On China’s Anti-monopoly Legislation in The Merger and Acquisition of Companies

1.Overview of current Chinese laws regulating the merger and acquisition of companies

Generally in current Chinese law system, provisions about merger and acquisition (hereinafter referred to as “M&A”) of companies are scattered in a series of laws, administrative regulations and department rules, such as Company Law of the People’s Republic of China ( Chapter VII  Company Merger and Division ), Securities Law of the People’s Republic of China(Chapter IV Listed Company Acquisition) ,Interim Provision on Merger and Acquisition of Company and the others. However, most of these provisions are made and promulgated to regulate the form and operation procedure of merger and acquisition of companies. There is not any provision in relevant laws which particularly deals with the monopoly problem occurring in the merger and acquisition of companies. Also at trial, no case is brought into court for the pleading of monopoly in merger and acquisition of companies . Therefore company’s managers need not concern too much about monopoly problem during M&A decision-making and operating, at least to the domestic Chinese invested companies ,it is true. As concerned about foreign invested company, things is changing. At present, in China, provisions governing the merger and acquisition of companies by foreign investors are more stricter than those governing the merger and acquisition of companies by domestic investors. These provisions have constituted a complete and systematic law framework. This framework mainly includes: provisions on which industries foreign investors are permitted to enter,  Catalogue for the Guidance of Foreign Investment Industries (2002) and Provision on Guidance of Foreign Investment（2002）; provisions on the merger and acquisition companies by foreign investors, Provisions on Shareholder Alteration of Foreign Invested Enterprises(1997), Provisions on the Merger and Division of Enterprises with Foreign Investment (2003), Interim Provisions on Domestic Investment by Foreign Invested Enterprises(2000), Interim Provisions on Merger and Acquisitions of Domestic Enterprises by Foreign Investors(2003); provisions and policies on merger and acquisition of domestic companies by foreign investors in securities market, Rules for the Establishment of Foreign-shared Securities Companies(2002),Rules for the Establishment of Foreign-shared Funds Management Companies(2002); other related laws governing merger and acquisition of companies by foreign investors, company law(1994), Securities law(1998) and etc.

In this framework, article 24 of Provisions on the Merger and Division of Enterprises with Foreign Investment (2003) is a milestone in China’s anti-monopoly legislation in the merger and acquisition of companies. See article 24:   

Article 24 The examining and approving department shall, within 45 days as of the date of receipt of the documents as prescribed in Articles 18 or 21 of these Provisions, make a preliminary written reply as to whether it agrees to the proposed merger or division.

Where the Ministry of Foreign Trade and Economic Cooperation is the examining and approving department of corporate mergers, the MOFTEC may, upon receipt of the documents as listed in the preceding paragraph, organize the relevant departments and agencies to hear the case of proposed corporate merger and conduct investigations into the company and the related market if the MOFTEC thinks that the corporate merger tends towards industry monopoly or it may constitute a predominant position in the market for particular commodities or services, which will hamper fair competition. The time limit for examination and approval as prescribed in the preceding paragraph shall then be extended to 180 days. 

Despite its vague and general, for example, how to measure the scope of the so-called “related market ”, how to definite the “predominant position” and etc, it reflects the legislators’ awareness of the harm of monopoly in merger and acquisition of companies and their intention to restrain these merger and acquisition which may tend towards industry monopoly. Moreover, it guides the evolution route of Chinese anti-monopoly law by declaring the purpose of prohibiting monopoly in merger and acquisition ---to safeguard fair competition, by indicating which kind of merger and acquisition is supposed to be covered by anti-monopoly law---- horizontal merger .

Over-reviewing all provisions on company merger and acquisition of companies both those governing merger and acquisition by domestic investors and those by foreign investors, especially the existing article 24 of Provisions on the Merger and Division of Enterprises with Foreign Investment (2003) , we may find out some clues to research the development of Chinese anti-monopoly legislation in the merger and acquisition of companies .

