[FT] China becomes hurdle to global mergers

China becomes hurdle to global mergers

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By Simon Rabinovitch in Beijing

When China’s antimonopoly law went into effect three years ago, there were fears that Beijing would use it as formal cover for protectionism.

Although the worst of those concerns have not materialised, there is a growing realisation that the law has become a hurdle for mergers and acquisitions, not just in China but globally.

When Beijing approved a merger of Russian potash producers UralKali and Silvinit in June, it demanded that the new company continue to meet the demands of Chinese customers and adhere to established pricing conventions. China threatened to impose penalties should it fail to do so.

It was the seventh time that the Chinese commerce ministry had imposed conditions on global mergers that had taken place beyond China’s borders.

Antitrust lawyers say the conditions have a common thread, which is that Beijing, more than other jurisdictions, wants to protect domestic companies from the potential effects of global mergers.

For foreign companies, that means the onus is on them to get to grips to with China’s antitrust regime and prepare filings that directly address Beijing’s concerns as early as possible.

But Peter Wang, a partner at Jones Day in Shanghai, said many were “still used to treating China as an afterthought” when submitting mergers for antitrust reviews.

“The Chinese regulators believe that they should be taken seriously, and it probably is a good idea for us to do that,” Mr Wang added.

In a sign that Chinese regulators are being taken more seriously, US and Chinese antitrust agencies last week signed a memorandum of understanding to help enhance their relationship.

“What we’ve seen so far from the Chinese antitrust agencies is very promising,” Jon Leibowitz, chairman of the Federal Trade Commission, one of two US antitrust regulators, told the Financial Times.

On the face of it, Chinese regulators have had a remarkably light touch. Of the roughly 250 mergers that they have reviewed, only one has been rejected:Coca-Cola’s bid for Huiyuan, a juicemaker. More than 95 per cent of all deals have been approved without any conditions.

But the details are more unsettling. The Chinese commerce ministry has yet to apply conditions on any purely domestic mergers, let alone reject them. In many cases, lawyers say that large Chinese state-owned companies still do not bother to notify regulators of their mergers, and the ministry turns a blind eye.

And even when foreign mergers are granted unconditional approvals, the review process is increasingly drawn out.

“Sometimes you even hear about drop-dead dates coming close or financing becoming precarious because of the extended delay,” Mr Wang said.

The remedies that Beijing imposes have also raised eyebrows. While divestitures required for approvals of the Mitsubishi Rayon-Lucite chemicals merger and the Pfizer-Wyeth pharmaceuticals deal were reasonable in antitrust terms, they have helped shift valuable businesses into the hands of Chinese companies.

“There is some concern about the potential for such orders to be used as a mechanism to transfer important businesses or assets or intellectual property to Chinese enterprises away from foreign firms,” said Gerry O’Brien, a lawyer with Mayer Brown in Hong Kong.

Nevertheless, Mr O’Brien said a “very constructive part” of the Chinese regime was the regulators’ willingness to work with companies to develop remedies in order to address concerns.

And for all the lingering concerns about how China might use its anti-monopoly law against foreign companies, there is also evidence of a countervailing trend with foreign companies using the law to demand greater transparency from the Chinese government in its merger reviews.

“By keeping it technical, you can actually achieve some progress,” said Adrian Emch, a lawyer with Hogan Lovells in Beijing.

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