Wednesday, April 22, 2009

Professor Beth Farmer on the Evolution of Chinese Merger Notification Guidelines

My colleague, Susan Beth Farmer has written an excellent analysis of the Chinese merger notification guidelines. I have included the Introduction, Part V (Questions and Issues), and Part VI (Conclusion) to that article here. The entire article may be downloaded at the Social Science Research Network website.


The Evolution of Chinese Merger Notification Guidelines: A Work in Progress
Integrating Global Consensus and Domestic Imperatives
Susan Beth Farmer1

I. Introduction

Competition laws worldwide have been developing at a rapid pace for the past several decades, spurred by technical assistance and recommendations from a diverse collection of organizations including the OECD,2 the United Nations Conference on Trade and Development,3 the International Competition Network (ICN)4 and the World Trade Organization.5 Following the lead, a large and growing number jurisdictions, recently joined by China6 have chosen to adopt their own antitrust laws and institute enforcement regimes. Antitrust law, also referred to as competition law (European Union) and anti-monopoly law (China), comprises a number of distinct types of trade restraints including horizontal agreements,7 defined to cover both hard core cartels8 and other pro competitive price and non-price cooperative agreements,9 vertical price-related distribution restraints, including resale price maintenance,10 non-price restraints11 and tying arrangements;12 monopolization;13 and mergers.14

Among these antitrust issues are areas characterized by wide, general consensus worldwide and others that are marked by divergent views in different jurisdictions. For example, there is widespread agreement that horizontal cartels are harmful and should be prohibited,15 though there is less agreement on the precise contours of where the outside boundaries lie, for example whether the appropriate enforcement mechanism should comprise governmental agency or also provide private rights of action, and whether criminal or civil remedies are appropriate. There is far less consensus with respect to modern vertical restraints and distribution rules.16 Monopolization, or abuse of a dominant position, represents another substantive area where there is general agreement at the margins but some divergence about other significant but not central issues, i.e. whether and under what circumstances competition the law can deal with oligopolistic market structures17 and where, precisely, the boundary lies between successful competition and unlawful dominance.18 These three areas, however, have one similarity: the law prohibits restraints of trade and the relevant prosecutor, or, in jurisdictions that have created private rights of action, the private plaintiff, is required to prove that the restraint harms competition.

The law regarding mergers and acquisitions falls in a different category of antitrust enforcement in several respects. Most significantly, modern merger statutes speak in predictive terms; mergers may be prohibited if they “tend to substantially restrict competition” in a properly defined relevant market and may be blocked before consummation. In a globalizing world, many large transactions cross borders and thus are subject to review by more than one government antitrust agency. In addition, acquisitions may involve key national industries, and may tread touch upon national security interests or national champion status. Finally, government enforcement agencies investigating proposed mergers do not have the luxury of lengthy investigations; time is of the essence in a proposed merger and failure to prohibit a transaction before it is consummated makes any future challenge as difficult as unscrambling eggs.19

This article analyzes merger review across different regimes, with particular focus on the newest jurisdiction that has adopted a comprehensive competition law of general application; China, which adopted its first comprehensive Anti-Monopoly Law of general application on August 30, 2007, effective August 1, 2008. This article is divided into five sections: part two analyzes the Chinese Anti-Monopoly law as it pertains to mergers20, part three examines the premerger notification guidelines for foreign acquisitions issued by the Ministry of Commerce and other governmental agencies on March 8, 200721, and the “legislative history” of the pre-merger notification thresholds, which went through two successive drafts and significant amendments between March and August, 2008. Part four addresses international benchmarking and key unanswered questions and issues in the guidelines. Finally, parts five and six highlight remaining issues and conclude.

. . . . .