2.The purpose of Chinese anti-monopoly legislation in the merger and acquisition of companies

There is no clear cut answer to the question -----what the objective or the goal of anti-trust legislation is in the merger and acquisition of companies，concerning of legislative histories in varied countries. In the United States, its first anti-trust law, Sherman Act proclaimed ”this bill does not seek to cripple combinations of capital and labor, the formation of partnerships or of corporations, but only to prevent and control combinations made with a view to prevent competition ,or for the restraint of trade, or to increase the profits of the producer at the cost of the consumer” [1]. In EU, in addition to improve efficiency, creating a united European market, protecting small business companies, securing fair competition and political freedom are the functions of a good anti-monopoly law too.[2]  In Chinese anti-monopoly law draft the legislation purpose is described as” to prohibit monopoly act, to maintain  free competition, to protect the legal interest both of consumers and competitors and to promote the development of market economy in China ” [3]

In summary, it seems that the possible goals of anti-monopoly beyond economic efficiency include consumer interests in lower prices, the political and social values of dispersed control over economic resources, multiple choices for producers and consumers free of the arbitrary dictates of monopolies or cartels.equal opportunity , and “fairness” in economic dealings. Frankly, all these goals are attractive to Chinese legislators. But in my own view, these purposes of anti-monopoly legislation are apparent but not predominate .To safeguard domestic Chinese invested companies’ survival from heated competition and to secure national economic interest is the real and main intention of Chinese legislators in the short run. Because

a. Chinese government and legislators hesitate to restrain domestic-domestic M&A. In the 1980s and 1990s, many Chinese law scholars have researched the problem of industry monopoly and urged government to take measures to crush existed industry giants down and restore fair competition market, but government was reluctant to do so, since almost every industry monopoly giant was state-owned and operated directly under  administrative orders. After the year of 2000,when China successfully entered into WTO and promised to open its domestic market more widely for foreign investment，Chinese government kept on encouraging merger and combination among domestic companies in order to enhance their international competitiveness. Under such an economic background and industry policy, it would be unwise for legislators to put out an anti-monopoly laws even if monopoly had been existed in some industries. This is the reason why in Chinese law system there is no provision to prohibit domestic-domestic companies merger which may tend to industry monopoly, as discussed in part I .

b. The threats of some industries monopolized by foreign investors through M&A are realistic and some are even fatal to national economy. As reported by international finance report, in December 2003,Chinese largest and the only survived film manufacture company LEKAI issued a M&A agreement with a multinational company , KEDAK. According to the agreement, LEKAI will sell itself to KEDAK by April 2006. After the perfect performance of this M&A agreement in Chinese market there will be no film made by domestic Chinese invested manufacturer. Meanwhile in the film manufacture industry ,KEDAK and other multinational companies like FUJI will share Chinese big market. A comments ,published on XINHUA PRESS, reviewing the development of Chinese M&A market in 2003,  emphasized two main development tendencies , one is that foreign investors speed up their steps to enter and obtain Chinese market by the merger and acquisition of domestic companies , the other is that large state-owned company groups were accelerating their steps in merger and reconstruction to secure national economic interest. The author even pointed out “after entrance into WTO, China have the latent crisis of losing market resources, competitive products, manufacture capacity when encountering multinational companies’ heavy challenge ,which will inevitably result in the lose of the control of  whole nation economy .” To avoid such an economic disaster, an easy and feasible way is to proclaim monopolization mergers illegal. In fact, in Interim Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (2003) the legislators explicitly express this legislation purpose “The Provisions are formulated in accordance with the laws and administrative regulations governing foreign investment enterprises and other relevant laws and administrative regulations to -------safeguard fair competition and national economic security. ”

c.     Several other laws and regulations has served the functions of safeguarding  “economic efficiency, consumer interests and effective competitiveness”. For instance, Interim Provisions on Preventing the Acts of Price Monopoly(2003)Article 1“In order to prevent acts of price monopoly, to promote fair competition and to protect the legal rights and interests of the operators and consumers” Article 2 further definite "price monopoly" as “ the acts that by means of collusion or abuse of the market predominance, the operators control the market prices, disturb the normal production and operation order, impair the legal rights and interests of the other operators and consumers, or harm the interests of the public.” Also Law of the People's Republic of China Against Unfair Competition(1993) claims the purpose of enact this law is “to safeguarding the healthy development of socialist market economy, encouraging and protecting fair competition, repressing unfair competition acts, and protecting the lawful rights and interests of business operators and consumers.”. Moreover, Law of the People's Republic of China on the Protection of Consumer Rights and Interests, “is formulated for the protection of the legitimate rights and interests of consumers, maintenance of the socio-economic order and promotion of the healthy development of socialist market economy.” Since these laws and related regulations burden the responsibility to secure legal rights of consumers and competitors, therefore the future anti-monopoly laws is not expected merely to be the restatement of these laws,it should take “defending domestic industries from foreign investors monopoly “ as its predominance goal.

