International antitrust enforcement is becoming more complex as global M&A activity continues to reach record levels. Businesses should be prepared for higher burdens and closer scrutiny from authorities that are becoming increasingly sophisticated.
Vanessa Ip reports.
INCREASING INTERNATIONALIZATION has been a long-running theme in global antitrust enforcement. In Clifford Chance’s latest Global Antitrust Trends 2016 report, the firms says that trends in enforcement invariably create ever-increasing complexity, driven by factors including the emergence of civil and criminal enforcement, leniency regimes, greater cross-border co-operation between enforcement authorities, and the increased availability of damages for antitrust breaches.
Allen and Overy predicted in February 2016 in its Global Trends in Merger Control Enforcement report that more than €60 billion (US$62.6 billion) of deals were frustrated in 2015 as a result of antitrust concerns. The firm reported that a further 92 cases globally were subject to interference in the form of remedies, demonstrating the clear impact antitrust intervention can have on business.
According to Antoine Winckler, a partner at Cleary Gottlieb Steen & Hamilton in Brussels, “The increasingly global nature of transactions has further led to continued collaboration and co-ordination of [the EU regulator] with other antitrust agencies around the world.” As regulation increases and antitrust authorities become more sophisticated, companies need to be more stringent and reinforce their antitrust compliance regimes to avoid being caught by regulatory sanction and scrutiny.
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美国
UNITED STATES
US ANTITRUST authorities are tough on enforcement and heavy handed when it comes to fines. Clifford Chance reported that in 2015, the US Department of Justice (DOJ) issued US$3.6 billion worth of criminal penalties, nearly triple the amount in 2014.
According to US practitioners, one of the most significant developments in the past 12 months has been the increasingly aggressive approach to mergers being taken by the DOJ and the Federal Trade Commission (FTC).
Janet McDavid, a partner at Hogan Lovells in Washington DC, says US merger control authorities are becoming more litigious. “[There has been an] increased willingness of both the FTC and DOJ to litigate matters that cannot be resolved in a way they think is satisfactory,” she says. “As a result, both agencies now have multiple matters in litigation. Both agencies have been insisting that parties to merger investigations put substantial and meaningful remedy proposals on the table before the agency will start to discuss the proposed remedy. The agencies have a view of what is needed to resolve their concerns and will not waste time considering inadequate remedy proposals.”
In its Competition/Antitrust Global Market Outlook 2016 publication, Linklaters reported that FTC and DOJ policies on merger remedies have become so strict and demanding that merging parties may ultimately be forced to abandon their transactions in cases where “the economics no longer makes sense”. But Jonathan Jacobson, a partner at Wilson Sonsini Goodrich & Rosati (WSGR) in New York, believes that increased merger enforcement will have a minimal but positive effect on foreign investment, “at least to the degree that foreign investors are buying US companies they compete against”.
Linklaters also reported a huge increase in US cartel fines imposed by the DOJ, which reached approximately US$2.85 billion in 2015 versus US$860 million in 2014. The firm says that the leap was largely a result of fines imposed by the DOJ investigation into foreign exchange trading, which accounted for 90% of total fines.
The DOJ continues to prosecute individuals involved in corporate misconduct. In 2015, the DOJ brought criminal charges against 66 individuals, up from 44 in the previous year.
A NEW PRESIDENT
Asked whether the new US administration will have an impact on the American antitrust regime, Jacobson says president-elect Donald Trump’s future appointments to the Supreme Court, and lower courts, will also mean reduced scope for antitrust, both agency and private. “Having said that, I suspect the changes will be relatively modest, given the broad bipartisan consensus in favour of sound antitrust enforcement,” he says.
McDavid hopes the Trump administration will continue the bipartisan consensus that antitrust enforcement decisions must be rooted in the basic principles that consumer welfare is fundamental. “Antitrust enforcement is not a tool of industrial policy, and the American antitrust agencies should be at the vanguard of international convergence efforts,” she says.
欧盟
EUROPEAN UNION
THERE HAVE BEEN a number of significant developments in relation to antitrust laws and enforcement in the EU in the past year. With regard to cartels, while the European Commission (EC) has continued to enforce leniency applications, it also imposed the largest cartel fines to date, totalling €2.93 billion.
