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Avoiding delays from Chinese merger review

by contributors Peter Wang, Sébastien Evrard and Yizhe Zhang, Jones Day | Published December 19, 2011 at 3:21 PM

Many companies and M&A counsel have recently found their deals being delayed by the Chinese merger review process -- a prospect they likely would never have considered only a few years ago. Multinational companies regularly require antitrust clearances for their transactions in many jurisdictions, but China now is emerging as a third major merger control jurisdiction that can reach out to review, delay and in the worst case block important deals.

This seemingly sudden rise to prominence of Chinese merger control is the result of a perfect storm of the broad reach and low reporting thresholds of China's 3-year-old Anti-Monopoly Law, or AML; China's constantly growing importance to multinational companies; and its increasingly aggressive approach to antitrust enforcement, including in the merger context. The result is that Chinese merger control now often is the gating factor on global M&A transactions. High-profile deals such as Nokia Siemens Networks Oy-Motorola Solutions Inc. and earlier Novartis AG-Alcon Inc. have required review periods of more than six months. Delays also have affected China-specific transactions, including recently General Electric Co.-Shenhua Group Corp. Ltd. and Yum Brands Inc.-Little Sheep Group Ltd.

Our focus here is on how to address and hopefully avoid such timing problems. Many times these delays result from simply not starting work on Chinese antitrust filings early enough, or not focusing them specifically on China from the outset. Often work on China filings starts weeks or even months after deal teams based in the United States or Europe already have started to look at issues in their home jurisdictions.

The better approach is to consider China antitrust issues much earlier -- before a deal is announced, if possible -- and work backward from the targeted closing date to develop a realistic timeline for China antitrust filing and review. How early parties make their initial China filing attempt is essentially the only variable they can control, because the rest is up to the largely nontransparent discretion of the Ministry of Commerce, or Mofcom, China's merger control agency, and other Chinese government ministries. Parties also can benefit from treating China filings like those for the other major jurisdictions, applying a specific China focus from the initial antitrust analysis to information gathering, data collection, the drafting of filings and the commissioning of economic analysis.

The rest of this article outlines some key features of merger control in China and more detailed advice on how to minimize the risk that China will delay deal closings.

Which transactions need to be filed in China?

Under China's AML, in effect since August 2008, most M&A transactions and joint ventures (a common form of foreign investment into China) are subject to merger control if (i) each of at least two parties has China sales exceeding 400 million renminbi ($63 million) and (ii) the parties' combined worldwide revenue exceeds Rmb10 billion or their combined China revenue exceeds Rmb2 billion. Filing is required even if the transaction has no connection with China.

Can I close my transaction before receiving clearance from Mofcom?

No. China's merger control regime bars closing before approval, with penalties including fines and reversal of the deal. Mofcom routinely checks for past regulatory compliance -- including past handling of China merger reviews -- when it considers approvals for foreign investment as well as for mergers.

What is the procedure for filing?

Mofcom's review process has four stages. First, the parties must file a merger application and wait for Mofcom to accept the filing as complete (Phase 0), which typically takes at least one month including one round of follow-up questions. After acceptance, the statutory review period is 30 days for initial review (Phase 1) and 90 days for any detailed investigation (Phase 2), which is also extendable by another 60 days for cause or by the parties' consent (Phase 3).

What is the typical timing for China clearance?

Very few transactions -- probably only a handful in 2011 -- are cleared during Phase 1. Most are extended into detailed Phase 2 review, even if there are no substantive issues. These extensions generally are due to Mofcom's lack of staff resources or delays in Mofcom's consultation process with other Chinese government agencies, which tends to focus on industrial policy and other nonantitrust issues. Competitively problematic or otherwise sensitive cases may go into the extended Phase 3. Indeed, it appears that parties sometimes have been encouraged to withdraw matters where approval is deemed not possible, especially when substantial concerns are raised by other government agencies.

Mofcom now requires between 2-1/2 and five months from the date of the initial filing attempt to approve most transactions. This does not include time required to gather information and prepare an initial filing. The variation depends on a number of factors including market concentration and the visibility and importance of the industry involved to China. Faster clearance appears to be correlated to, among other things, a lack of horizontal overlaps or vertical relationships, low market shares, low-visibility products and a lack of domestic complainants.

However, many delays also are at least partly self-inflicted. They can be exacerbated by insufficient planning, late starts and a lack of sufficient focus on the Chinese process and anticipated Chinese competition and policy concerns until final stages. Instead, companies must take China merger review just as seriously as that in the U.S. and European Union, especially if timing of closing is a concern.

What can I expect during the investigation?

The review process itself includes an unpredictable mix of aggressive antitrust theories, a regulatory posture in which parties may be asked to disprove potential theories and problems, and nontransparent opportunities for trade associations, government departments and third parties to voice complaints that are not limited to competition issues. The parties should expect multiple rounds of formal and informal follow-up questions, demands for detailed market data focused on the Chinese market and requests for meetings with senior China-based (and ideally Chinese-speaking) executives.

What are the approval statistics? Among the approximately 270 cases that Mofcom had reviewed and concluded as of September, 97% were unconditionally approved. Only one transaction (Coca-Cola Co.-China Huiyuan Juice Group Ltd.) has been prohibited, while nine have been conditionally approved with remedies.

What can I do to make sure China's merger control procedure does not delay my deal?

The best way to obtain approval quickly is to file as soon as possible after the deal is announced. Equally important is to start to work on China market analysis and filing preparation once a deal is likely. Waiting until the process is under way in other jurisdictions such as the U.S. and the EU before turning attention to China is likely to result in significant delays.

Mofcom requires parties to submit a considerable amount of China-specific data as part of an antitrust filing. Because such data is sometimes difficult to find, it is important that the merging parties start gathering China-specific data as soon as possible in the process. In many cases, Mofcom now strongly encourages parties to commission their own China market data, including market shares and analysis for all possible submarkets, notwithstanding parties' arguments that a broader product market is appropriate. Similarly, Mofcom requires parties to provide both China and worldwide market shares for each possible product market or submarket, notwithstanding the parties' arguments as to geographic market.

Most cases now involve several rounds of follow-up questions. Usually 80% of these questions can be anticipated ahead of time. Parties should gather information responsive to all anticipated questions and prepare draft answers well in advance of actually receiving Mofcom's question lists. This allows quick responses, even accounting for the time required to redraft information into Chinese, and reduces the likelihood that Mofcom will suspend the review clock while awaiting answers.

Peter Wang, Sébastien Evrard and Yizhe Zhang are antitrust lawyers in the Beijing and Shanghai offices of Jones Day.

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