It's good to talk, says Mofcom

The making of China's Anti-monopoly Law was rooted in national conditions in China; however, reference was also made to useful international experience, comments of various parties were widely sought, and after long and repeated deliberations the law was finally passed, promulgated and implemented. During the preparation of the relevant supporting legislation, the relevant authorities likewise based themselves on the requirements of the law, sought comments from various quarters and transparently and compliantly carried out the relevant procedures.

    The Anti-monopoly Law is a new thing in China, and the making and enforcement thereof and the administration of justice in respect thereto are at a preliminary stage and require continuing improvement. Furthermore, there is a need to strengthen advocacy therefor and continue to strengthen society and create a culture of market competition. We have exchanged opinions and co-operated, and are willing to continue to exchange opinions and co-operate, with relevant parties in the anti-monopoly field both inside and outside of China.

Are you planning on joining or working with the International Competition Network (ICN)?

The ICN is an international organisation that focuses its efforts on the implementation of competition law. Since its establishment, the ICN has done much work in promoting exchanges on, and co-ordination of, anti-monopoly law enforcement and competition policy, and certain of the recommendations it has put forth and reference documents it has released have had substantial influence on its members.

    Since the promulgation and implementation of China's Anti-monopoly Law, the Ministry of Commerce, with a view to understanding new trends in international competition policy and learning from foreign anti-monopoly law enforcement experience and practice, has attached importance to strengthening exchanges and co-operation with the anti-monopoly law enforcement authorities of other countries and regions and with international organisations and institutions, including the ICN.

The PRC Anti-monopoly Law came into effect in August 2008. A lot has happened since then, including some significant deals and the decline of the economy. What are your feelings about the enforcement of the law so far?

Since the formal implementation of the Anti-monopoly Law on August 1 2008, relevant law enforcement work has progressed steadily and good results have been achieved. During the period between the implementation of the Law and the end of July 2009, the Ministry of Commerce received 127 business operator concentration filings, formally accepted 71 of them and finished the review of 53 of them, 50 of which it approved unconditionally, two of which it approved conditionally (the acquisition of Anheuser-Busch by InBev, and the acquisition of Lucite by Mitsubishi Rayon) and one of which it prohibited (the acquisition of Huiyuan Juice by Coca-Cola).

    With respect to trials, there are certain specific features: (i) anti-monopoly reviews better safeguard fair competition and the public interest; (ii) while their merger and acquisition capacity has been enhanced, enterprises' awareness of the need to file in accordance with the law has continuously been strengthened; and (iii) duly trying important and sensitive cases in accordance with the law. The careful attitude and law enforcement capabilities shown in reviews have been well received by all parties.

Comments:

“As a practitioner, I think that the first year's experience of merger reviews by Mofcom has been very positive. I hope that Mofcom can keep up this generally high standard of assessment.” DC

“After these comments were made, Mofcom approved two more transactions with conditions: GM's acquisition of Delphi and Pfizer's purchase of Wyeth.” CLP

“My reading of this is that Mofcom still has big work ahead of it in educating businesses – in particular Chinese businesses – on the need to seek merger control clearance.”

What suggestions do you have for enterprises that need to make M&A filings? What can they do to ensure that the process goes smoothly and efficiently?

The Ministry of Commerce encourages enterprises that need to make merger and acquisition filings and their lawyers to conduct informal discussions with the Anti-monopoly Bureau on how to define the relevant market, how to complete the merger and acquisition filing forms, etc. before filing.

    Such pre-filing discussions facilitate communication between the anti-monopoly law enforcement authority and the legal profession and industry, thereby enhancing efficiency and ensuring the transparency and predictability of the review process. They also aid the persons handling the case in understanding the same, better arranging the relevant work and efficiently dealing with difficult issues during the limited time after the formal filing, and also help the filing parties understand the Anti-monopoly Bureau's thinking, thereby enhancing the work efficiency of both parties and economising on review time.

    At the time of filing, the filing parties are required, in accordance with the law, to submit documentation that complies with the requirements and, to the extent possible, submit it all at one time. If the investigator requests that supplementary documentation be submitted, the same should be done as required. During the investigation, the filing parties should co-operate as required by the investigators. If new circumstances arise or the filing parties need to explain an issue to the investigators, they can at any time arrange in writing for a meeting. If an issue that could affect competition is encountered during review of the case, the filing parties should actively seek a way of resolving it and consult as necessary with the investigating authority.

    Generally speaking, in their day-to-day business, enterprises should raise their awareness of fair competition, avoid abusing their market dominance or reaching monopoly agreements and, if they are victims, should actively move to safeguard their lawful rights and interests. When making merger and acquisition decisions and designing acquisition structure plans, enterprises should make anti-monopoly considerations one of their primary factors of concern.