May Lyn Yuen, a senior associate at Hogan Lovells in Brussels, says: “The EC found that [from 1997 to 2011], truck manufacturers had been co-ordinating prices, and the timing and passing on of costs, for the introduction of diesel emission technologies. In 2016, the EC also concluded its investigation into 14 liner shipping companies in the price signalling case. The EC did not conclude that there was an infringement of EU competition rules in this case, but expressed concern that the announcement of future price increases could be interpreted as signals of future market conduct and lead to a decrease in competition.”
Merger notifications have also reached a record high. According to Winckler, this is due to a high level of M&A activity in 2015, which resulted in the highest number of merger notifications to the EC since 2008. “In the period between January and October this year, the EC received 276 notifications, of which it has conditionally cleared 17 and prohibited one merger [the proposed acquisition of O2 by Hutchison],” he says. “So far, five cases have been withdrawn by the notifying parties. This provides an intervention rate of 6.5%, which is slightly higher than the corresponding rate of last year. In 2015, the commission imposed remedies in 20 cases, or in 5.9% of all notified cases, but did not issue any prohibition decisions. In total, eight cases were withdrawn in 2015.”
While merger control will often be an important consideration for high-profile investments and M&A, Fiona Carlin, a partner at Baker McKenzie in Brussels, warns that certain features of European merger control laws can mean that a mandatory merger filing is required in less obvious situations.
For example, “The EC recently adopted an approach that has potentially far-reaching implications for how transactions involving state-owned enterprises [SOEs] should be assessed for the purposes of EU merger control,” she says. “When assessing the planned joint venture between China General Nuclear Power Corporation (CGN) and EDF, the commission controversially considered that the activities and turnover of other SOEs active in the same business sectors, ie., energy and nuclear sectors, controlled by China’s state-owned Assets Supervision and Administrative Commission (SASAC) were attributable to CGN for the purposes of its review.”
In this case, “CGN’s turnover in Europe was not enough on its own to trigger an EC filing, but only once the turnover of other relevant SOEs were considered,” explains Alastair Mordaunt, partner and head of Hong Kong competition practice at Freshfields Bruckhaus Deringer. “The takeaway for SOEs is that they need to consider both the turnover and activities of other SOEs in their sector when assessing, first, whether their acquisition triggers an EU filing, and second, the impact on competition arising from it. From a practical standpoint, this adds further burden on what is already a relatively difficult and often time-consuming information gathering process.
“Other less obvious situations requiring EU merger approval involve minority investments which can be captured where control is acquired, for example, through negative control over strategic rights such as the business plan, budget or appointment/removal of senior management,” adds Mordaunt. “This is something that Chinese investors are sometimes not aware of.”
In the antitrust area, foreign investors are also not often sensitive to areas of antitrust enforcement that are different from the US system, says Winckler. “In particular, EU enforcement policy is often viewed as more complex and rigorous in areas such as ‘vertical’ contracts, i.e., distribution [particularly in the online arena], or abuse of dominance. Obviously the commission’s tight control over state subsidies granted by national governments is also specific to the EU.
“Interestingly, with no foreign investment regulations at the EU level, European companies have remained attractive to foreign investors, including those from China. Chinese outbound investment in Europe has continued on record high levels, resulting in an increasing number of transactions involving Chinese entities, including SOEs, reviewed by the EC. Notably, following the German government’s recent reopening of the review of the acquisition of Aixtron, a semi-conductor equipment supplier, by Grand Chip Investment Fund, a Chinese investor, there has been an initiative to call for a Europe-wide safeguard clause to stop foreign takeovers of firms where technology is deemed strategic for the future economic success of the region.”
The EDF/CGN decision established an important precedent in the energy sector, which may have a sector-wide impact. Other sectors that have seen increased activity by antitrust regulators worldwide include the agro-chemical sector and the telecoms sector. “Transactions currently under review in the agro-chemical sector include the proposed merger between Dow and DuPont, and the proposed acquisition by Chinese SOE ChemChina of Syngenta,” says Winckler. “In addition, Bayer’s proposed acquisition of Monsanto is likely to be notified to the EC in the near future.”
Yuen adds: “There are currently about 20 publicly known antitrust cases that the EC is actively pursuing. These cases involve a broad range of industry sectors including automotive, transport, consumer goods, financial services, electronics, natural resources, telecommunications and information technology. The EC has also conducted inquiries into the e-commerce, pharmaceuticals and energy sectors. It is therefore difficult to single out one or several industry sectors that have been most affected by EU competition enforcement. The lesson is that all investors should be prepared for antitrust scrutiny, regardless of the sector that they are involved in.”
