While each of these elements is similar to what other antitrust regulators would review, it is difficult to assess, without a fuller disclosure, whether the market conditions warranted a decision to block the transaction.
While Article 30 of the AML requires that Mofcom publicize decisions blocking transactions or imposing remedies, the brevity of its statements contrasts with accepted practice elsewhere. The European Commission must publish fully-reasoned decisions under EU law, for both clearance and blocking decisions.
The U.S. antitrust agencies are less transparent. While they have no obligations to publicize their reasons to “clear” transactions (in contrast to the European Commission, the U.S. agencies do not clear transactions per se, they just let the waiting period expire), the U.S. agencies must file a complaint alleging a credible theory of competitive harm if they challenge transactions.
Mofcom’s Coca-Cola/Huiyuan press release also alludes to its theories of competitive harm to block the transaction:
This is reminiscent of the “portfolio effect” theory that the European Commission articulated in its 1997 review of the Guinness/Grand Met transaction. There, the EC held that the holder of a portfolio of leading brands may gain a better ability for tying, assuming the holder of the portfolio has the brand leader or one or more leading brands in a particular market.8 While this theory had a somewhat short life span in Europe and was never fully adopted by the U.S. agencies, it seems to constitute the key theory of competitive harm used by Mofcom to block Coca-Cola/Huiyuan.
Mofcom’s press release also adds that Coca-Coca’s acquisition of Huiyuan would have “reduced the room for small and medium-size juice companies to survive.” Such a concern would not have been raised by U.S. antitrust agencies, which focus on competition and not the ability of competitors to survive. Competitors play more of a role before the European Commission, which has historically paid more attention to complaints lodged by competitors.
Suspecting Favoritism
Lack of transparency in merger control can give the impression that the government’s antitrust analysis of mergers is an impenetrable black box, and that other considerations may come into play. A recurrent critique against the enforcement of the AML thus far has been that it mixes industrial policy concerns to favor Chinese competitors. Bluntly put, the Chinese antitrust regime would have a strong tendency to protect domestic competitors.
The remedy imposed in the InBev/Anheuser-Busch transaction fueled this critique. It has been reported that InBev and Anheuser-Busch would hold a combined market share of approximately 13 percent of the Chinese beer market. Such a share typically raises no antitrust risk. Indeed, Mofcom approved the transaction subject to remedies unrelated to the transaction before review.
The remedy, rather, constrains InBev’s future M&A activity in China. To get the Anheuser-Busch transaction through, InBev committed not to increase its equity stakes in two Chinese brewers (Tsingtao Brewery and Guangzhou Zhujiang Brewery), or to seek to acquire “any shares” in two other Chinese Brewers (China Resources Snow Brewery and Beijing Yanging Beer).
Because such a remedy may be unprecedented, may not have been warranted by the transaction under review, and, at least on its face, seems aimed at favoring domestic competitors, it has bolstered the critique that industrial policy plays a role in Mofcom’s antitrust analysis.
But it could be that the most relevant sign of industrial policy considerations is what Chinese enforcers have not yet tackled. The elephant in the room is the lack of AML enforcement actions against cartels.
Most antitrust regulators agree, often outdoing themselves in rhetoric, that the detection, prohibition and punishment of cartels is their number one priority. To assist with the detection of cartels, about 60 antitrust regimes have adopted “leniency regimes,” which provide incentives for cartel conspirators to cooperate with antitrust enforcers and provide evidence against their fellow participants. Interestingly, the AML does not contain a leniency regime.
Could it be that no such detection tool is needed in China as cartels openly operate, at least in some sectors of the economy? And why wouldn’t they if they were not banned before the AML came into force? Again, this is reminiscent of the European experience, where member states were obligated to adopt antitrust principles upon joining the European Union. There, the transition took time, and, as old habits die hard, the remnants of cartels generated investigations and litigations on both sides of the Atlantic.
Here, the transition to a cartel-free economy is also likely to take some time, especially to the extent that some sectors are controlled by state-owned enterprises, which some officials thought would be exempt from the AML.9 The arguments heard last November before Judge David Trager of the Eastern District of New York, in the In Re Vitamin C Antitrust Litigation, are informative here.
Plaintiffs allege that Chinese vitamin C producers acted in concert to raise prices and limit the supply of vitamin C in violation of the U.S. antitrust laws. In their motion to dismiss, which was rejected last November, defendants invoked act of state immunity and international comity, essentially arguing that the Chinese government had compelled their price-fixing activities. In response to a direct question by Judge Trager, China’s Ministry of Commerce noted that Mofcom could require price fixing for any industry.
But it would be a mistake to think that the AML’s sole impact thus far has been merger control. Private actions brought under a variety of antitrust theories are wending their way through the courts and are likely to generate more scrutiny in the near future.
For instance, a complaint was filed against Microsoft claiming that the company abused its dominant position through excessive pricing. Recently, a medical information Web site brought a monopolization claim against Baidu, the leading search engine in China, claiming that Baidu had abused its dominant position by taking retaliatory measures aimed at reducing the number of hits that plaintiff generated on Baidu.
A few other cases have been brought against wireless carriers, loosely inspired by the AML. The first case that made it to court was brought by a Web-based book publisher (Beijing Sursen Electronics) alleging that its competitor Qidian had abused its dominant position by not allowing a famous author to publish on the Beijing Sursen Electronics Web site.
Lessons From Year One
The key takeaway from the first year of AML enforcement is that the Chinese antitrust agencies have been tackling antitrust issues presented to them, particularly in the merger context, and have not shied away from imposing creative antitrust theories to address their concerns. Parties to global M&A transactions now need to assess antitrust risk in China with the same level of scrutiny as they assess antitrust risk in other jurisdictions.
The next frontier of AML enforcement seems to be classic antitrust offenses, such as a price fixing and monopolization, and the specific challenges that they may bring to state-owned enterprises and an economy used to functioning without such constraints.
Olivier N. Antoine is a counsel with the antitrust group of Crowell & Moring in New York. Jonathan Z. Zhou is a partner and founding member of Fangda Partners in the firm’s Beijing and Shanghai offices.
Endnotes:
1. For a comprehensive discussion of the preliminary steps taken to enact the AML, See, e.g, Stephen Harris, Jr., “The Making of an Antitrust Law: The Pending Anti-Monopoly Law of the People’s Republic of China,” 7. Chi. J. Int’l L. 169 (2006).
2. See, http://ec.europa.eu/competition/mergers/statistics.pdf.
3. See, http://ec.europa.eu/competition/mergers/statistics.pdf.
4. See, http://www.ftc.gov/os/2008/11/hsrreportfy2007.pdf.
5. See, http://ec.europa.eu/competition/mergers/cases/decisions/m53_en.pdf.
6. See http://blogs.wsj.com/chinajournal/2009/03/18/china%e2%80%99s-statement-blocking-coca-cola-huiyuan-deal/.
7. See id.
8. See, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31998D0602:EN:HTML.
9. In August 2008, Chinese news briefings reported that a member of a research institute at the state-owned Assets Supervision and Administration Commission (SASAC), the administrative agency supervising China’s large State Owned Enterprise, claimed that the restructuring of state-owned enterprises were exempt from the AML. See, e.g., Dina Kallay, “China’s New Anti-Monopoly Law: An International Antitrust Convergence Perspective,” remarks delivered at Melbourne Law School’s “Unleashing the Tiger? Competition Law in China and Hong Kong” Conference. However, based on our recent experience, it is clear that Mofcom has taken a position that any merger between state-owned entities should obtain merger control clearance as well.