    In the filing and review process, the filing parties' and their lawyers' familiarity with the law, the industry and market conditions and their active co-operation with the law enforcement authorities are extremely important.

Comments:
“But the level of guidance that is provided in many cases is not substantial. The officials involved in the consultation are not always the same as those who will be involved in the review, and are often reluctant to make comments. This is compromising the value of the pre-consultation process at the moment.”

“In this response, Mofcom provides some valuable guidance to parties who are contemplating M&A transactions that may require notification in China. Firstly, when parties plan an M&A transaction, they should include anti-monopoly as one of the major factors to be considered in the structuring of the deal at the outset. Second, one cannot overemphasise the importance of both good preparation for the merger filing and the need for informal discussions with Mofcom's Anti-monopoly Bureau before the filing is made.” DC

“One is tempted to see here not just an enjoinder that business take matters up with the competition enforcement authorities by way of lodging a complaint but also encouragement to make use of the judicial process … [T]hird parties can sue under the AML for damages where they are victims of anti-competitive practices. I have always had a suspicion that China may seek to make up for lost time by encouraging a more active private enforcement than we are accustomed to in many European states. Only time will tell of course …”

“Rather hidden away in this response is the highlighting of the fundamental need for enterprises to have internal anti-monopoly compliance programmes so that they are aware of anti-monopoly issues that arise in the conduct of their daily business.” DC

“The lack of finalised implementation rules and guidance makes the process of educating staff as to what is compliant with the law very difficult. Their ideal to use the present time to get up to speed on the law is diluted somewhat by the lack of guidance available.”

There are many confusing and unclear aspects to the definition of market share and the concept of relevant market in the Anti-monopoly Law. Could you clarify how the Ministry of Commerce sees the issue of relevant market?

Defining the relevant market is the exercise by which the scope of the market in which the business operators compete is determined. Pursuant to Article 12 of the Anti-monopoly Law, “the term 'relevant market' means the spectrum of goods and geographical area within which a business operator competes during a certain period with respect to specific goods or services”. Based on this definition, in anti-monopoly review of a business operator concentration, the relevant market includes at least two dimensions, goods and geographical territory. In the course of anti-monopoly law enforcement practice, it is often necessary to define the relevant goods market and the relevant geographical market.

    The relevant market usually means the effective competition scope within which the concerned parties conduct their business activities. Definition of relevant market emphasises the competitive relationship indicated by the good among the relevant goods or the geographical area and, in economic terms, this is expressed as substitutability, i.e. the demand substitutability and supply substitutability repeatedly emphasised in the guidelines for defining relevant market.

    Relevant market is relevant to the specific case. Depending on the goods and geographic area involved in a case, there may be one or more relevant goods markets, and the relevant geographical market could be the global market, the national market, a regional market, etc.

    When defining the relevant market, either a quantitative or qualitative analysis approach may be used. There is not just one single way of defining the relevant market. In anti-monopoly law enforcement practice, either a quantitative or qualitative analysis approach may be used, depending on the actual circumstances. The guidelines emphasise that anti-monopoly law enforcement authorities should encourage business operators to use, in accordance with the circumstances of the case, objective and true data and draw upon economic analysis methods to define the relevant market.

Comments:
“This is certainly true, and it is worth noting that Mofcom has recently established an economic analysis section, apparently for phase two and more difficult cases … It shows Mofcom is willing to explore various analytical tools. This is the right approach, in line with trends in Europe, US, etc. to embrace a more effect-based analysis to examine the competitive effects more thoroughly.”

The acquisition of Lucite by Mitsubishi Rayon was a very complex transaction. How do you go about reviewing transactions like this?

With respect to a complex transaction, the Ministry of Commerce will promptly put together a case-handling committee comprising persons with the various professional skills to carefully go over the submitted documentation, carry out more extensive analysis of the important issues involved in the filing and seek the opinions of such third parties as relevant industry associations, competitors in the industry, upstream and downstream enterprises, and the parties to the concentration transaction, as well as relevant legal, economic and industry experts, by such means as written solicitation of comments, discussion meetings, seminars, hearings, onsite surveys, commissioned surveys, talks with the concerned parties, etc. It should be noted that the Ministry of Commerce uses these opinions as reference when assessing the impact on competition.

