Feature: Competition goes global | Asian Legal Business

Geely, meaning 'lucky' in Chinese, is an ambitious automaker based in Zhejiang. This company has recently completed a headline-grabbing transaction in Europe: its US$1.8bn acquisition of Swedish premium brand Volvo. Through the acquisition, Geely will not only obtain a critical edge in its home market, but also make a major inroad into the European and North American markets.

The successful completion of the biggest overseas acquisition by a Chinese automaker to date, however, was not based on luck. Working alongside the company's sizeable strategy and execution team was a strong squad of legal advisors, including leading international firm Freshfields Bruckhaus Deringer and PRC top-tier law firm Haiwen.

Apart from advising on complex issues relating to corporate, IP, tax, finance and employment law, the legal advisors also handled merger control filings and anti-trust-related issues across more than 10 jurisdictions, including the European Union, US, China, Russia and Australia.

The multitude of large-scale overseas investment and acquisitions by Chinese companies, such as the Geely-Volvo deal, has given rise to the importance of global anti-trust compliance and merger control filings in their process of expansion. "In the Geely-Volvo deal, the target company has substantial sales around the world, so the transaction triggered merger filing thresholds in over 10 jurisdictions," says Michael Han, a partner with Freshfields in Beijing who co-headed the firm's team working on the anti-trust aspect of the transaction.

Han and the team worked closely with Geely coordinating all the merger filings required, including a filing with MOFCOM, either by dealing directly with the competition authorities or through local counsel. "It's a quite challenging process, in the sense that we had to complete all the filings and obtain approvals within about two months, and the client was not so familiar with anti-trust regimes in other countries," he says.

Although Han noted that many PRC companies currently lack understanding on anti-trust issues and their implications outside China, inevitable exposure will occur to more anti-trust risks and scrutiny, as their push into overseas markets continues. International firms, therefore, will be expected to put in more effort and maintain good communication to safeguard clients' interest.

"With Chinese companies increasingly acquiring controlling stakes in foreign companies, the number of similar transactions in which multi-jurisdictional merger filings are required will grow," says Han. "In addition, they also need to consider making merger filings for certain transactions that take place in China and Asia but can potentially meet notification thresholds in other jurisdictions."

A recent transaction between Air China and Cathay Pacific, in which a Shanghai-based cargo joint venture was set up, is a good example. Under the deal, Cathay acquired 49% of the interests in Air China Cargo (the JV) and conversely, Air China reduced its stake in the JV from 100% to 51%. Although both companies and the joint venture are all located outside the EU, sales revenues off the different party's corporate groups in the EU exceeded certain thresholds.

Notification to the European Commission became necessary: Cathay notified the transaction to the Commission in May 2010. In July the EU anti-trust regulator approved the proposed JV, stating that the transaction would not reduce competition between Asia and Europe as combined market share is "limited" and the routes operated are largely complementary

As larger Chinese companies now fall regularly under anti-trust scrutiny by foreign regulators like those located in the EU and US, merger control and anti-trust compliance are indispensable. This is part of compliance procedures these companies need to go through to complete their transactions or conduct business - both at home and abroad.

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Merger filings: more clarity, deeper understanding
While it has been two years since the Anti-Monopoly Law became effective, merger control remains the majority of anti-trust work that law firms handle. This is largely due to the fact that the Ministry of Commerce (MOFCOM), the authority responsible for merger control review, is most active on the legislative front and in individual enforcement cases.

The regulator's growing sophistication and assertiveness have been well received by anti-trust lawyers. With more implementing measures and guidelines in place, both domestic and international firms are increasingly busy assisting clients with merger filings before MOFCOM. "A series of measures, guidelines and interpretations issued by MOFCOM have addressed many questions about the applicability of a notification and added clarity to the merger review scheme. They have a profound impact on a lawyers' practise and clients' decision-making processes," says Zhang Xinyang, a senior member of Commerce & Finance's anti-trust and competition practice group.

Zhang and his team have handled a number of influential concentration notification filings - notably, China Minmetals Group's recent US$814m acquisition of a 51% stake in Hunan Nonferrous Metals. The team helped China Minmetals win anti-trust approval from MOFCOM for this transaction, which was completed on 1 August. Since the beginning of 2010, Commerce & Finance has experienced a noticeable increase in the number of enquiries and instructions for merger notifications and anti-trust clearances.

