China’s new-found clout in regulating global mergers is causing headaches for companies seeking high-stakes deals that need Beijing’s approval.
Where corporate lawyers and advisers were once primarily concerned with merger clearance in the United States and Europe, China’s anti-monopoly law – just five years old – has altered the calculus, as Beijing forces often painful delays with an antitrust regime that some see as an industrial policy tool.
“It’s to the point where China is one of the key concerns that global companies now have when doing merger clearance deals,” said Peter Wang, an antitrust expert and Shanghai-based partner for law firm Jones Day.
Tucked into the hulking Commerce Ministry (MOFCOM) a stone’s throw from Tiananmen Square, a handful of antitrust officials are what stands between multi-billion dollar mergers and access to the world’s second-largest economy. The hiccups in China’s system have the potential to gum up the works – extending firms’ funding needs and creating uncertainty around mergers.
Recent deals highlight concerns over the long delays in China’s merger reviews and the tough conditions that some experts see as limiting operational control for companies while not being particularly designed to curtail monopoly.
Japanese trading house Marubeni Corp sat through a year-long review before its $5.6 billion purchase of U.S. grain merchant Gavilon was approved, with conditions, in Beijing last month. A week earlier, China removed the last obstacle to Glencore’s $30 billion, 14-month takeover of miner Xstrata after the commodities trader agreed to sell a $5.2 billion mining project to ease its grip on copper.
Any major deal involving strategic industries or the supply of vital commodities such as copper, crude oil, iron ore or soybeans is likely to be very closely scrutinized in China.
Yee Wah Chin, an antitrust lawyer with New York law firm Ingram, Yuzek, Gainen, Carroll and Bertolotti, noted the conditions in both cases had little obvious antitrust rationale. “What they have accomplished in both cases is industrial policy. Basically, there was concern about security of supply for an essential input. If you look at the remedy, it’s what the remedy addressed,” she said.
DESPERATE TO CLOSE
Part of the problem, experts say, is the ideological divergence on what constitutes an antitrust review, with China appearing to use industrial policy protection rather than consumer protection as a benchmark. And, the experts note, there is a real sense that Chinese companies are not held to the same merger standards as China turns the screws on foreign companies, trying to create space for its domestic firms to grow.
At home, the policy prescription of China’s state planner, the National Development and Reform Commission (NDRC), as well as the Ministry of Industry and Information Technology and other regulators, has been decidedly pro-merger, with Beijing pursuing plans for sweeping consolidation in automotives, mining, pharmaceuticals and electronic and information technology to reduce competition and create economies of scale.
The U.S. Trade Representative has said that 90 percent of the deals registered with MOFCOM since 2008 involved multinational firms. None of the ministry’s conditional approvals has been between Chinese firms, though it has set conditions on cases in which one party is Chinese.
“Sometimes the remedies have nothing to do with antitrust concerns, but you are so desperate to close a deal that you give up the store to the Chinese,” said Daniel Sokol, professor of law at the University of Florida’s Levin College of Law. “Firms will make all kinds of concessions. If this were the United States, people would say: I’ll see you in court. No one’s going to do that in China,” he said.
MOFCOM IN THE MIDDLE
China has only rejected one merger outright – Coca-Cola’s planned purchase of juice maker Huiyuan in 2009. It has conditionally approved 19 cases, though these are just a handful of the nearly 600 mergers the ministry has processed.
While the ministry has tried to streamline the application process and move reviews along more quickly, short staffing can create bottlenecks for perfunctory case filings in China.
People familiar with MOFCOM’s anti-monopoly bureau, headed by director-general Shang Ming, say it has only 10-12 case handlers, and all deals have to go through a pre-notification phase conducted by a department with just five people. That compares with a U.S. Federal Trade Commission’s Bureau of Competition that has hundreds of employees and at least 150 lawyers and 80 economists handling case reviews. In Brussels, the European Commission has 124 officials and external experts assessing mergers, plus a team of 25 economists who assist the overall antitrust division.
