This article was written by Liu Cheng (partner), Simon Holmes (European Head of Competition, Trade & Regulatory) and Michael Reiss (managing associate)
Chinese State-owned enterprises (SOEs) acquiring businesses or entering into joint ventures with other parties may unexpectedly trigger an EU merger filing. This was clarified by the European Commission’s decision clearing the UK joint venture between China General Nuclear Power Corporation (CGN) and Électricité de France (EDF), which was published on 26 April 2016.
The important message for Chinese SOEs is as follows: in deciding whether the Commission has jurisdiction to review a transaction and in its competitive assessment, the Commission is likely to take into account not only the Chinese SOE directly involved in the transaction, but also the turnover and activities of other Chinese SOEs.
This makes it easier for transactions involving Chinese SOEs to trigger the EU merger control regime. It also means that the information they will need to provide to the Commission is likely to be significant, resulting in longer pre-notification discussions (or, if not done, a greater risk of transactions being referred to a longer phase 2 investigation).
Transactions requiring an EU filing must be cleared by the Commission before they can be implemented. The Commission has fined companies in the past for failing to notify – even where there were ultimately no competition concerns. Fines can be up to 10% of a notifying party’s global group turnover.
There are two steps in the EU merger control process where the Commission’s inclusion of other SOEs – not party to the transaction – can be crucial: jurisdiction and substantive assessment.
First, there is the initial question of whether the Commission has jurisdiction to look at a transaction at all. Amongst other things, this depends on each party to the transaction having sufficient sales (“turnover”) in the EU. Typically the parties to a transaction are the acquirer and the target or the two parents in the case of a joint venture. Where the parties’ combined global turnover is over EUR 5,000 million, then each party must have over EUR 250 million turnover in the EU to trigger a filing. Alternatively, where the parties’ combined global turnover is at least EUR 2,500 million, then each party must have at least EUR 100 million turnover in the EU (and the parties must have a combined turnover of over EUR 100 million in at least three EU Member States in which they also individually have over EUR 25 million).
In recent cases involving Chinese SOEs, the Chinese SOE in question had sufficient EU turnover by itself. For example, when the Commission reviewed the acquisition of Pirelli by China National Tyre & Rubber Co. (a wholly owned subsidiary of China National Chemical Corporation), it simply noted, “For the purposes of establishing jurisdiction, there is no need to conclude on whether the turnover of other companies owned by the Chinese State and under the supervision of the Central SASAC should be taken into account, since the turnover thresholds are met on the basis of ChemChina's and Pirelli's turnovers alone.” Therefore, the Commission did not have to make a clear decision on this issue.
In the EDF / CGN / NNB Group of companies case, by contrast, the Commission actually had to decide on this question. In the EDF / CGN / NNB Group of companies case, CGN did not have sufficient turnover in the EU by itself. The Commission therefore analysed this SOE’s autonomy from the Chinese State. It concluded that, at least as regards SOEs controlled by Central SASAC active in the energy industry, the turnover of all such companies should be aggregated for the purposes of EU jurisdiction. It focused on energy industry SOEs, as considering these would allocate sufficient turnover to trigger the EU jurisdiction, without the need to consider other SOEs. However, the Commission would likely widen the approach to SOEs in other sectors where necessary in future cases. It also left open the question in this case whether local SASACs (and the SOEs controlled by them) should also be aggregated, as sufficient turnover had already been established without resolving this question.
A similar approach may implicitly have been taken by the Commission in earlier cases such as CNOOC/Nexen. However, that case was cleared under the simplified procedure by way of a short form decision (running to just two pages and three paragraphs), and therefore the Commission’s exact approach and reasoning was not made clear.
Secondly, the assessment of whether a transaction is liable to raise competition concerns, may also be affected by whether the activities of not only the directly involved SOE should be taken into account, but also those of all Central SASAC (or even local SASAC) owned SOEs.
The Commission’s now standard approach is to take into account at least all Central SASAC owned SOEs. This was the approach taken in EDF / CGN / NNB Group of companies and earlier cases, including CNRC / Pirelli and DSM / SINOCHEM / JV.
The Commission is likely to take this precautionary approach in future cases, leaving open the question until eventually the Commission needs to decide the point where it affects the outcome of the case.
Implications for Chinese SOEs
These EU merger cases mean that even Chinese SOEs with little or no sales in the EU need to consider carefully whether an EU filing is required. Provided the other party to the transaction (e.g. the target in the case of an acquisition or a partner in the case of a JV) has sufficient EU turnover, the transaction may trigger a filing. Please note that this could be the case even in scenarios where a filing is unexpected, such as where:
- a Chinese SOE has little or no presence in the EU when acquiring a business there;
- a Chinese SOE enters into a JV with a non-European partner;
- a Chinese SOE enters into a JV where that JV will not be active at all in the EU; and/or
- a Chinese SOE and another party (even a non-European one) jointly acquire a target that has little or no presence in the EU.
As noted above, transactions requiring an EU filing must be cleared by the European Commission before they can be implemented or significant fines can be imposed. Not only can they be imposed but they almost certainly will be imposed if the Commission learns of them. This might be as a result of the deal being in the press; because the deal is notified to another competition authority (e.g. MOFCOM); or because the parties notify another deal to the Commission which refers (directly or indirectly) to the earlier un-notified deal.
The other implication is that Chinese SOEs notifying transactions will need to provide information not only about their own activities, but also about other Chinese SOEs in the same or related markets. Notified cases involving Chinese SOEs are therefore likely to require longer pre-notification discussions with the Commission (or, if this is not done, the risk of such cases being referred to a detailed phase 2 investigation will increase).
Chinese SOEs will therefore need to consider their future transactions carefully with their advisers before stepping ahead.
Editor’s note: This article was simultaneously published on Chinalawinsight.com
Case M.7850 - EDF / CGN / NNB Group of companies
Case M.7643 – CNRC/Pirelli, paragraph 7
Case M.7850 - EDF / CGN / NNB Group of companies, paragraph 49
Ibid., paragraph 50
Case M.6715 –CNOOC/Nexen.