2008 is proving a landmark year for competition legislation.
India, China and others are introducing new regulatory constraints on local and international M&A deals
When Coca-Cola announced in early September its intention to buy Chinese juice-maker Huiyuan, the global business community immediately wondered whether China would allow the deal to go ahead.
The announcement briefly stole investor attention from the US market meltdown, partly because it came just five weeks after China’s new anti-monopoly law had taken effect.
The US$2.4 billion deal that would allow the world’s largest beverage company even greater penetration into the Chinese market looked like it would be the first guinea pig for the country’s new and untested competition regime.
While Coke sought to expand its footprint in China, Tata Motors was eagerly waiting to unveil its new Nano, the world’s most affordable car. But behind the scenes, Tata’s competitors were hard at work interpreting another new competition regime. They were attempting to use India’s Competition (Amendment) Act, 2007 – a piece of legislation that still lacks clear implementing guidelines, not to mention five of the six panel members of its regulatory authority – to fight back. The competitors alleged that the Nano’s pricing structure was unfair and called for Tata to release more details.
Regulators in the respective countries have yet to resolve either of these matters, but the fact that they have arisen at all is significant. India and China are making their mark on the global antitrust map with the establishment of new competition regimes that will add to the hurdles facing international M&A deals.
Developed economies have long had antitrust regimes. Indeed, international companies have had to meet competition requirements in the US and the EU for many years.
Such legislation isn’t confined to western markets: Japan, South Korea, Taiwan, Brazil and South Africa all boast recognized anti-monopoly controls that are an integral consideration for any international transaction. Hong Kong too is developing a new competition law.
“All of these countries are at different stages and with different experiences in antitrust enforcement,” says Jonas Koponen, a Brussels-based competition and antitrust partner at Linklaters. “Japan and Korea have had regimes for a while and they have, in the past five years … begun to put their mark on international investigations.”
A deterrent to M&A?
For companies engaged in international mergers, one of the most troublesome aspects of national competition laws is their frequent requirement for pre-merger notifications.
Completing these filings in numerous jurisdictions, each with its own set of rules and procedures, is a complex and time-consuming task. “Over the years this has become an important box to check in any merger of significance, and in particular global mergers that may be reviewed by dozens of agencies,” says Koponen.
In some cases, antitrust requirements prevent transactions from taking shape as the merging parties intended. Business arrangements may need to be changed and existing agreements with suppliers and competitors may be illegal under competition legislation in certain jurisdictions.
Furthermore, as Koponen points out, the growing prevalence of antitrust laws increases the possibility of a regulator in one country or another saying “no” to a deal. It not only puts the completion of certain transactions in jeopardy, but also causes delays and imposes a complex regulatory burden on company managers.
“There is no doubt that if a single jurisdiction is central to the transaction as a whole, the decision of one authority could cause a deal of global importance to collapse altogether,” says Tom Pick, a partner at Rechtsanwalt Hammonds in Brussels.
Some observers worry that maintaining compliance with the growing number of national competition laws will become so tedious that certain deals will no longer be viable. Economic turmoil in the global financial markets has already contributed to a slowdown in M&A activity and the increasing number of regulatory roadblocks could make matters worse.
“Companies will have to adapt their everyday business practices in order to avoid very severe penalties, which could be either criminal [prosecutions] or fines,” warns Koponen. The end result, he says, is that deals will not be done.
Krishna Sarma, managing partner of Corporate Law Group in New Delhi is also worried. The emergence of more numerous and more stringent competition regimes across Asia could lead to a “real slowdown in business deals and mergers and acquisitions of companies, both domestic and international,” she says.
Other observers are more optimistic. They believe that despite the new merger controls, China and India will be resilient to the downturn, perhaps even offsetting part of its impact elsewhere.
“We will see a significant continuous increase in M&A activity in Asia in general and … India will definitely evolve as one of the main M&A targets for decades to come,” says Benjamin Parameswaran confidently.
A leading member of the India desk at German law firm Hengeler Mueller, Parameswaran, despite his optimism, is quick to add that “as a consequence of the envisaged new Indian Competition Act, the pace [and] execution of transactions may be somewhat slower.”
China’s new antitrust law has been a decade and a half in the making. It finally took effect at the beginning of August.
“Part of the challenge with China is that the system is so new … as of yet there are no clear rules other than you have to file. We don’t know what information you have to provide, who decides and how long it takes,” says Koponen.
Continuous monitoring of the regime appears imperative, especially since it’s too early to gain strategic insights based on previous experience.