Lawyers who deal with China’s anti-monopoly bureau say the case handlers, while overburdened, are increasingly savvy and confident legal professionals. “One of the things I’ve been very impressed with is that they’ve gone in five years from nothing to a very sophisticated analysis,” said Chin, the New York-based antitrust lawyer.
But when it comes to politically sensitive cases, MOFCOM, as the primary merger reviewer, is seen as a weak player, often stymied by more powerful agencies. Analysts say it is frequently forced to heed the demands of the powerful NDRC, which is less concerned with promoting competition and consumer welfare than with carving out space for domestic champions.
“MOFCOM doesn’t have the kind of political power not to listen to outside interests within the Chinese government,” said one Beijing-based lawyer, who declined to be named because of the sensitivity of the issue.
By law, uniquely required to consider industrial policy, MOFCOM appears to be increasingly disposed to use remedies that essentially allow a company to acquire ownership, but not complete control, of another firm.
While Washington and Brussels often insist a company divest any part of its business where antitrust concerns arise – a so-called structural remedy – China appears to favor behavioral remedies by which the regulator can more closely dictate the interaction between a parent company and a newly acquired firm.
The concern is that this gives government agencies, via monitors assigned to oversee operations, real powers over day-to-day business.
CLEAR TRACK RECORD
Ninette Dodoo, a Beijing-based attorney and vice chair of the legal working group at the European Union Chamber of Commerce in China, said MOFCOM does not openly state a preference for structural or behavioral remedies. But its track record seems clear. “We can’t overlook that the vast majority of remedies have been non-structural,” Dodoo said.
China has employed this strategy before: on Seagate Technology’s $1.4 billion buy of Samsung’s hard disc drive business in 2011 and, the next year, on Western Digital Corp’s $4.8 billion acquisition of a similar unit belonging to Hitachi Ltd. MOFCOM insisted Western Digital keep the Hitachi unit as an independent competitor with its original sales team and brands intact, increase R&D and submit a plan on how to prevent the two firms from sharing information. The Chinese government installed a corporate monitor to see that the conditions were met.
Sokol, the law professor, said in some extreme cases, there are fears that corporate monitors could facilitate industrial espionage when oversight has little to do with antitrust issues but focuses instead on organizational structure, operational management and supply chain distribution.
“It’s them (the government) thinking: we’re not in this space but we want to create a national champion here, and in order to do that we have to understand how these businesses work,” he said.
More than 100 countries claim a right to review mergers and acquisitions, many of which hold different legal standards from the United States and Europe. Similar issues exist in the antitrust policies of other emerging countries, such as India.
European Competition Commissioner Joaquin Almunia said in a November speech that “merger control is not the place for protectionist measures,” adding he would resist such policies in the 27-nation bloc. “What we must avoid are attempts to shield Europe’s companies from competition, in particular during this harsh period for the economy. In this game, only a few of them will benefit, and the majority will lose,” he said.
China’s Commerce Ministry, including its anti-monopoly bureau, did not respond to inquiries about its merger review regime for this article.
As the new kid on the global merger review block, China seems especially unpredictable, particularly when it comes to delays. A full antitrust review can take six months or more given the tight staffing and required input from scattered agencies. A review for even a simple merger can go well past that 6-month deadline. More frequently, MOFCOM will kick back an application with more questions or require firms to withdraw and re-file at the end of the statutory period, allowing the clock to start again.
“What we’re seeing in China is protracted pre-filing contacts and lengthy reviews … significantly delaying deals which have already been through EU and U.S. review,” said Catriona Hatton, partner at Brussels-based law firm Baker Botts.
Aware of the potential for delays, many firms file in China earlier than in the United States and Europe.
Late last month, Australia’s GrainCorp Ltd said its planned $3.1 billion takeover of Archer Daniels Midland had been specially structured to factor in likely delays in approval by Chinese regulators.
Dodoo, from the European Chamber, said companies have to ask themselves if they want to get a deal done or fight the system. “Companies are thinking about the cost of doing business in China. In some cases, it’s a poison pill you have to swallow,” she said.