MOFCOM's hidden motives for merger review

Nate Bush
[email protected]

On June 17 2014, China's Ministry of Commerce (MOFCOM) prohibited the establishment of the P3 Network shipping alliance (P3) between AP Møller Maersk A/S, Mediterranean Shipping Company and CMA CGM. MOFCOM's decision flags two subtle perils of Chinese merger review: its applicability to “non-full function” joint ventures and the low threshold for prohibition.

Was P3 really a concentration?

The parties emphasised that P3 would be “operational,” not “commercial.” It would entail a long term vessel sharing agreement on core Asia-Europe, Europe-America, and America-Asia routes, supported by a new joint operational center to coordinate schedules and logistics. The parties pitched the alliance as enabling more efficient use of vessels to reduce costs, emissions and delays and to expand service to more ports. Critically, each shipper would retain independent pricing, marketing and customer service.

MOFCOM deemed P3 a “close alliance” that was “substantially different” from traditional shipping alliances, emphasising the role of the network center in scheduling and vessel management and the allocation of operating costs. However, MOFCOM's published decision does not specifically explain why P3 qualified as notifiable concentration under the Anti-monopoly Law (AML).

The AML defines reportable “concentrations” of “business operators” to include mergers, acquisitions and acquisitions of “control” or “decisive influence” over “other business operators” by “contract or other means.” On June 6 2014, MOFCOM updated the Guidance on Notification of Concentrations of Business Operators to track its established practice of capturing joint ventures under “common control” by multiple business operators under the third category.

While the extension of merger review to ventures under “joint control” follows European Commission (EC) practice, MOFCOM has not followed the EC's practice of limiting such review to joint ventures “performing on a lasting basis all the functions of an autonomous economic entity.” The “full functionality” test screens many cooperative arrangements (such as many R&D consortia or joint manufacturing ventures), which are subject to the disciplines on competitor collaborations and cartels instead of merger review.

Significantly, P3 was not treated as a merger in other jurisdictions. A majority of the US Federal Maritime Commission (FMC) voted to approve the alliance under Section 6(g) of the Shipping Act, a separate statute allowing the FMC to seek injunctions against any agreements that, by a reduction in competition, produce an “unreasonable reduction in transportation service or an unreasonable increase in transportation cost.” The EC reportedly advised the parties that it would not initiate an investigation, implicitly treating the alliance as a competitor collaboration rather than a merger.

Because MOFCOM has not adopted the principle of full-functionality, the distinction between joint ventures subject to merger review by MOFCOM under Chapter IV of the AML and other forms of competitor collaboration subject to the rules against monopoly agreements under Chapter II of the AML depends on the existence of joint control. Under MOFCOM's recent guidance, the existence of control is determined on case-specific assessment of various factors, including the transaction purpose, future plans, shareholding structure, shareholder meeting structure, powers, historical activity, composition and structure of board of directors and board of supervisors, appointment and removal of senior officers, relations among shareholders and directors, and material business relationships among parties. This complex and flexible test blurs the line between reportable joint ventures and other forms of competitor collaboration (particularly where no jointly-owned legal entity is established). Some companies might actually prefer the certainty of a merger clearance decision from MOFCOM to the risks of a future cartel investigation by the National Development and Reform Commission (NDRC) or the State Administration of Industry and Commerce. In any event, MOFCOM's assertion of jurisdiction over non-full function joint ventures like P3 means that many cooperative arrangements between competitors and non-competitors may face merger review in China.

What about efficiencies?

The AML sets a low threshold for the prohibition or imposition of remedial conditions, requiring only that MOFCOM find that a concentration “will or may result in the effect of eliminating or restricting market competition.” The AML does not require any express finding of the relative significance or likelihood of the possible anticompetitive effects. In this case, MOFCOM found that the parties were the top three liners on the Asia-Europe routes, with capacity shares of 20.6%, 15.2% and 10.9%. Treating the alliance as a full consolidation of these shares, MOFCOM found the market would change from “scattered” with an HHI of 890 to “highly concentrated” with an HHI of 2,240. MOFCOM concluded that the alliance would marginalise competing lines and wield substantial bargaining power vis-à-vis both customers and port operators, and thus “may” have the effect of eliminating or restricting competition. It did not squarely address claims that the alliance would be confined to logistical rather than commercial functions or that the alliance would realise substantial efficiencies.

MOFCOM no doubt focused on the interests of China's own shipping lines, exporters, importers and ports, but it was not alone. Dissenting US Federal Maritime Commission Commissioner Lidinski stridently objected to the alliance on similar grounds, warning in an official statement that the alliance would enable Maersk “to deploy its assets along with those of the other two carriers, to dominate vessel competition and narrow shipper options at US ports.”

MOFCOM rejected the parties' proposed remedies (which are not public) as “lacking relevant legal basis and persuasive evidence” and “unable to resolve the competitive concerns.” Ironically, the narrow scope of the operational alliance may have left little room for any commercial concessions to appease MOFCOM. P3 ultimately foundered on MOFCOM's low threshold for intervention in potentially anticompetitive transactions – including non-full function joint ventures.