Should China Harmonize its Merger Assessment with the U.S. and EU?

• Author: Ioannis Kokkoris
• Pages: 21-77

KOKKORIS (DO NOT DELETE) 2015/11/29 12:09 PM

2014] MERGER ASSESSMENT 21

SHOULD CHINA HARMONIZE ITS MERGER ASSESSMENT

WITH THE U.S. AND EU？

Ioannis Kokkoris

I. INTRODUCTION

China’s Anti-Monopoly Law (AML) came into force in August

2008, and has been deemed “the equivalent of the United States’

(U.S.) Sherman Antitrust Act or the analogous portions of the Treaty

Establishing the European Community.”1

From the very beginning, the merger control regime in China has

been more intensively scrutinized and analyzed than the enforcement

of anti-competitive agreements and abuse of dominance, and many

of the merger parties are multinational corporations whose mergers

would be notified to multi-jurisdictions. Consequently, there were

some controversial decisions, such as P3 Alliance, Google/Motorola,

Seagate/Samsung, which are divergent from the decisions of the ma-

jor merger authorities such as the European Union (EU) Commission

or the U.S. FTC for the same cases. Some of the decisions made by

the Ministry of Commerce (MOFCOM) were fraught with unusual

analytical process and remedies. The Chinese competition authorities

have also been involved in international cartels (e.g. LCD panel) as

well as abuse of dominance cases (e.g. Qualcomm) that were investi-

gated by a number of major jurisdictions. The international profile of

the Chinese antitrust authorities is described as “one of the world’s

youngest and least understood regulators.”2

The AML has substantially adopted the EU legal framework and

the U.S. competition regime, including not only the statutes and the

regulation system, but also the competition agencies’ enforcement

experience.3 With regard to the AML’s ultimate regulatory frame-

work, it is obvious that the structure is more similar to EU regimes,

since the AML also categorizes competition controls into three types:

antitrust, abuse of dominance, and concentrations.

As this article will illustrate, a combination, a merger, or an ac-

quisition (concentration) will result in an economic concentration by

the absorber or acquiring entity and is one of the means by which a

1 Salil K. Mehra & Meng Yanbei, Against Antitrust Functionalism: Reconsidering China’s Anti-

monopoly Law, 49 VA. J. INT’L L. 380 (2008), available at http://ssrn.com/abstract=1266796.

2 Javier Blas, China Clears Marubeni-Gavilon Deal, FINANCIAL TIMES (Apr. 23, 2013, 6:37 PM),

http://www.ft.com/cms/s/0/032f2e7c-ac33-11e2-9e7f-00144feabdc0.html#axzz2xWuFputW.

3 MICHAEL FAURE & XINZHU ZHANG, COMPETITION POLICY AND REGULATION: RECENT

DEVELOPMENTS IN CHINA, THE US AND EUROPE (Michael Faure & Xinzhu Zhang eds., 2011).

KOKKORIS (DO NOT DELETE) 2015/11/29 12:09 PM

22 TSINGHUA CHINA LAW REVIEW [Vol. 7:19

company may wish to implement a restructuring procedure. Merger

control has a significant role in today’s economies; a fact that is un-

derlined by the ever-increasing number of concentrations that take

place. The purpose of merger legislation is to capture concentrations

that may have anti-competitive effects on the market structure.

There are several reasons for firms to engage in concentrations. A

merger or an acquisition is a common method that firms choose in

order to be profitable and to sustain their viability and profitability

through time. Mergers consolidate the ownership and control of

business assets, including physical assets (e.g., plant) and intangibles

(e.g., brand reputation). They can enhance corporate—and wider

economic—performance by improving the efficiency with which

business assets are used. Further reasons for firms to engage in com-

binations, mergers, and acquisitions include economies of scale and

economies of scope4 from which firms benefit, as well as efficiencies

stemming from the tendency of some countries to endorse the con-

cept of “national champions.”5 Furthermore, mergers may also satis-

fy the ambitions of executives for more power and greater control.6

The recent financial crisis has illustrated the unprecedented diffi-

culties that companies face, as well as the initiatives adopted at cor-

porate and government level, in mitigating its adverse impact. A stra-

tegic response for struggling firms, and one of the means of imple-

menting a successful debt restructuring process, is to combine or

merge in order to achieve competitive and necessary efficiencies.7

4 Economies of scale refer to the situation where long-run average costs of production decrease as

output rises, see DAVID BEGG ET AL., ECONOMICS 109 (5th ed. 1997), and economies of scope refer to

the situation where the joint output of a single firm is greater than the output that could be achieved by

two different firms each producing a single product (with equivalent production inputs allocated be-

tween the two firms), see ROBERT PINDYCK & DANIEL RUBINFELD, MICROECONOMICS 227 (Sally

Yaggan et al. eds., 4th ed. 1998). Economies of scope are conceptually similar to economies of scale.