"Given the enhanced transparency and clarity of the notification requirements and review procedures, clients and legal advisors are more certain about whether a transaction triggers the requirement to notify," says Zhang. "Therefore, a greater number of notifications have been filed compared to the previous year." In addition to foreign companies, the firm also represents a growing number of domestic companies, particularly A-share listed companies, in merger control processes. Domestic companies are increasingly active in making M&A transactions and undertaking restructurings.

Apart from the improving regulatory framework, the six decisions made public by MOFCOM also provides valuable insight into the application of the rules concerning merger control under AML. "In the past two years, the six high-profile cases have shown that MOFCOM has been tough and will continue to be tough. The application of the rules is effectively making companies, including Chinese companies, comply with the merger control requirements under the law," says Ninette Dodoo, legal counsel for Clifford Chance in Beijing.

Dodoo specialises in anti-trust and competition practice and has been involved in the merger filings for the InBev/Anheuser-Busch and Pfizer/Wyeth transactions. "Our clients have increasingly recognised that they need to involve anti-trust lawyers much earlier in deals and [of] the importance of consulting with MOFCOM early, taking the authorities' advice on board and working with the authorities," she said. Nevertheless, the merger control regime is still evolving.

Although anti-trust lawyers will continue to have a challenging role to play for quite some time, the experience of taking part in the regime's evolution itself proves itself to be fascinating. "With a regime which is nearly two years old, it's understandable and expected that a lot of evolution is still to be done. Several areas and issues are yet to be clarified. But MOFCOM is positive about trying to introduce rules, which do not hinder business but instead offer a good, vibrant, competitive environment for companies to thrive," said Dodoo.

"Much remains to be learnt and developed, but being at the forefront of the development of China's AML and working closely with clients and the regulators during the evolution constitute the fascinating part about this job."

Enforcement actions yet to pick up pace
Administrative enforcement aspects of the AML remain underdeveloped, such as cartel and abuse of dominant market position. But new measures and rules that are being finalised by the National Development and Reform Commission (NDRC) and the State Administration of Industry and Commerce (SAIC) - the other two AML enforcement authorities - have shed some light on future regulatory enforcement policy.

"Many companies, particularly foreign companies, are closely monitoring the development of the draft rules and enforcement actions. Some have already instructed law firms to help them review their business practices in China and adjust to the new AML environment as indicated by the draft rules, and to make necessary changes to their operations and procedures to ensure compliance," says Xue Yi, a partner of Zhong Lun in Beijing. The new implementing rules are expected to be in place by the end of this year. They will make important clarifications relating to ambiguous concepts and provisions in the AML and will provide practical guidance on AML compliance. Yet, as few formal actions have been taken it is difficult to predict how NDRC and SAIC will enforce the law.

However, the market is certain that enforcement actions will be robust - and if that proves true, firms are expected to see a surge in their anti-trust workloads.

On the private litigation front, only a handful of cases have been heard by the courts so far - but they represent the first steps in judicial enforcement of the AML. The results of the cases, nonetheless, demonstrate that it is difficult for plaintiffs to win in court. Zhan Hao, a partner of Grandall's Beijing office, says that the major challenge facing plaintiffs is the burden of proof.

The Civil Procedural Law doesn't have a discovery process that allows plaintiffs to have access to evidence that is necessary to prosecute AML offences. Another major issue that may have discouraged companies from taking up anti-trust litigation actions to date is the question of damages. It's still unclear how much of a damages award a plaintiff can receive: therefore it's hard to predict whether the outcome of a law suit is beneficial.

However, many key questions and issues in prosecuting anti-competitive conducts in the people's courts will soon be addressed. The Supreme People's Court's judicial interpretation of AML is reportedly to be published at the end of 2010.

"The bulk of our firm's anti-trust and competition mandates in Europe are concerning cartels and abuse of dominance. We represent clients in a range of complex anti-trust investigations and litigation," says Freshfields' Han. "Although we haven't seen much work from these fronts in China, as it's still early days for the regime, we would expect to see new implementing rules to come out and real enforcement actions to be initiated over the next few years. We are optimistic about this practice in China and will continue to grow our legal team here," he says. ALB

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