IMPACT OF BREXIT
A significant development, of which the ramifications are not yet fully known, was the UK electorate’s referendum vote earlier this year to leave the EU. For Chinese investors, Carlin observes that for now, the same law applies.
“Chinese and other international companies doing business in the UK will still be obliged to comply with UK competition law, which is largely substantively the same as EU competition law,” she says.
“International companies will also still be subject to EU competition law to the extent that their activities have an effect on trade between EU member states. Businesses will therefore need to continue to ensure that their agreements and practices are EU and UK competition law-compliant.”
Carlin adds that the UK Government will be setting out a new industrial strategy, which may have an impact on acquisitions of UK companies. At present, the government can only intervene in deals in limited circumstances where specific public interest considerations apply, but these considerations may play a greater role in the approval of acquisitions of UK companies in the future.
Carlin also predicts that merger procedures may become more expensive for Chinese investors undertaking major acquisitions of businesses in the EU. She says that once the UK withdraws from the EU, it will no longer be part of that “one-stop-shop”, thereby increasing the regulatory burden on companies.
中国
CHINA
CHINESE ANTITRUST AUTHORITIES have become increasingly sophisticated since the enactment of the Anti-Monopoly Law (AML) eight years ago. This year, antitrust authorities solicited opinions on six draft guidelines, including: (1) the Antitrust Guidelines on Prohibiting Abuses of Intellectual Property Rights; (2) the Antitrust Guidelines on Commitment by the Antitrust Investigation Target; (3) the Antitrust Guidelines for the Application of Lenient Treatment Rules in Horizontal Monopoly Agreement Cases; (4) the Antitrust Guidelines for Auto Sector; (5) the Antitrust Guidelines on the General Conditions and Procedure for Exemption of Monopoly Agreements; and (6) the Antitrust Guidelines on the Determination of Illegal Gains and Fines in Relation to Business Operators’ Monopolistic Conduct.
According to Huang Wei, a partner at Tian Yuan Law Firm in Beijing, the draft guidelines seek to clarify substantial antitrust laws and improve transparency.
Hazel Yin, a partner at King & Wood Mallesons in Beijing, says the guidelines are based on the AML “and are focused on areas where current laws and regulations provide only general principles or ‘catch all’ clauses”. She adds that the guidelines are expected to provide a basis for antitrust authorities to regulate more varieties of anti-competitive behaviour from different angles.
A recent example is the Tetra Pak case, where the State Administration of Industry and Commerce (SAIC) imposed its largest ever fine (about €91 million) for antitrust violations against the Swedish packaging giant.
According to Susan Ning, head of King & Wood Mallesons’ commercial and regulatory group in Beijing: “The AML contains catch-all clauses for each category of monopoly behaviour, for example, cartel, vertical restraint and abuse of dominance. Recently, the SAIC published its decision on the Tetra Pak case, where it defined Tetra Pak’s loyalty discount scheme as abusive conduct under the catch-all clause.
“This is the first case in which the AML enforcement authority invoked the catch-all clause and it definitely will not be the last. Therefore, it is advisable that companies pay attention to behaviours that are not specifically listed in the AML, but have been identified by competition authorities as monopolistic in other jurisdictions such as the EU and US.”
Although the guidelines have not officially been released, Huang says they provide valuable insights into the National Development and Reform Commission’s (NDRC) enforcement approaches, as well as forecasts on future antitrust enforcement developments. “Among these guidelines, we think the antitrust guidelines for the auto sector and the antitrust guidelines on prohibiting abuses of intellectual property rights [IPR] are of greater importance to foreign investors,” he says. “The former provides in-depth guidance on compliance risks relating to vertical monopoly agreements, which is the most frequently fined conduct by the NDRC. The latter provides in-depth guidance on the IPR-related activities, which is one of the most frequently challenged questions faced by foreign companies.”
Kevin Wang, a partner at CMS China in Shanghai agrees. “The guidelines [for the auto sector] shed light on some previous uncertainties on recognition of anti-competitive behaviour, and will cause the players in the supply, distribution and aftermarket chains of the motor vehicle sector to review and adjust their current market practices to adapt to such antitrust guidelines,” he says. “Also, the principles and positions adopted in the draft guidelines may be taken as reference when assessing behaviours such as restrictions on territory and customer, or price suggestions in other sectors.”