V. Questions and Issues

The substantive analysis used in reviewing prospective mergers is of critical importance to the academic, legal and corporate communities. In the first instance, substantive guidelines describing the methodology and analytic approach of the enforcement agency would be a useful first step in China’s entry into the world of merger review. Though concentrations and mergers have been subject to some legal review under pre-existing Chinese law, the AML is a clean slate and the views and priorities of the enforcement entities are unknown and unpredictable. The legal standards may accrete over time if the relevant agencies publish their decisions and underlying analyses. Nevertheless, Guidelines promulgating the substantive standards, even if amended as the agency develops expertise, would be an important foundation for further consultation and learning. It is not necessary that every jurisdiction adopt identical substantive merger standards, and this article does not insist that the Chinese merger guidelines simply translate the American or European guidelines on the subject, but transparency is a fundamental consideration for firms that choose to compete in multiple jurisdictions.

Harmony is a value beyond clarity. Harmonization of the substantive legal rules is, doubtless important to firms engaged in global competition, but it is a non-trivial step beyond simple transparency. Nations at different stages of economic development may encounter different issues and challenges as they move beyond state control and towards a market economy. The Chinese economy has been undergoing a process of Reform and Opening Up22 for the past 30 years, but still has numerous sectors controlled by state owned enterprises (SOEs).23 Therefore, acquisitions may increase both concentration and market competition, and may be predicted to be pro-competitive. In industries with large SOE presence, a transaction that creates a large, even a very large, private competitor may be pro-competitive, while that would not be the case in a longstanding market economy with few publicly controlled entities. On this basis, therefore, the traditional HHI levels may imperfectly forecast competitive risk and trigger challenges to highly beneficial transactions. Additionally, modern economic tests, including the HHI24 and SSNIP25 may not be useful to an agency in its initial stages of organization or an economy transitioning towards market principles and, as the AML states, “promoting the healthy development of socialist market economy.”26 Even more problematic, the backward-looking NAAG test27 is of little utility in an economy where there has been little competition in the past.

At a minimum, a neutral observer would recommend that the new enforcement agency strive to articulate and promulgate its substantive standards and procedural requirements, disseminating them to the widest possible audience. A conscientious deliberative process promotes serious consideration of the issues, analysis of international benchmarks and various outside commentary, the exercise of articulating principles and standards is salutary. Finally, wide dissemination of the standards and procedures maximizes transparency and provides guidance and direction to scholars and the subjects of regulation. Further transparency would include statistics identifying the number of per-merger notifications filed, preliminary investigations opened, in depth investigations conducted, challenges and the results would provide a minimum level of openness. Beyond mere numbers, however, the agency could follow the European practice of providing a written explanation of its decision on each transaction reviewed. These decisions may be published, both in Chinese, and to promote more understanding and compliance, in translation to English and the language of the principal place of business of any foreign firm participating in the acquisition.

VI. Conclusion

It has been clear for some time that international organizations - OECD, WTO, ICN, the United Nations - advocate strong national competition policy and use the substance and deployment of national antitrust law as an indicator of a state’s place in the world.28 Competition policy involves issues well beyond mergers, covering in addition hard core horizontal cartels, benign horizontal agreements, vertical distribution restraints, and monopolization or abuse of a dominant market position. With the adoption of the AML, China joined a growing number of jurisdictions that have adopted antitrust laws of general application, but the test of the AML, however, will be in its application. The challenges of facing new enforcement agencies are vast: organizational, establishing enforcement procedures that comport with the existing Chinese legal system, allocating appropriate functions to the three entities and coordinating process and substance, and, finally but most important, setting policies and priorities. Given the choice of where to begin enforcement, an agency should weigh the destructiveness of the restraint, importance and ability to enforce, and its own proficiency or readiness to enforce the particular category of violations.

On a relative scale of harm, there is overwhelming consensus that horizontal cartels, which frequently cross national borders, are at the top of the list.29 Beyond hard core horizontal cartels, however, jurisdictions can and do differ in their approaches to other cooperative behavior, single firm conduct, and concentrations. A discontinuity has been developing on the effect of vertical restraints, with the United States taking an increasingly benign view,30 and the European Union,31 Japan,32 and others, characterizing some vertical price agreements as hard core, non-exemptible restraints.33 Important differences in the legal framework34 have led different jurisdictions to adopt inconsistent standards on the threshold of illegality for dominance or monopolization. Accordingly, any state embarking on a competition enforcement project would be advised to consider priorities and establish a hierarchy of enforcement goals.