“The Chinese economy is an enormously dynamic one … [so this law] is likely to impact on a great deal of economic activity,” warns Koponen.
China has adopted a two-stage system that requires the notification of a transaction within 30 days and a further review within 90 days.
Companies with sales in China are likely to feel the impact, even if the amount generated is not considerably large. As little as US$50 million could set an antitrust notification trigger, while a global turnover of US$1.3 billion may simultaneously mandate detailed reporting.
Another parameter is the national interest test, says Koponen. Deals will be scrutinized with respect to their impact on competition, but also assessed on national interest considerations.
“That’s a nebulous concept. There have been concerns voiced [by many commentators] as to how this will apply in practice,” he says.
There is also widespread concern that China’s anti-monopoly law may foster domestic protectionism and discourage the protection of intellectual property rights. “India’s competition policy mandates promoting and sustaining competition. On the other hand, China’s competition policy aims to protect public interest and promote the socialist market economy,” argues Ravinder Kulkarni, a senior partner at Indian law firm Khaitan & Co.
Another anxiety is a lack of attention to specific transactional areas. “It is somewhat surprising that the treatment of joint ventures has not received more attention in China given the importance they play for economic development,” says Marc Waha, at Norton Rose in Hong Kong.
While companies attempt to decipher the conditions for merger activity set by Chinese regulators, India has yet to complete the implementing regulations for its new law, which is expected to come into effect early next year.
“The success of the proposed regime will largely depend on whether or not it is implemented in a rational fashion,” says Parameswaran. “[It] is crucial to [ensure] the Competition Commission of India is not abused as a tool for the harassment of certain business houses and sectors.”
India’s legislation has been in the works for years, but it is still dotted with questions. The first is whether it will actually come into force in its current form. With elections looming, nothing is guaranteed.
The law contains mandatory filing requirements for deals that fall within prescribed local nexus thresholds. Companies with assets of more than US$500 million or turnover of US$1.5 billion will have to seek approval for any type of merger or acquisition. Companies that belong to larger groups with assets of US$2 billion or a turnover of US$6 billion will also have to go through the process.
However, it is unclear whether all deals that fall within these thresholds will have to be notified, particularly purchases of minority stakes.
“Right now, people don’t fully understand,” explains Koponen. “Obviously the broader the interpretation of the class of deals that will have to be notified … the greater the impact will be on commercial activity.”
Casting a wide net
While India’s proposed thresholds are higher than those in the EU, and twice as high as in the UK, they have received criticism for being too low.
Some observers worry that a large number of international mergers, including those with little relevance to India, will be caught up in the country’s bureaucratic net. This will not only impose an administrative burden on the merging entities, but could also overwhelm India’s fledgling competition authority.
With domestic M&A growing at 156% a year, many question whether the Competition Commission of India (CCI) will have the capacity to process the barrage of notifications it will receive in a timely manner.
Anand Pathak of P&A Law Offices in New Delhi believes this is the most difficult challenge facing Indian – and Chinese – authorities. “Neither jurisdiction has the luxury of having a number of competition law practitioners who can be recruited into the enforcement agency,” he says.
Pathak also describes the Indian law as “terribly drafted [and containing] concepts that have no basis in competition law or economics”. As a result, he says, “the enforcement posture of the new competition commission will be crucial.”
Others, however, believe that India’s notification thresholds are not low enough. “We feel that the notification thresholds are on the higher side, which means only the large mergers would be caught,” says Atul Chitale, of Indian law firm Chitale & Chitale Partners.
Of course, not all laws are created equal. The thresholds specified in India’s competition act are based on both turnover and the value of assets, while those in China rely predominantly on turnover alone. On the positive side, both laws are based purely on fiscal thresholds rather than market share, which removes some uncertainty about which M&A deals require notification.
Criticism that the initial thresholds are too low has been widespread, but new regimes are often forced to revise their thresholds once the laws come into effect. South Korea, for example, traditionally had a low threshold, but increased it due to the huge workload it generated. In Brazil, the threshold remains low despite being raised from previous levels.
Lawyers should “recognize this ‘bedding in’ process as the new competition laws come into operation,” says Dave Poddar, a competition partner at Mallesons Stephen Jaques.
“I am optimistic that the regulators in [India and China] have shown they are willing to take into consideration international best practices,” Poddar continues.
A waiting game
Another concern with India’s competition act is the fact that deals can be reviewed by the competition commission for up to 210 days (seven months) before a decision is reached.
