Six years ago, China did not have a legal system for regulating the impact of M&A deals and pricing agreements on competition. Today, its three agencies that oversee antitrust matters – the National Development and Reform Commission (NDRC), the State Administration for Industry & Commerce (SAIC) and the Ministry of Commerce (MOFCOM) – are active as ever in enforcing China’s Anti-Monopoly Law (AML). And with global M&A volumes and joint ventures in China soaring to new highs, lawyers who can help companies steer a deal past China’s antitrust regime are becoming hot property. “This year, we have seen an increase in the number of MOFCOM reviews,” says Susan Ning, a partner and head of King & Wood Mallesons’ Antitrust and International Trade Group in Beijing. “What makes this phenomenal is that, compared to the increase on MOFCOM’s side, investigations by the NDRC and SAIC have also gone up dramatically. The NDRC has noted more cartel agreement, price-fixing and resale price maintenance violations, and they have increased their enforcement with regards to the AML,” says Ning.

Increasing influence

Due to heightened regulatory scrutiny, multinational companies are also turning to antitrust lawyers for advice on other areas of competition law in China such as price-fixing and the abuse of market power. The NDRC, which regulates pricing activities, is stepping up efforts to bring companies in compliance with the AML. In recent years, it has targeted industries ranging from drugmakers and milk powder producers to jewellers and technology firms, and has handed down record fines to a number of international companies including Mead Johnson Nutrition Co and Danone SA.

The NDRC is also investigating Qualcomm Inc, the world’s biggest cellphone chip maker, over allegations that the company overcharged and abused its market position in wireless communications standards. A decision against Qualcomm could see the company hit with record fines of more than $1 billion. “The big multinational companies that are doing business in China should be more cautious about their behaviour concerning cartel agreements with their competitors, and ensure that they do not abuse their dominant position in the market,” says Li Hua, a partner and competition law specialist at Squire Patton Boggs in Beijing. Just before this story went to print, Reuters reported that SAIC is investigating Microsoft Corp over potential antitrust violations concerning its Windows operating system. The agency also said it is investigating a Microsoft vice-president and senior managers, and has made copies of the firm’s financial statements and contracts.

China is also increasingly using antitrust rules to impose conditions on global deals. According to Reuters, MOFCOM, which is responsible for merger control reviews, has assessed about 750 merger proposals since the enactment of the AML in 2008. Last year, MOFCOM conditionally approved Glencore’s $29 billion takeover of Anglo-Swiss miner Xstrata, provided they sold Xstrata’s Las Bambas copper project in Peru and guaranteed a long-term supply of copper concentrate for Chinese customers. In a separate case, the Ministry required Google Inc to continue licensing its Android mobile operating system in a free, open-source environment when the U.S. technology company bought Motorola Mobility Holdings Inc in 2012.

In the pipeline is a string of large cross-border deals which are expected to need MOFCOM’s approval, typically required when the combined companies’ annual sales in China exceed 400 million yuan ($65 million). These include U.S. conglomerate General Electric’s $16.9 billion bid for the energy business of French engineer Alstom, and U.S. medical device maker Medtronic Inc’s $43 billion purchase of Dublin-based rival Covidien Plc.

Although MOFCOM has made companies wait several months and agree to concessions to win approval, it is rare for the agency to block proposals entirely. However, in June, MOFCOM rejected Danish shipping group Maersk’s planned alliance with Swiss and French rivals. Maersk wanted to bring down costs by sharing ships with Switzerland’s Mediterranean Shipping and France’s CMA CGM, but MOFCOM concluded that the alliance would stifle competition and was not in the interest of Chinese consumers. The rejection was the first time the regulator has blocked a tie-up between non-Chinese firms, and came as a surprise to a number of antitrust lawyers and industry experts.

MOFCOM makes its move

While increasing its influence on international deals, MOFCOM has also taken steps to improve its merger control process. In February, the agency introduced streamlined procedures for simpler proposals involving companies with low market share in China, or Chinese offshore joint ventures with no domestic business. The provisions contain a list of criteria for identifying which parties entering into concentrations – such as mergers, acquisitions and joint ventures – are eligible for the simplified merger review (see Insert). MOFCOM later introduced guidelines in April to supplement the simplified merger review procedure. 

Prior to the introduction of the streamlined procedures, all transactions were subject to the same review process with MOFCOM. As a result, even simple cases could take several months to obtain approval. “Before the simplified procedure was introduced, every case needed to follow the application procedure from A to Z. It was too burdensome, costly and time-consuming for companies,” says Li. But under the new rules, companies looking to use the simplified procedure can now apply to MOFCOM to receive the benefits of the streamlined process, which include fewer application documents and a shorter expected turnaround time.

On the other hand, parties applying for the simplified procedure have to prepare a public notice containing information relating to the deal, including a brief overview of the transaction, an introduction to the parties involved and the reason for applying for the procedure. MOFCOM will then make the notice available for 10 days on its website for public comment.

While the new provisions aim to shorten the majority of cases that are publicised for the simplified procedure, some ambiguities still remain, says Ning. One major uncertainty, she says, is that the guidelines do not clearly provide a timeframe for how long the simplified review is expected to take. “I believe that MOFCOM, after officially accepting a simplified procedure case, will endeavour to complete the review and clear the case within 30 days. But in the regulation rules itself, it doesn’t clearly provide such a time limit.”

