In early 2013, an enterprise in country A intends to set up a join venture enterprise Z with an enterprise in country B. Joint venture Z is a business that involves the simple processing of steel products (steel cut). Raw materials (steel products) are all imported from country A and country B, and the products are sold in country C.
X and Y, both large conglomerates, have already invested and established subsidiaries in China, but have not established a joint venture or cross-hold shares within China. X and Y each has a worldwide revenue of more than RMB10 billion (US$1.52 billion) and a revenue of more than RMB1 billion in China in 2012.
According to article 2 of the Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators, business operator concentration includes the situation where a business operator acquires control over other business operators by contract or other means or can exert a decisive influence on other business operators.
Report to MOFCOM
Based on this, the act in which X and Y co-establish and co-invest in joint venture Z is a situation involving a concentration of business operators. Business operators need to report to the Ministry of Commerce (MOFCOM) in advance, otherwise they cannot carry out a concentration of business operators. Article 3 of the provisions on declaration standard states that the concentration of business operators should be reported to MOFCOM when one of the following criteria is met:
- All operators involved in the concentration need to have had total worldwide revenue of more than RMB10 billion in the previous fiscal year, and at least two of the operators need to have had revenue of more than RMB400 million in China in the previous fiscal year;
- All operators involved in the concentration need to have had revenue of more than RMB2 billion in China in the previous fiscal year, and at least two operators must have had revenue of more than RMB400 million in China in the previous fiscal year.
Based on this, the revenues of X and Y can meet the conditions for concentration of business operators. However, joint venture Z intends to be set up outside China, in country C, and the raw materials come from countries A and B, and their products are sold directly in country C. In this situation, would X and Y still need to report to MOFCOM on the concentration of business operators regarding joint venture Z?
According to article 2 of the Antitrust Laws, the laws apply even if a monopolistic business practice falls outside the People’s Republic of China, as long as it eliminates or limits competition within the country. Although X and Y evaluated their situations on their own and believe that setting up joint venture Z in country C would not constitute elimination or limitation of competition in the Chinese market, after careful consideration they still decided to consult with us in making an appointment with MOFCOM regarding the set-up of joint venture Z.
At the meeting, X and Y claimed that the set-up of joint venture Z would definitely affect the current volume of steel products exported from countries A and B to China, and would affect the volume of similar products exported to China from joint venture Z. It could not eliminate the chance that after setting up joint venture Z, the prices of products produced by joint venture Z would have a synchronous effect on the pricing for similar products of X and Y.
Because the scale of merchandized raw materials from joint venture Z is far smaller than the scale of the same raw materials imported to China, and the scale of the manufactured products is also much smaller than China’s total imports of similar products, MOFCOM has not requested a report from the concentration of business operators.
As the world becomes globalized and regional economies integrate more and more, cross-border mergers and acquisitions (M&A) transactions take place and the ways in which business operators concentrate have become more flexible. This will eventually result in a strengthened extraterritorial application of the antitrust laws. Article 2 of the Antitrust Laws clearly states that in a situation where competition in the Chinese market is eliminated and limited, even if the monopolistic practice happens outside of China, the Antitrust Laws will still have effect extraterritorially, according to the Effects Principle.
Cross-border M&A, or restructuring among large conglomerates, will inevitably have an impact on a certain industry or product market. In practice, with the support of professional lawyers, proactive business conversations with MOFCOM can effectively lower the risks involving antitrust investigations and speed up the investigation process in concentrating business operators.
The extraterritorial application of the Antitrust Laws will have an unpredictably intriguing effect on the settlement of international disputes. As article 48 of the Antitrust Laws states: “With business operations that violate this law concerning the concentration of business operators, the anti-monopoly authority will order to terminate the execution of concentration, dispose of shares or assets, transfer the business and take other necessary measures to restore the market situation before the concentration, and may impose a fine of under RMB500,000.”
In short, when overseas M&A involves a review of the concentration of business operators, and there have not been any previous business conversations or reporting procedures, potential risks include being ordered to: (1) cease the concentration; (2) dispose of shares or assets; (3) transfer the business; or (4) take other necessary measures to restore the market situation before concentration.
In international disputes arising from cross-border M&A, it is possible that a party or several parties use the characteristics of the extraterritorial application of antitrust law to place the “force majeure trap” in the terms of the M&A transaction.
It is also possible that this can be used as a means to disqualify the M&A transactions or avoid the contractual obligations by purposely selecting the place of arbitration, arbitration rules, etc., and initiating the antitrust review by a certain country. Extraterritorial applications of the Antitrust Laws will certainly become an unexpected guest in international disputes.
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