolution Days Inbev Coke Mits GM Pfizer Panasonic Novarti s Uralkali Alpha GE Seagate Cases Henkel WD Google ARM UTC Walmart Allen & Overy

18 Conclusion Anticipate PRC merger control process: educating your teams (including differences with other regimes) collecting group turnover, draft the description of your group, collect data on key markets, etc designating person(s) in charge For each transaction: approach your advisors in advance anticipate delays and antitrust risks ( managing your management ) organize lobby efforts, targeting (1) local competitors, trade association, customers & SoEs, and (2) other agencies coordinate multi-j filings (MOFCOM talks to other authorities) Allen & Overy

19 François Renard (Beijing) Questions? These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings. Allen & Overy