IP is also a hot topic. “In China there are more and more discussions about e-commerce, online-offline sales, geo-restraints of digital content, as well as on big data,” says Ning. “Although based on publicly available information, there has not yet been any antitrust investigation against internet companies in China, and it can be expected that antitrust compliance will become more and more important in the internet industry in the coming years. In that regard, internet companies are advised to bear antitrust risks in mind and reinforce their compliance programmes.”
Antitrust enforcement is developing at a rapid pace in China. Clifford Chance reported that in 2015, Chinese antitrust fines reached RMB7 billion (US$1 billion) representing a year-on-year increase of 400%.
According to Huang, 2016 was a very active year for the NDRC. “It has fined seven pharmaceutical companies in two cases, both relating to horizontal monopoly agreements, and fined a leading domestic home appliance company for its vertical monopoly agreement conduct [via the Shanghai Municipal Price Bureau],” he says. “As we learned, the NDRC will further publish two sanction decisions against a medical equipment company and an auto company, respectively, for conducting vertical monopoly agreement practices.”
Zhan Hao, the managing partner at AnJie Law Firm in Beijing, says: “Generally speaking, for China’s antitrust public enforcement, industries that are closely related to consumer welfare bear more risk of becoming a priority for enforcement. Currently, the antitrust enforcement priorities rest with the pharmaceutical and medical device, auto, shipping, household appliances, insurance and public utility industries.”
With regard to private enforcement, Zhan says there has been an increasing number of high-profile antitrust private litigation cases. “The issues involved in the disputes have become more diversified than before, including, but not limited to, the essential facility doctrine, injunction and royalty calculation for Standard Essential Patents (SEPs), de facto SEPs, refusal to deal, and horizontal monopoly agreements.”
In terms of antitrust enforcement in China, practitioners agree that foreign investors tend to underestimate the potential risk of private antitrust litigation in the country and do not devote enough attention to familiarizing themselves with the investigation procedures adopted by the NDRC and the SAIC.
Huang observes that foreign investors may fail to notice antitrust risks in respect of vertical non-price-related monopoly agreements, accurately evaluate their market power, and devote enough attention to antitrust risk related to miscellaneous abusive activities.
“The antitrust enforcement agencies in China have a right to find market dominance abuse activities not explicitly prohibited by the AML,” he says. “For example, in the Tetra Pak case, the SAIC found loyalty rebates could constitute antitrust violations even though the AML does not explicitly prohibit it. Therefore, in designing a new business arrangement that tends to exclude or restrict competition, especially those that have been regulated in other jurisdictions, a firm with market power shall be especially cautious.”
For transactions that meet merger control thresholds in China as well as other jurisdictions, Yin says it is important for business operators to harmonize their filings in each jurisdiction. “This is becoming increasingly challenging as the Ministry of Commerce [MOFCOM], the supervising authority for merger control in China, is becoming more proactive in its enforcement as it accumulates more and more experience. Particularly in certain complex cases that have a significant impact in China, MOFCOM has issued decisions that differ from those made in other jurisdictions. MOFCOM may review cases at a different speed, impose remedies on cases approved unconditionally in other jurisdictions, or choose different remedies when it deems necessary. It is therefore advisable for business operators to take MOFCOM’s position into account in the early stages of a transaction.”
Although China is at a relatively early stage in its antitrust law development, it is expected that Chinese antitrust authorities will continue to accelerate the pace of enforcement. According to Ning, the impact of this on companies is that compliance costs of business operators will need to be increased in order to cope with the evolving antitrust regime. “In the short term, companies may feel the pressure of increased compliance costs,” she says. “In the long term, however, they will benefit from an improvement of the legal environment in China.”
In case of investigations, “foreign investors need to understand the importance of communication with the Chinese anti-monopoly enforcement authorities and utilize the local expertise to overcome the cultural differences”, says Wang, from CMS China. But the same goes for Chinese businesses investing overseas.
In general, co-operation and communication between antitrust enforcement agencies in different jurisdictions are increasing, posing more challenge to companies’ compliance work, says Zhan. Now is the time, says Yin, for foreign investors to re-assess antitrust risks globally and strengthen their compliance structures to account for this.
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