With reference to the merger control law and practice of the United States, the European Union and the People’s Republic of China, critically assess the extent to which the key definitions of transactions covered by the regimes are sufficiently flexible and broad so as to capture all potential anti-competitive transactions which are NOT covered by rules relating to agreements and to single firm conduct.

Weight: 30%
Length: 4000 words
Due: 30 May 2021 AEST/AEDT
Assignment:

With reference to the merger control law and practice of the United States, the European Union and the People’s Republic of China, critically assess the extent to which the key definitions of transactions covered by the regimes are sufficiently flexible and broad so as to capture all potential anti-competitive transactions which are NOT covered by rules relating to agreements and to single firm conduct.

In your answer to this question, you should ensure you consider whether the relevant laws are sufficiently sensitive to the difficulties that may arise through the acquisitions of minority shareholdings, joint ventures and mergers ‘by contract’.

Do not in this essay discuss in any detail questions relating to jurisdictional/notification thresholds, or substantive analyses of mergers (including horizontal and vertical effects). Illustrate your answer with examples drawn from enforcement practice in the three regimes in so far as it is reasonable to do so.

Introduction – 500 Words

Body – 3000 Words

History of Merger Control – USA

The anti-trust policy in the United States of America (U.S.) has been enacted for over 100 years. Over the years, it has been considered as one of the toughest regimes in the world. With regards to merger law and control, the U.S enacted and passed Sections 1 and 2 of the Sherman Antitrust Act (Sherman Act) back in 1890. However current merger review is controlled by section 7 of the Clayton Antitrust Act of 1914 (Clayton Act). This act deals with and addresses mergers as a form of threat to competition.

Sherman Act

The Sherman Act was originally adopted to control competitive markets and respond to the use of trusts. Section was created to focus on preventing transactions that are per se illegal and those that on the face of it do not appear to infringe on the Sherman Act. Section 1 does not allow the use of contracts or what it deems conspiracies that may monopolize trade requiring collaboration. Section 2 of the Act focuses on preventing mergers that monopolize the market and as such its focus is on the end of the merger.

Clayton Act

Section 7 of the Clayton Act prevents any merger that has the effect of substantially lessening competition or allows the creation of a monopoly. Under the Act, the plaintiff does not have to prove that the merger affects competition.

Federal Trade Commission Act

The Federal Trade Commission (FTC) originally was created to assist the Sherman and Clayton Acts with preventing unfair practices by competitors in competitive markets. The FTC Act aimed at the anti-competitive conduct prior to and after it existence.

The Hart-Scott-Rodino Antitrust Improvement Act

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 was created to close several loopholes in existing merger policies. Within the Hart Scott Rodino Act, is a pre-merger notification that requires almost all mergers are reported. For large mergers generally have to file notification with the FTC and Department of Justice (DOJ).

History of Merger Control – EU

Merger Regulation came into effect in 1990 when the EU introduced a new legal framework for review of mergers and acquisitions. This new framework also included all forms of concentration. The merger regulation was based on dismantling what they deemed internal frontiers. These were considered major corporate reorganization in the form of concentrations. Secondly, the focus was to ensure all mergers were dynamic enough to withstand the pressure of competition and improve growth and standard of living. Finally it make sure that reorganization did not damage competition.

History of Merger Control – PRC

Chinese merger control takes the form of the Chinese Anti-monopoly Law which was created in 2008. This law deal with merger control in China. In 2018, as part of institutional reform the Antimonopoly Bureau of the Ministry of Commerce (MOFCOM) was created. MOFCOM merged with the Anti-unfair Competition Bureau of the State Administration for Industry and Commerce (SAIC) and State Administration for Market Regulation (SAMR) was born. SAMR is now responsible for all merger control enforcement.

Merger Authorities

The main merger control authorities in the United States are the FTC and the Antitrust Division of the FTC. These agencies share jurisdiction for transactions. With regards to premerger obligations, both agencies will be notified and both may carry out investigation however only one agency will open up investigations into the particular merger.

Under the European Union (EU) law, which includes all member states as well as Iceland, Liechtenstein and Norway, a broad single principle applies for concentrations that meet specific judicial thresholds. The European Commission (EC) utilises the Directorate-General for Competition (DGCOMP) and the National Competition Authorities (NCA).

In China, the major merger authority within the anti-monopoly bureau is the State Administration for Market Regulations (SAMR) and they are responsible for enforcing merger control in China.

SAMR has the power to stop transactions which it deems to harm competition. It can also impose restrictions to limit the anti-competitive effects of transactions. No transactions can be implemented without express permission from SAMR. If individuals or firms attempt to implement notifiable concentrations or transactions without the permission of SAMR, the transaction will be halted, namely, shares or assets will be disposed of and SAMR may take other measures to restore pre-transaction status as well as issuing fines up to RMB 500,000. It is also worth noting that this limit is being considered to be increased.