China chose to promulgate its first set of AML Guidelines on the subject of pre-merger notification. On the one hand, since the AML itself requires pre-merger notification but does not provide sufficient information to comply, Guidelines are needed. On the other hand, the Commission or Agency could have paced its enforcement of concentrations. The organizational structure of three entities with separate responsibilities under the AML may complicate the priority-setting process and set up incentives for maximum activity by each as it competes for position. Additionally, given China’s historic rapid economic growth and pace of mergers, including foreign investments, there may have been a felt need to assert enforcement power in this arena early.

Retrospectively, the experience of the AML and Guideline process has revealed notable receptivity to international commentary on the substance and procedures of merger review. The now-adopted Notification Guidelines went through several public drafts and comments were affirmatively solicited from “all sectors of society” including domestic and foreign scholars and lawyers.35 Even more important, some of the amendments in the second draft are consistent with some of the comments filed by foreign counsel. Indeed the Solicitation of Comment refers to, and justifies some of the proposed amendments, based on global consensus of antitrust enforcement agencies worldwide.36

In a different system, reviewing proposed mergers, including pre-merger notification, may not be an obvious first step for a new competition agency implementing a new antitrust law. However, the enforcement mechanism in China will involve three different government ministries, each responsible for enforcing different segments of the AML. The SAIC, the State Administration of Industry and Commerce, will be responsible for enforcing the provisions against abuse of dominant positions, the NDRC, National Development and Reform Commission, will be entrusted with anti-cartel enforcement, and MOFCOMM, the Ministry of Commerce, will have jurisdiction over the merger review provisions of the AML.37

MOFCOM has already begun to issue additional draft Guidelines and review proposed mergers.38 Emerging from a lengthy drafting process, the operative agencies appear to be movingwith alacrity. Going forward, clarity, transparency and predictability would be recommended in the refinement of the notification procedures and promulgation of substantive merger standards. The AML is indeterminate and judicial interpretation is unavailable, so a clear articulation of the appropriate methodology and controlling legal standard is an unfinished project.

Finally, it must be observed that the process has been marked by impressive transparency and consideration of views from parties that will be affected by the merger review process. Viewing the various official drafts and public comments suggests that some of the recommendations were taken on board. Additionally, the solicitation itself refers to the consensus-based international benchmarks of the ICN and asserts consistency with international standards. The application of the AML, Notification Guidelines and additional Guidelines continues to be a work in progress.39


1Professor of Law, Pennsylvania State University, Dickinson Law School. J.D. Vanderbilt Law School, B.A. Wellesley College. This article was completed during a sabbatical at the University of International Business and Economics in Beijing, China on a Fulbright fellowship. I am grateful to Professors Huang Yong, Li Richean, and the other faculty and fellows of the UIBE Competition Centre, Prof. Wang Xioaye, and Prof. Zhang Xinzhu of the Chinese Academy of Social Sciences (CASS), Lester Ross of WilmerHale, Michael Han of Freshfields both in Beijing, and Vanessa Yanhua Zhang of LECG Consulting for their helpful comments and information.

2See generally, The OECD, founded in 1961, describes itself as a membership organization of 30 nations dedicated to collecting economic information, and supporting economic growth, employment, improved living standards, trade and development. With respect to antitrust principles, the organization states: “Well-designed competition law, effective law enforcement and competition-based economic reform promote increased efficiency,
economic growth and employment for the benefit of all. OECD work on competition law and policy actively encourages decision-makers in government to tackle anti-competitive practices and regulations and promotes market-oriented reform throughout the world.”,3373,en_2649_37463_1_1_1_1_37463,00.html (Sept. 4, 2008).