Economies of scale apply to efficiencies associated with increasing or decreasing the scale of produ c-

tion and refer to changes in the output of a single product type. Economies of scope refer to efficiencies

associated with increasing or decreasing the scope of marketing and distribution, as well as changes in

the number of different types of products. In addition, economies of scale refer primarily to supply-side

changes (such as level of production), whereas economies of scope refer to demand-side changes (such

as marketing and distribution).

5 The concept “national champion” refers to domestic firms that are able to successfully compete in

international markets post-merger. Ioannis Kokkoris, Assessment of Efficiencies in Horizontal Mergers:

The OFT Is Setting the Example, 30 EUR. COMPETITION L. REV. 581, 581 n.2 (2009).

6 Managers may b e interested in the size, growth or risk diversification of the company they run.

Owners of firms may sometimes give managers incentives in their contracts to achieve some of these

targets (e.g., increasing the firm’s size in the marketplace). See MASSIMO MOTTA, COMPETITION

POLICY: THEORY AND PRACTICE 243 n.34 (2004).

7 Debra A. Valentine, Former Gen. Counsel, Fed. Trade Comm’n, Horizontal Issues: What’s Hap-

pening and What’s on the Horizon (Dec. 8, 1995), available at http://www.ftc.gov/public-

statements/1995/12/horizontal-issues-whats-happening-and-whats-horizon.

KOKKORIS (DO NOT DELETE) 2015/11/29 12:09 PM

2014] MERGER ASSESSMENT 23

Either a failing firm within a booming industry or firms in a dis-

tressed industry will choose to engage in a merger or acquisition as a

means, inter alia, to ensure their viability or enhance their profitabil-

ity. Given these enormous transformations, the applicability and im-

portance of the failing firm and failing division defense8 might be

crucial across all jurisdictions. As this paper will discuss, MOFCOM

has not explicitly introduced such a policy in its merger assessment,

which shows a clear lack of harmonization across major jurisdic-

tions.

The importance of mergers (and thus of the failing firm defense)

for the restructuring process is indicated, inter alia, by the U.S. Su-

preme Court in United States v. General Dynamics Corp.9 The Court

upheld the proposition that private parties, shareholders, and credi-

tors benefit from the merger of a failing firm. The shareholders are

unlikely to lose the investment and likely to obtain additional bene-

fits if the merger proves profitable. The creditors will benefit as a

result of retaining their rights against the debtor and are likely to be

reimbursed for the credit they have provided to the firm. On the con-

trary, in the event of bankruptcy, they are not likely to be able to re-

cover their claims or investments.

Thus, the restructuring process can be used as a tool to determine

if the whole firm or one of its divisions must be merged or acquired

by another undertaking in order to maintain its viability and future

prospects for profitability. In such a case, the only possible means of

restructuring is through a successful concentration. This concentra-

tion may need to be assessed by the relevant competition10 authori-

ties. If the authorities believe that the concentration will have anti-

8 An equivalent term is “failing company defense.” In vigorously competitive markets, mergers

involving failing firms may often enhance general welfare, either through increasing the efficiency of

existing capacity, redeploying that capacity to socially more valued uses, or preserving jobs and having

other socially beneficial advantages. Moreover, there might be beneficial effects on economic grounds

resulting from, inter alia, economies of scale, economies of scope, or other efficiencies, so that prohibit-

ing the deal would add new detrimental economic and social effects to the effect on competition, which

would exist in any case. The burden of proof of such welfare benefits lies with the party that claims the

defense. If one of the companies in the merger is a “failing firm” or if a division of a firm is failing and

would leave the market anyway, then the merger may be deemed not to significantly impede effective

competition. The basic requirement is that the deterioration of the competitive structure that follows the

merger cannot be said to be caused by the merger. See generally Thomas D. Fina & Vish al Mehta, The

Failing Firm Defense: Alive and Well, ANTITRUST SOURCE (Aug. 2011),

http://www.americanbar.org/content/dam/aba/publishing/antitrust_source/aug11_fina_7_26f.authcheck

dam.pdf.

9 United States v. Gen. Dynamics Corp., 415 U.S. 486 (1974).

10 This Article will mainly use the term “competition,” which is interchangeable with “antitrust” as

used in the United States for the law or au thorities that protect trade and commerce from restraints,

monopolies, price fixing, and price discrimination. See BLACK’S LAW DICTIONARY 104 (9th ed. 2009).