Merger Law – Legislation

The main merger provision in the U.S is Section 7 of the Clayton Act which prohibits the acquisition of assets that may substantially lessen competition or create monopolies in the market. There is also provisions within the Sherman Act, under Section 1 which prohibits contracts, combinations and conspiracies. Section 2 prohibits monopolization and the conspiracy to monopolize.

In the EU, merger regulation (MR) lists the rules for notification and assessment of concentrations, transactions, judicial thresholds, notification requirements and assessment standards. The EC sets out five different guidelines to address assessment, which include Horizontal Mergers, Acceptable Remedies, Restrictions directly related, and necessary to concentrations and non-horizontal mergers.

Merger control law came in to effect in China on 1 August 2008. It is governed by Articles 20 to 31 of Chapter 4 of ‘Concentrations between Undertakings’ in the Anti Monopoly Law of China (AMLC). The guidelines state:
the Provisions of the State Council on the Notification Thresholds for Concentrations between Undertakings;
the Guidelines of the Anti-monopoly Commission of the State Council on Defining Relevant Markets;
the Guiding Opinions on Notifications of Concentrations between Undertakings;
the Measures for Review of Concentrations between Undertakings;
the Interim Provisions on Standards Applicable to Simple Cases of Concentrations between Undertakings; and
the Guiding Opinions on Simple Cases of Notifications of Concentration between Undertakings (for Trial Implementation).

INSERT ANALYSIS. Is the above broad enough to capture all conduct?

Merger Law – Transactions

Anti-trust laws in the U.S are not limited to any industry or transactions. Under Section 7 of the Clayton Act, any transaction that has the potential to lessen competition is able to be reviewed. A merger in the U.S for the purpose of substantive reach could potentially include any acquisition of assets, stock and shares of another individual. Under pre-merger obligations under the Hart-Scott-Rodino Act, a merger may include any acquisition of assets, voting securities and non-corporate interests. Under U.S law transactions you do not need to confer control to be identified. The acquisition of control is not an element of U.S merger control. Control means:

Either (i) holding 50 per cent of the outstanding voting securities of an issuer, or (ii) in the case of an unincorporated entity, having the right to 50 per cent or more of the profits of the entity, or having the right in the event of dissolution to 50 per cent or more of the assets of the entity; or
Having the contractual power presently to designate 50 per cent or more of the directors for-profit or non-for profit corporation.
In the EU, Transactions are ruled by the MR when they constitute a concentration which results in a change of control of an undertaking on a lasting basis. Within antitrust, the concept of undertaking covers every entity under control which is engaged in economic activity despite its legal status nor the way it was financed. The MR defines control as the possibility of exercising decisive influence and result from the ownership or right to use all or part of an undertakings assets.

In China, under article 20 of the AMLC, concentrations between undertakings that trigger the merger filing thresholds are subject to merger control law. The types of transactions include:

mergers of undertakings;
the acquisition of control over other undertakings through a share or asset transfer; and
the acquisition of control over other undertakings, or the ability to exert a decisive influence on other undertakings, through contracts or the like.

Article 20 of the AMLC provides that a concentration involves one business operator obtaining control or otherwise being able to exercise a decisive influence on another business operator. Article 3 of the Guiding Opinions on Notification of Concentrations between Undertakings (the Guiding Opinions) (2018 Revision) further clarifies that ‘control’ refers to sole control and joint control.

Article 3 of the Guiding Opinions provides as follows:

the purpose of the transactions and future plans
the equity structures and post-transaction equity changes
the items to vote and the voting mechanism of shareholders’ meetings, the business operators’ attendance rate and resolutions in the past
the structure and the voting mechanism of the board of directors and the board of super-visors
the appointment and dismissal of senior executives
the relationship between shareholders and directors of the acquired business operator, and whether there are votes by proxy or persons acting in concert, and
whether there is a significant commercial relationship or a cooperation agreement among the controlling business operators and other business operators.

INSERT ANALYSIS. Is the above broad enough to capture all conduct?

Joint Ventures

In the U.S joint ventures are subject to merger control where the joint venture involves acquisition of assets and voting securities or non-corporate interests. Profit joint ventures are covered by U.S merger law but not-for-profit ventures are exempt, but may still be reviewed if certain thresholds of the Hart-Scott-Rodino Act are met. Also to note that if the joint venture is as a result of a contractual relationship between parties, no contribution to the entities, transactions are not subject to merger review.