3The United Nations Conference on Trade and Development (UNCTAD) includes research and technical assistance in the fields of competition and consumer protection in its programs of economic development. See generally, The antitrust activities include:
UNCTAD provides competition authorities from developing countries and economies in transition with a development-focused intergovernmental forum for addressing practical competition law and policy issues. Every year, UNCTAD hosts the Intergovernmental Group of Experts on Competition Law and Policy for consultations on competition issues of common concern to member States and informal exchange of experiences and best practices, including a Voluntary Peer Review of Competition Law and Policy. UNCTAD is also engaged in technical cooperation with countries seeking capacity-building and technical assistance in formulating and/or effectively enforcing their competition law.
UNCTAD has developed a Voluntary Peer Review mechanism as part of its technical cooperation activities. UNCTAD is a depository of international competition legislations, the Model Law on Competition and the United Nations Set of Principles on Competition.

5 The World Trade Organization first raised competition policy in 1996 in connection with the Singapore Ministerial Conference and established a working group to assess the relationship of trade and competition policy. The working group considered issues including capacity building support for developing countries’ competition enforcement, fundamental competition principles and international cooperation. Work proceeded until the Cancun Ministerial Conference (2003), when no consensus was reached on issues including competition and the General Council decided in the July 2004 Package (adopted August 1, 2004) that, with respect to:
“Relationship between Trade and Investment, Interaction between Trade and Competition Policy and Transparency in Government Procurement: the Council agrees that these issues, mentioned in the Doha Ministerial Declaration in paragraphs 20-22, 23-25 and 26 respectively, will not form part of the Work Programme set out in that Declaration and therefore no work towards negotiations on any of these issues will take place within the WTO during the Doha Round.

6China passed the Anti-monopoly Law (AML), the first comprehensive antitrust law of general application, on August 31, 2007, effective as of August 1, 2008. Anti-Monopoly Law of the People’s Republic of China (promulgated by the Standing Committee of the National People’s Congress on Aug. 30, 2007, effective Aug. 1, 2008) [hereinafter AML],, attached as Appendix A.

7For a discussion of antitrust analysis of horizontal agreements, see generally, U.S. Department of Justice and the Federal Trade Commission, Horizontal Merger Guidelines (issued April 2, 1992, revised April 8, 1997) [hereinafter US DOJ/FTC Horizontal Merger Guidelines].

8See, e.g., Scott D. Hammond, Recent Developments, Trends and Milestones in the Antitrust Division’s Criminal Enforcement Program (56th Annual Spring Meeting, ABA Section of Antitrust Law, March 26, 2008). Hard core cartels are frequently prosecuted criminally by jurisdictions that have criminal enforcement power including the United States. Eleven criminal defendants were fined $100 million or more between 1996 and 2007 (Hammond at 12), and more than 150 individuals since 2000 have completed or are in the process of serving terms of imprisonment (Hammond at 4) in connection with criminal antitrust prosecutions.

9See, e.g., Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 2 (1979); California Dental Ass’n v. FTC, 526 U.S. 756 (1999).

10See, e.g., Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007).

11See, e.g., Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).

12See, e.g., Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).

13See., e.g., Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004).

14See., e.g., H.J. Heinz Co. v. FTC, 246 F.3d 708 (D.C. Cir. 2001); Staples, Inc. v. FTC, 970 F. Supp. 1066 (D.D.C. 1997).

15See., e.g., ICN Working Group on Cartels, Defining Hard Core Cartel Conduct: Effective Institutions, Effective Penalties (ICN 4th Annual Conference, Bonn, Germany, June 6 -8, 2005).

16Compare, e.g., Leegin, supra note 10, with Commission Regulation 2790/1999, O.J. 1999, L.336/21, On the Application of Article 81(3) of the Treaty to Categories of Vertical Agreements and Concerted Practices (“Article 4. The exemption provided for in Article 2 shall not apply to vertical agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object: (a) the restriction of the buyer’s ability to determine its sale price, without prejudice to the possibility of the supplier’s imposing a maximum sale price or recommending a sale price, provided that they do not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties . . . .”).

