Under the radar

    Neither company is Chinese, and neither has operations in China. But together they are said to represent almost 40% of the country's yearly iron ore imports. So when their new joint venture was announced it sparked considerable speculation as to the motives behind it – particularly as it came on the same day that Rio rejected an attempted investment of US$19.5 billion by shareholder and state-owned entity Aluminium Corporation of China, better known as Chinalco.

    Whatever the reasons – whether purely commercial or otherwise – China's regulators are naturally very interested. On June 16, an official with the Ministry of Industry and Information Technology was quoted by the Xinhua news agency as saying that the proposed tie-up had a “strong monopolistic colour”; the China Steel Association has also been very clear in its opposition to the proposed JV. This has sparked plenty of impassioned debate and comment across the world's media: the opening sentence of a June 15 analysis article in the South China Morning Post reads, for example: “Beijing is preparing to exact a form of revenge after its failed attempt to grab a stake in global mining giant Rio Tinto.”

Full or partial?
The main legal argument which has risen to the surface is whether the Rio/BHP joint venture can be properly deemed a “concentration” – the term used in the PRC Anti-monopoly Law (AML) (中华人民共和国反垄断法) for what EU lawyers might call a full-function joint venture, or a JV which is operating on a market, rather than being restricted to pre-market activities. The AML in Article 20 defines concentrations as:

• mergers of business operators;

• a business operator obtaining control of other business operators through the acquisition of their equity or assets; or

• a business operator obtaining the control of, or being able to exercise a decisive influence on, other business operators through contractual or other means.

    So should the Rio/BHP tie-up be regarded as a concentration under the AML? The answer is, unfortunately, not clear.

    “Mofcom has already indicated that they have the power to review JVs that have 'sustainable and independent operations'”, says David Cox, DLA Piper's Asia head of competition, referring to a draft regulation that was issued by the Ministry in March.

    This draft was issued two months after an earlier document, which laid out broader terms for review, had raised considerable protests from the market.

    “The draft in March was suggesting they'd agree to restrict the review to JVs which aim to play a role in the market,” says François Renard, head of Allen & Overy's Asian antitrust practice.

    “The spirit of merger-control regimes is that authorities should review an operation only where there is a change in the structure of the market; if they have the power to review any operation, any deal between companies, they may end up reviewing everything; that's why we need limits,” he says.

    If Rio/BHP is deemed a concentration, the possibility of a blocked deal becomes a lot greater. Under Article 21, the companies would need to submit a merger-filing to be reviewed by Mofcom. (The problems may not end there, though – see box: How long is China's anti-monopoly arm?)

    But many lawyers argue that the JV in question is not full function and independent, and should be classified a partial-function joint venture, to use EU parlance.

    “In this case, there will be behind the scenes collaboration on production, but then they will ship and sell the iron ore separately,” says JSM senior associate Gerry O'Brien. He explains that, although the Chinese rules do not include the same level of detail as is found in EU rules, they suggest Mofcom wants to make the same distinction between full- and partial-function JVs.

    “If they continue [in this way] then this would fall outside their scope,” he says.

    In this case, then under PRC law the venture could feasibly be reviewed as a monopoly agreement – at any time in the future – by the State Administration for Industry and Commerce (SAIC), which is one of the three anti-monopoly enforcement agencies under the Anti-monopoly Commission of the State Council and is responsible for enforcement of conduct rules. Another possibility, although unlikely in the case of Rio/BHP, is that the National Development and Reform Commission (NDRC) could look at it with regard to pricing issues.

    This could be a problem.

    “To go the partial function route might be to light a time bomb,” says Cox.

    “Not having a concentration may well be more of a problem – the deal could be called into question at any time in the future,” he continues, explaining that the SAIC would have the power to review the whole deal under the conduct rules.

    Although it has so far remained relatively quiet, the SAIC has considerable enforcement responsibility under the AML. As explained by Zhan Hao in a February 2009 column in CLP: “SAIC retains responsibility over AML affairs related to monopoly agreement(s), abuse of dominance and administrative monopoly(s), though this excludes price-related monopoly behaviour.”

    In June, the SAIC published a significant document – the Provisions on Procedures for Investigation and Handling of Cases of Monopolistic Agreements and Cases of Abuse of Dominant Market Position by Administrations for Industry and Commerce (工商行政管理机关查处垄断协议、滥用市场支配地位案件程序规定) – which, among other things, defines its powers and processes. Despite the new provisions, the SAIC remains untested and Mofcom is the only one of the three agencies with “sufficient implementation rules”.

    Other lawyers highlight the benefits of making a merger filing with Mofcom.

    “At least the merger-review process gives you clear review timeframes, and the certainty of pre-approval,” says O'Brien. “Deals that fall outside of this regime could be implemented and operating for some time before a body like the SAIC decides to raise objections.”

    Kirstie Nicholson, of counsel with Lovells in Shanghai, says: “It could backfire if you take it outside Mofcom's jurisdiction. One of the advantages of a Mofcom review is that there are clearer statutory deadlines so you can plan the commercial timetable around that. There is currently no indication of how long NDRC or SAIC may take to look at a transaction and then decide they don't like it, but this review period could well be significant (running into many months, if not years) … and you'll then have to unwind it.”