In some cases, it could be argued that the simplified procedure could in fact take longer to process, lawyers say. For instance, if a public notice is successfully challenged by a third party or any other agency, then the parties that filed the simplified procedure application would have to revert to the normal procedure. “In this case, the days spent [on the simplified procedure application] will not be counted, and the process starts from the beginning. So it could be delayed even longer than a normal procedure since you’ve already gone halfway with the simplified one,” says Ning. While this is understandable to a certain extent since the simplified procedure forms are slightly different and shortened from the normal documents, Ning suggests that it would be more appropriate for the days spent submitting through the simplified review process to be counted proportionately towards the normal application process.

For her part, Li says that the guidelines still leave a few questions surrounding joint ventures unanswered: “Article 4 says that at least two operators need to have joint control of a JV. If just one of the parties solely controls the JV, then it is not classified as a concentration.” But for example, if one party has a 60 percent stake in a JV, and two other parties have 20 percent each, it cannot automatically be said that the two other parties have no control in the JV, adds Li. “The new rules list all kinds of factors to decide if a party has any control, including the JV’s business plan, the operators’ shareholder structure or other things like the nomination of high-level managers. The new Article tries to clarify all the ambiguities in the AML, but in practice it is still really difficult to apply. But it is a step forward nonetheless,” concludes Li.

Nonetheless, the new simplified merger review procedure should encourage companies to notify MOFCOM of their transactions. To ensure that parties comply with China’s merger control laws, MOFCOM announced that, as of May 1, companies that break the merger control filing rules by closing transactions without the agency’s approval will be openly publicised. In addition to financial penalties for non-compliance, this public naming and shaming can inflict severe reputational damage to the companies involved.

Surging demand

China’s antitrust regulators’ increasingly aggressive stance and MOFCOM’s introduction of a streamlined merger review procedure come at a time when business activity is booming. According to Thomson Reuters, global M&A volumes hit $1.75 trillion this year in the six months to June, marking a 75 percent increase from a year ago. And with joint ventures in China also surging with the estimated value of alliances formed in China up 277 percent in 2013 from 2012, antitrust lawyers in China are becoming a hot commodity. “Earlier on, there were no specialised competition lawyers in China. But now, we have specialised lawyers in that sector, and the number is growing,” says Li. “It is not only an interesting sector, but also a challenging one since in addition to legal knowledge, lawyers also need an economics background and political and global vision when handling the bigger cases,” adds Li.

While recruitment of competition lawyers has been growing since China introduced antitrust law in 2008, headhunters say there has been a sharp uptick in the past year, even for foreign law firms that are shrinking in other practice areas. Janet Chan, manager of the legal division at recruiter Michael Page, told Reuters that she had seen a 20 percent increase in demand for antitrust attorneys over the past 12 to 18 months.

Li joined Squire Patton Boggs from Gide Loyrette Nouel in June to help grow the firm’s competition practice. Linklaters in Hong Kong hired partner Clara Ingen-Housz from Baker and McKenzie last year to bolster its competition group, while Mayer Brown JSM has hired a new competition associate who will be joining the Hong Kong office in September. King & Wood Mallesons has three partners and more than a dozen associates dedicated to competition law work, and is looking to further expand its China competition team, says Ning.

Li also points out that there is a growing demand for lawyers to provide compliance training. “However, all this depends on the willingness of the company to organise such kinds of training to avoid any legal risk related to the AML in the future.”

As China’s antitrust regulators ramp up their investigations and enforcement activities, and with MOFCOM getting more involved in merger reviews on an international scale, the consequences of price-fixing, abusing market power and failing to file for transactions are becoming more severe. “China is becoming the third country, in addition to the U.S. and EU, to strongly enforce its AML,” says Li. “For most big transactions, companies cannot avoid going through the Chinese jurisdiction. For any transaction, if a company meets the criteria, I strongly suggest that they file with MOFCOM to avoid any reputational damage and penalties.”

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Simple case criteria

The following criteria are used to identify which concentrations are eligible for the simplified merger review procedure:

• Horizontal mergers – The total market share of all parties to the concentration must be less than 15 percent in the same market.
• Vertical mergers – The market share of each party to the concentration in each of the upstream and downstream markets must be less than 25 percent.
• Mergers that are neither horizontal nor vertical – The market share of each of the parties to the concentration must be less than 25 percent.
• Offshore joint ventures – The joint venture should not have business operations in China.
• Acquisitions of offshore targets – The offshore target should not have business operations in China.
• Reduction in the number of controlling shareholders – The joint venture that is jointly controlled by two or more parties should be controlled by one or more existing parties through the concentration.

Exclusions 

However, concentrations that meet the simple case criteria may not be eligible for the simplified procedure under the following circumstances:

• The joint venture changes from joint to sole control, and the joint venture competes with the controlling party in the same relevant market.
• The affected market is hard to define.
• The concentration may create a negative effect on market entry or innovation.
• The concentration may create a negative effect on consumers or other relevant operators.
• The concentration may create a negative effect on the development of national economic development.