17Compare E.I. duPont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir. 1984) (oligopoly behavior not an unfair method of competition under FTC Act §5 where no agreement or conspiracy was found) with Compagnie Maritime Belge Transports SA v. Comm’n, Cases C-395/96P and C-396/96P, 2000 E.C.R. I-1365, ¶¶ 36, 42, 48 (discussing collective dominance); and DG competition Discussion Paper on Application of Article 82 of the Treaty to Exclusionary Abuses (Dec. 2005) (“For collective dominance to exist under Article 82, two or more undertakings must from an economic point of view present themselves or act together on a particular market as a collective entity . . . the existence of an agreement or of other links in law is not indispensable to a finding of a collective dominant position . . . Undertakings in oligopolistic markets may sometimes be able to raise prices substantially above the competitive level without having recourse to any explicit agreement or concerted practice . . . Indeed, they may be able to co-ordinate their behavior on the market by observing and reacting to each other’s behavior.”).

18Compare U.S. v. Microsoft Corp., 253 F.3d 34 (D.C. Cir.) (cert. denied 534 U.S. 952) (2001) with Case T-201/04, Microsoft Corp. v. Comm’n, available at (Judgment of the Court of First Instance, Sept. 17, 2007).

19FTC v. Staples, Inc., 970 F. Supp. 1066, 1091 (D.C. Cir. 1991) (“The strong public interest in effective enforcement of the antitrust laws weighs heavily in favor of an injunction in this case, as does the need to preserve meaningful relief following a full administrative trial on the merits. “Unscrambling the eggs” after the fact is not a realistic option in this case... the Court finds that it is extremely unlikely, if the Court denied the plaintiff's motion and the merger were to go through, that the merger could be effectively undone and the companies divided if the agency later found that the merger violated the antitrust laws.”).

20A detailed comparative analysis of the merger laws of selected jurisdictions follows in a companion article.

21Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (promulgated Aug. 8. 2006, effective Sept. 8, 2007)[hereinafter M&A Filing Guidelines], available at and attached as Appendix B.

22Lieberthal, supra note ___ at 127, describing the reform era beginning in the late 1970s with Deng Xiaoping’s policies and the third plenary session of the eleventh central committee ofthe CCP.


24The Herfindahl-Hirschmann Index is the standard measure of market power. ...

25SSNIP is used by the US DOJ/FTC Horizontal Merger Guidelines, supra note 7, as the test for a relevant market. The relevant inquiry is whether, in the instance of a small but significant and non-transitory increase in prices, approximately 5% for the foreseeable future (SSNIP), the buyer would turn to another substitute product. Any acceptable substitutes would be added to the relevant market definition and the test would be repeated until the buyer accepted no more substitutes.

26AML art. 1.

27National Ass’n of Attorneys General, Horizontal Merger Guidelines 9 (March 30, 1993). The methodology for defining relevant product markets is stated as follows: “The Attorneys General will determine the customers who purchase the products or services ("products") of the merging firms. Each product produced in common by the merging parties will constitute a provisional product market. However, if a market is incorrectly defined too narrowly, the merger may appear to be not horizontal when there may be a horizontal anticompetitive effect in a broader market. In short, the provisional product market will be expanded to include suitable substitutes for the product which are comparably priced. A comparably priced substitute will be deemed suitable and thereby expand the product market definition if, and only if, considered suitable by customers accounting for seventy-five percent of the purchases.

Actual substitution by customers in the past will presumptively establish that a product is considered a suitable substitute for the provisionally defined product. However, other evidence offered by the parties probative of the assertion that customers deem a product to be a suitable substitute will also be considered.”

28 ___ and accompanying text

29Cf Jesse Markham, supra note ----.