Joint ventures (JV) in EU are deemed to constitute a concentration if the joint venture will perform on a lasting basis all the functions of an economic entity. This is also relates to Greenfield operations. A JV is a fully functioning character if it operates on the market on a lasting basis. This function is not valid if it only takes over from its parents and doesn’t have its own market presence

An example of a judgement relating to a fully functioning joint venture was found in Austria Asphalt. This merger involved the 50% acquisition of Austria GmbH and Co OG which was owned by Teerag Asdag AG. Post transaction, Austria Asphalt would aquire the plant but the production was supplied to Teerag prior to the transaction. It would then be supplied to its parents jointly. As the transaction happened after, it was deemed that it was unlikely that it was an autonomous economic entity and therefore was not a full functioning JV.

The ECJ found that the wording of Article 3 of the EUMR was infact unclear. Article 3 (1)(b) states:

‘a change of control on a lasting basis results from the acquisition, by one or more undertakings, of direct or indirect control of the whole or parts of one or more other undertakings’

Article 3(4) states creation of a joint venture is a concentration within Article 3(1)(b) whereby “on a lasting basis all of the functions of an autonomous economic entity”.

In Austrian Asphalt, the transaction concerned the acquisition of joint control (on a lasting basis) by Austria Asphalt of an existing undertaking (i.e. the Murzzuschlag asphalt plant), but did not involve the creation of a joint venture with an autonomous market presence. As such, it was not clear whether Article 3(1)(b) or Article 3(4) prevailed in the circumstances and as such the ECJ held that the interpretation of Article 3 did not provide a clear answer.

Merger control law captures joint ventures if turnover thresholds are triggered. Article 4 of the Guiding Opinions states that to constitute a joint venture, it must have two undertakings under joint control. If there is only one undertaking control of the joint venture, it is not considered.

INSERT ANALYSIS. Is the above broad enough to capture all conduct?

Acquisitions of Minority Shareholdings

Under U.S Law any acquisition of a minority interest in an entity may be subject to either an FTC or DOJ review. Smaller and non-controlling stakes in issuers of voting securities may require HSR notification. If the acquisition is of a non-corporate interest, they will not be required to have an HSR notification.
Infringement of the Section 7 prohibition (i.e., the merger would substantially lessen competition) was found in the following cases:

Nemours & Co 353 US 586, 592 (1957).602-11 (1957): 23% stock acquisition breaches Section 7 of the Clayton Act;
Denver & Rio Grande 387US 485, 501-04 (1967): 20% stock acquisition warrants ICC assessment of anticompetitive effects under S 7);
American Crystal Co v Cuban-American Sugar Co 259 F2d 524 (1958): 23% stock acquisition infringes Section 7 of the Clayton Act;

According to Ypma et al, there is no correlation between degree of shareholding and the remedial action where similar levels of shareholding are founds in both categories. In American Crystal Co v Cuban-American Sugar Co, the possibility of Cuban Americans gaining control via board presentation and voting would end up making the acquisition at 23%, which would make it anticompetitive. They also point out that there is a lack of definition regarding scope relating to scope of investment within the Section 7 exemption.

In the EU, the acquisition of a minority shareholding in a company can amount to a concentration if the minority shareholder thereby acquires control of the company. In contrast, the acquisition of a minority shareholding not conferring control on the acquirer is not a concentration caught by the MR.

In 2019, the United Kingdom’s (UK) Competition and Markets Authority (CMA) cleared the minority acquisition of 16% shareholding in RooFoods Pty Ltd also known as the food delivery business Deliveroo, a competition to the well known food delivery UberEats. The acquisition would enable Amazon to have representation on the Deliveroo board. The CMA investigated the proposal and found the main areas of competition were the supply of online restaurants platforms in the UK and the supply of online grocery delivery services in the UK.

The major competition concerns were based on the lessening of competition by Amazon and Deliveroo, and that it would discourage Deliveroo from competition and Amazon would rely on Deliveroo for its presence in the market. The CMA cleared the acquisition on the basis that there would be sufficient competition from other companies such as UberEats and other online delivery services.

Minority shareholdings are not considered as a controlling stake. However, this issue is not clear and in some cases SAMR has reached the opposite conclusion. Jin gives the following examples:

In Mitsubishi’s proposed acquisition of a stake in Toyo Tire & Rubber (2018), the equity transferred represented 16.95% of the target. In GE Capital’s proposed equity transfer to IBK Securities (2016), the equity transferred represented 20% of Hyundai Capital. In the acquisition of stakes in Chongqing Department Store by Wu Mart and Better Life Commercial Chain Share (2016), the equity transferred to the buyers represented 21.32% and 10.91% respectively.

Additionally, in 2015 Fujian Electronics was fined RMB 150,0000 for failure to notify its acquisition of a 35% stake in CHINO-E. This again indicates that the transfer of a minority shareholding might be considered to confer joint control and therefore trigger a SAMR filing obligation.

INSERT ANALYSIS. Is the above broad enough to capture all conduct?

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