    Nicholson adds that in the EU, some companies have been known to take the opposite approach and deliberately structure their deal to make it eligible for merger review. They thus gain more legal certainty – their deal can no longer be challenged on anti-monopoly grounds.

    Renard explains the issue with an interesting metaphor:

    “Under merger review, the baby is not born yet, and authorities must make a prospective antitrust analysis [of its likely effects on the market]. Under the antitrust review [of anti-monopoly agreements], the baby is born and authorities can only block it if they can prove that it has an anti-competitive object or effect.”

    So the review by, and the burden of proof on, the regulators is different depending on which route was dictated by the structure of the agreement. Uncertainty arises under the second route because behaviour that may be regarded as anti-competitive could potentially occur at any time.

    Some specialists fear that Rio/BHP – a case which they say would be viewed as abnormal anywhere in the world – will influence the perspective of the Chinese authorities, persuading them to create a precedent or draft a rule which would be over-reaching.

    “That would impact everyday life of many businesses and companies which have nothing to hide but don't want to go through lengthy merger review for all their common projects with other parties,” says Renard. (For more, see this recent article on Asialaw.com)

No escape
In the case of Rio Tinto and BHP Billiton, they may feel they have nothing to lose by trying to avoid a merger filing and structuring their deal as a mere co-operative agreement. But Renard in observing the reaction from officials and from the public says the companies may have given too much weight to the legal issues, and underestimated the effect of their decision in China. There, it is apparently perceived as an attempt to circumvent the Chinese merger control regime. He and his peers encourage others to be careful before choosing the same route.

    Rio Tinto did not respond to requests for comment, while a spokeperson for BHP Billiton said the company is “not yet in a position to comment at all about the regulatory matters”.

    In the end, whether a joint venture is reviewed at the outset by Mofcom, later by the SAIC or the NDRC, or even by a combination of these agencies at some point, lawyers say there is no escaping from the supervision of the AML. Keeping under the radar is simply not an option.

    “Clearly this is a transaction which can be reviewed under the AML. Even if the merger-control regime doesn't apply, at least one of the other AML enforcement agencies will have jurisdiction if it is deemed to restrict competition,” says O'Brien. “The AML allows review of any deal which limits competition in China.”

How long is China's anti-monopoly arm?

Another issue raised by the recent BHP Billiton/Rio Tinto case is the extent to which the Anti-monopoly Law applies to economic activities originating outside the boundaries of the country.

    Philip Monaghan, a Norton Rose senior associate based in Hong Kong, says Article 2 of the AML “is fairly categorical in that respect”. The second half of that article reads:

    The Law shall apply to monopolistic acts outside the People's Republic of China that have the effect of eliminating or restricting competition in the domestic market. [CLP's own translation]

    “If the wording of Article 2 is intended to put the matter beyond controversy, the extraterritorial application of competition law is still by no means uncontroversial as it runs counter to that core principle in international relations: the territorial sovereignty of states,” he says.

    Monaghan points to the example that the US has set in asserting jurisdiction over overseas conduct, and the opposition it has stirred up along the way (such as the introduction by the UK of a statute specifically written to block US antitrust multiple damages awards from being enforceable in UK courts).

    For Monaghan, Rio/BHP appears to be the Chinese equivalent of Gencor/Lonrho which is regarded as the test case for the extraterritorial application of EU competition law in the merger field. The 1999 case also involved mining companies, both of them South African. Their merger was approved in South Africa but blocked by the European Commission. The decision was appealed on the ground that the Commission did not have jurisdiction despite the companies' significant sales in the EU.

    “The court found that sales within the Community were a sufficient basis for jurisdiction,” he says. “Fast forward to 2008–2009 … and it's deja vu for a competition lawyer.”

    In the recent case, Australia backed Rio/BHP while it was reported that European approval had been difficult to obtain. It was said that Mofcom indicated it would also be interested in reviewing the transaction – but the companies did not file in China.

    Despite comments made by Colin Barnett, premier of Western Australia, suggesting that, while the deal might require clearance in the US and the EU, the Chinese authorities would not have jurisdiction, international antitrust practice seems to support the views of the Chinese officials.

On his China Law Vision blog,
Grandall Legal Group managing partner Zhan Hao says Mofcom would face one big problem if the concentration were to be classed as a merger and it decided to block the deal: enforcement of its decision.

    Referring to Rio/BHP, he writes: “It would be unpractical to prohibit the import of iron ore because of China's demand for it. Simply put, defensive measures are very limited, if any at all. The only effective approach is that there is co-operation with the anti-monopoly law enforcement department by other countries.”

    François Renard of Allen & Overy agrees that Rio/BHP raises some interesting issues but suggests different possible sanctions that would be effective. One is a simple prohibition of the operation. Assuming that this operation is qualified as a merger, the merged entity which had not received approval in China would effectively not exist within the PRC, Renard says, as third parties could challenge the legality of any contracts, deals or operations of the newly-merged entity in China. Arguably, the newly-formed company would not want to take such a risk.

    If the authorities instead decided to conditionally approve the merger and impose remedies on the parties, and the parties did not comply with those remedies, the approval would be removed and the concentration would also face the same substantial commercial risks.

    For a company simply not to exist in China would seem to be an effective punishment. PT