    The acquisition of Lucite by Mitsubishi Rayon was a major transaction of global extent. Mitsubishi Rayon is one of the world's largest chemical enterprises producing MMA products and owns one of the top propylene series businesses. That transaction drew wide attention from many quarters. Additionally, that transaction was the second in the year since the implementation of the Anti-monopoly Law in which the Ministry of Commerce rendered a decision granting conditional approval, with the conditions including both behavioural remedies and structural remedies. During the review of that case, the Ministry of Construction held talks on several occasions with the concentration parties on the competition issues involved in the case. During the specified period of time, the concentration parties presented a solution that was sufficient to eliminate the adverse effects, and the Ministry of Commerce accepted the undertakings given by the parties and conditionally approved that business operator concentration.

Comments:
“The express use of relevant experts is welcomed. However, the current system for the solicitation of third party comments by Mofcom remains somewhat untransparent. In particular, there appears to be no system by Mofcom for the publication of a general notice that a particular transaction is being reviewed and inviting any interested parties to submit comments. This omission may deprive companies of an important opportunity to comment on a transaction. It also deprives Mofcom of an important source of further information about the potential impact of a proposed transaction.” KN

“Compared to other merger authorities, Mofcom tends to put a lot more weight on the views of trade associations, which are comprised of competitors. Trade associations are mostly controlled by domestic companies, although foreign investors sometimes join as members (often in name only). The problem is how to shift out the bias in their views, since competitors tend to have vested interests in opposing new players encroaching on their markets.”

“The Mitsubishi/Lucite case illustrates the importance of good planning and careful preparation, particularly in cases which present competition problems. It also shows that even in difficult cases, Mofcom is very pragmatic in the types of remedies or solutions that it will accept.” DC

“It is noteworthy that in this Mitsubishi/Lucite deal, it had been cleared in Germany, Taiwan and a number of other jurisdictions, all at phase one and without conditions. After the rather drastic divestiture conditions in the Lucite case … M&A practitioners and corporate lawyers would have to pay extra attention to the China equation when doing global deals.”

“It would have been interesting to hear Mofcom's views on the confidentiality of commitments given by parties in respect of a transaction that is given conditional clearance. In this decision, Mofcom published extensive details about the commitments agreed, including the relevant deadlines (something that would be considered confidential under the EC Merger Regulation). It is important for any parties discussing commitments with Mofcom that they can be confident that commercially sensitive details will be kept confidential.” KN

There was a strong reaction internationally to the decision prohibiting the acquisition of Huiyuan Juice by Coca-Cola. How does the Ministry of Commerce view this reaction?

Conducting an anti-monopoly review of a business operator concentration that reaches the statutory threshold is standard international practice. Since the implementation of the Anti-monopoly Law, China has also commenced implementing such a system. In accordance with the law, the Ministry of Commerce is the law enforcement authority responsible for this work. We noticed that after we received the filing from Coca-Cola, keen attention was paid to the review of the case by various quarters of society.

    During the review, the Ministry of Commerce examined the submitted documentation carefully, carried out an extensive analysis of the competition issues involved in the filing and confirmed that that transaction would have the effect of eliminating or restricting competition in the fruit juice and beverage market in China. With a view to eliminating the adverse effects of that transaction, the Ministry of Commerce held talks with Coca-Cola on restrictive conditions. During the talks, Coca-Cola failed, in respect of the problems found by the Ministry of Commerce, to present a solution that was sufficient to eliminate the adverse effects. Consequently, the Ministry of Commerce rendered the decision prohibiting that transaction.

    After the Ministry of Commerce published its decision, there were different reactions from various quarters of society. This is normal.

    From what we understand, the Ministry of Commerce's decision has been welcomed and supported by the great majority of people. In this regard, I would like to borrow the assessment of William E Kovacic, Chairman of the US Federal Trade Commission, made not long ago this year. He said: “The Chinese government, in denying Coca-Cola's acquisition of Huiyuan Juice, did not unfairly use the Anti-monopoly Law and adhered to professional standards.”

    International anti-monopoly law enforcement experience shows that anti-monopoly review is work with strong technical and legal components. That various quarters of society are discussing the case itself and the review results is normal, and we are willing to listen to, and in fact have listened to, the comments and suggestions from various quarters of society. This is also part of the process of China's anti-monopoly law enforcement learning and borrowing from the experience of various countries, and improving its own practice.

Comments:

“There is room for more specific guidance and transparency on the filing thresholds, which are still very amorphous in China.”

“I think that the criticisms of Mofcom would have been less virulent had Mofcom explained in more detail in their published decision the analysis and reasoning behind the decision.” DC

“Kovacic made this comment in Beijing in July; Reuters also quotes him as saying that he felt it too early to draw firm conclusions about China's use of the law.” CLP

“I hope that this comment implies that Mofcom is keen to engage with the competition authorities of other jurisdictions in order to ensure consistency of competition law enforcement internationally for the benefit of the companies who must comply with such laws.” KN