The law will force corporations with a relatively insignificant presence in India to subject their international mergers to clearance by the CCI and possible delays, laments Kulkarni. This “is being perceived by many as a likely constraint on international business interests”.
There is also controversy over the CCI itself, which to date has appointed only one of its six members. “The current commission of one is responsible for drafting regulations, issuing guidelines, implementing the law and filling its own seats with the appropriate legal and economic experts,” says Marta Palacios of Perkins Coie in San Francisco.
As the regulations are drafted, businesses will have to be more cautious: they will face considerable liabilities if the law is broken. Failure to comply with notification requirements in India may lead to penalties of up to 1% of total assets or turnover – whichever is higher – and even a possible jail sentence, according to Sanjay Bhatt, a partner at Kesar Dass B & Associates in New Delhi.
Deals closed outside of India may also have to comply, since the law includes extra-territorial provisions for companies conducting businesses there.
“The key is to ensure that the timing of the transaction factors is in compliance with these pieces of legislation,” says Paul Collins, of Stikeman Elliott in Toronto.
It is difficult to predict the full impact of India and China’s emerging competition regimes on international M&A activity, especially since the competition authorities in both countries have yet to be tested. To date, neither has issued reliable guidelines or regulations.
“International businesses should proceed with caution, stay informed of new developments in each jurisdiction and work with competition or antitrust counsel that has a good 30,000-foot perspective of the many competition and merger-reporting regimes around the world,” advises Palacios.
Lawyers caution against unnecessary anxiety over the new laws, since most companies are already aware of existing requirements, upon which these new policies are based. These new regimes “need not necessarily have a negative impact on international M&A,” says Tom Pick at Rechtsanwalt Hammonds.
“Earlier drafts of the respective merger control rules would have captured international transactions with no or little connection [to] the domestic economies of China and India,” says Waha. “The impact on international M&A deals will thus be less than originally anticipated.”
Law firms gear up
Businesses aren’t the only entities preparing for the introduction of new anti-monopoly legislation. Law firms are eagerly anticipating the new work these laws will undoubtedly send their way and many are gearing up for the challenge.
International firm Linklaters has created a new competition desk in Hong Kong. White & Case is expanding its antitrust practice in Asia and recently hired Joy Fuyuno in Tokyo from the antitrust section of the American Bar Association. Allen & Overy, meanwhile, has boosted its antitrust practice, working in conjunction with reputed Indian law firm Trilegal.
Crossing anti-monopoly hurdles often requires a battalion of lawyers using their own offices to interface with local regulators and competition experts from partner firms.
“I wouldn’t say hundreds of lawyers but certainly there will be dozens on the competition law project only,” says Koponen. “It’s a very complex puzzle to do and it takes a great deal of planning and organization.”
Towards a global framework?
The systems used by the Chinese and Indian laws for controlling mergers and prohibiting anti-competitive agreements and abuses of dominant positions are based conceptually on legal precedents set in the EU.
However, in spite of the uniformity in many aspects of competition policy in different jurisdictions, there has been no organized effort to create a truly global regime.
The International Competition Network (ICN), an organization of regulators and lawyers from around the world, is the closest there is to a global forum on competition. It possesses no legislative authority, but members have been working towards standardizing global legislation, while regularly recommending best practices and guidelines.
At the same time, there are signs of international cooperation in some areas, particularly in fighting cartels. A recent market investigation of marine hoses used in the oil and gas sector, for example, brought together enforcement agencies from Asia, Europe and the US.
In the meantime, until the creases of jurisdictional difference can be ironed out, companies will have to remain alert, evaluating the potential risks of their M&A investments in a very detailed and holistic manner.
“Experienced dealmakers will now have to consider the possibility of extended merger control investigations in India and China, as well as the ‘usual suspects’,” says Warsha Kale, associate director of EU competition law at Berwin Leighton Paisner.
Regulatory bodies are to some extent offering their assistance in this process.
“Merger control regulators are conscious of the practical reality that opposition in one jurisdiction may create global issues and are therefore much more willing to [find] … remedies … to deal with any competition issues,” says Poddar.
According to Manas Chaudhuri, head of the competition law practice at New Delhi-based J Sagar & Associates, what is imperative at this stage is thorough groundwork, consultations and conscious efforts to stay abreast of threshold revisions.
“International enterprises should consider interacting with industry associations, law firms, professional institutes and [the] chambers of commerce and industries of these jurisdictions to get a feel for the situations prevailing.”