30Compare GTE Sylvania; Dr. Miles Medical and U.S. v. Colgate with Kahn and Leegin.

31Article 4(a) of Regulation 2790/1999, identifies resale price maintenance as a hard core restraint, 1999 O.J., L. 336/21. See Cases 56, 58/64, Consten and Grundig v. Comm’n, 1966 E.C.R. 299.

32Japan Antimonopoly Act §§ 2(9), 19, 23(2) declares that vertical minimum price fixing is unlawful if it has the tendency to hinder competition without a justification, unless exempted by the JFTC. Applied, the agency has taken a per se rather than broad-ranging rule of reason approach. Mitsuo Matsushita, The Antimonopoly of Japan 191 (Institute for Int’l Economics).

33Other ICN members - Indonesia, India and South Africa on dominant buyer power.

34Compare, for example, the US rule on monopoly, requiring market shares of at least 70% for illegality, with EU standards on abuse of dominance, which have, historically, raised competitive concerns at significantly lower market shares, including, rarely, market shares under 50%. Cite.

352008 Solicitation of Comments, supra, note —.

36The Chinese AML was not yet effective as of the ICN Spring 2008 meeting in Kyoto and neither the Chinese Antimonopoly Commission nor Enforcement Agency were members of the International Competition Network, which is limited to government antitrust enforcement agencies. However, a Professor of Law at CASS attended and made a presentation on the AML. It should be noted that the ICN members are the national agencies responsible for enforcing the relevant antitrust laws, not the respective sovereign states, so there are a variety of precedents that would enable the Chinese Antimonopoly Commission, Enforcement Agency or other relevant agencies to participate in ICN. For example, the State Council of the People’s Republic of China, Taiwan Affairs Office:

“On the basis of the principle of one China, the Chinese Government has made arrangements for Taiwan's participation in some inter-governmental international organizations which accept regional membership in an agreeable and acceptable way according to the nature, regulations and actual conditions of these international organizations. As a region of China, Taiwan has participated in the Asian Development Bank (ADB) and the Asia-Pacific Economic Co-operation (APEC), respectively, under the names ''Taipei, China" and "Chinese Taipei." In September 1992, the chairman of the council of the predecessor of the World Trade Organization (WTO), the General Agreement on Tariffs and Trade (GATT), stated that Taiwan may participate in this organization as "a separate Taiwan-Penghu-Jinmen-Mazu tariff zone" (abbreviated as Chinese Taipei) after the PRC's entry into GATT. The WTO should persist in the principle defined in the afore-said statement when examining the acceptance of Taiwan's entry into the organization. This is only an ad hoc arrangement and cannot constitute a model applicable to other intergovernmental international organizations or international gatherings.” Taiwan Affairs Office of the State Council,

37H. Stephen Harris and Keith D. Shugarman, Interview with Shang Ming, Director General of the Anti-Monopoly Bureau Under the Ministry of Commerce of the People’s Republic of China, Feb. 2009 The Antitrust Source 1, available at, Zhu Zhongliang, Challenges and Opportunities—Implementation of China’s Anti-Monopoly Law, ABA Int’l Law Section Spring Meeting (New York, New York, April 4, 2008).

38Id. Since its inception, MOFCOM reviewed two proposed transactions: InBev N.V./S/A. - Anheuser-Busch Co. And Coca Cola Co. - China Huiyuan Juice Group Ltd., approving the former with additional commitments and rejecting the latter.

39Other draft guidelines were issued after promulgation of the Notification Guidelines and are pending. These include Guidelines for Definition of Relevant market (Draft) (Jan. 5, 2009), Provisional Measures on the Review of Concentrations Between Undertakings, Provisional Measures on the Collection of Evidence for Suspected Monopolistic Concentrations Between Undertakings Not Reaching the Notification Thresholds, Provisional Measures on the Investigation and Handling of Concentrations Between Undertakings Not Notified in Accordance
with the Law, and Provisional Measures on the Notification of Concentrations Between Undertakings.

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