3.     The legislation mode of China’s anti-monopoly law

a.The future China’s anti-monopoly law will merely cover horizontal mergers

Mergers are usually classified according to the market relationship of the merging parties: horizontal mergers involve parties that are competitors; vertical mergers, parties that are or could become buyer and seller; and conglomerate mergers, every other case. A horizontal merger eliminates a competitor and concentrates the market power of two firms in the hands of one. Although vertical and conglomerate mergers also may be feared because of their potential impact on concentration in the long run, horizontal mergers are considered to be the most effective way to eliminate effective competition and to lead to monopoly. Therefore, in American anti-trust law history, to prohibit monopoly occurrence in horizontal merger is their fundamental function. ”The starting point for the Sherman Act’s legal attack on the great trusts and combines was the classic manifestation of anticompetitive conduct, the substantial horizontal merger ”[4], “vertical mergers were not thought to be covered by Clayton Act before the 1950amendment. And ,although the Sherman Act applied , there were few cases dealing with vertical integration in any firm.”[5] Although in history, few vertical and conglomerate mergers were covered by anti-monopoly law, like famous Brown Shoe case, these judgments were found lack of standing grounds. So in 1992 in America, the Justice Department and Federal Trade Commission jointly issued a new  horizontal merger guidelines, which again indicted that anti-monopoly laws mainly cover horizontal mergers. With no doubt, American over 100-year-long anti-trust practice and advanced legislation experience will influence Chinese anti-monopoly legislation. In the circle of Chinese anti-monopoly researchers, it is a commence sense that the future China’s anti-monopoly law should merely cover horizontal mergers. And this viewpoint is of cogency if we take the following facts into consider:

 I  Vertical and conglomerate mergers play small role in M&A market. “UNCTAD World Investment Report(2003) discovered that approximately 70% multinational M&A in 2003 fell into the category of horizontal merger.”[6] “In China from the entrance of WTO, nearly all the large mergers and acquisitions of domestic enterprises by foreign investors were horizontal mergers,[7]” Therefore, it is unnecessary to cover vertical and conglomerate mergers in pursuit to safeguard domestic Chinese invested companies and to secure national economic interest.

II Strict anti-monopoly law will restrain foreign investment in China and hamper Chinese economic development. Import & Export Statistics by FIEs 2003(1-5) showed that import and export by foreign invested enterprises was still on rapid increase and their total import & export value shared 54.12% of the total national import & export value, exceeding those made by domestic Chinese invested enterprises. Statistics about Utilization of Foreign Investment in 2003(1-6) of China demonstrated the tendency that the form of utilization of foreign investment is changing gradually from foreign direct investment in building new companies to investment in the existing domestic companies by M&A. Considering the economy engine role played by foreign investment, legislators will be in embarrassment if they put out a too strict anti-monopoly law to cover mergers and acquisitions of companies,for that would upset foreign investors and harm domestic economy. So making a loose anti-monopoly law only cover horizontal mergers is a realistic way for legislators.

b.     Prospect of Chinese anti-monopoly law in the coming decade

A complete anti-monopoly law should at least cover the following three sections, which also been called “three pillars of anti-monopoly law”: Section A forbidden of any contract, combination in the form of trust or otherwise ,or conspiracy, in restraint of trade or commerce in a nation or a region; Section B forbidden of  abuse of the market predominance ; Section C controlling industry concentration or merger .Among them, Section C is regarded as the core of whole anti-monopoly law system.[8] As mentioned above ,in present Chinese law system, Section A and Section B are stipulated in  price law and Interim Provisions on Preventing the Acts of Price Monopoly, Law of the People's Republic of China Against Unfair Competition  Law of the People's Republic of China on the Protection of Consumer Rights and Interests ,so the relevant provisions in these laws and regulations with no double are   parts of the future Chinese anti- monopoly law . Unfortunately, the legislation on Section C is so weak that a complete anti-monopoly law system is not established yet. How to develop the China’s anti-monopoly legislation in the merger and acquisition of companies? In my view, the legislators may following these three steps:

Firstly, by 2005,formulate a legislation interpretation or  official comments to perform article 24 of Provisions on the Merger and Division of Enterprises with Foreign Investment (2003). In Such an act a sound machinery should be established, by which Ministry of Foreign Trade and Economic Cooperation and relevant administrative departments can objectively measure the extent of industry concentration before and after the merger and acquisition of companies, to definite the “predominant position”, and to decides whether or not deliver his approval.

Secondly, enact an administrative regulation somewhat like American horizontal merger guidelines , such a regulation will govern only not those merger and acquisition of companies by foreign investors but also those by domestic investors. Because China promised to treat foreign investors with no discrimination and would grant them national treatment widely after 2005.

Finally, compile all the regulations and provisions related to anti-monopoly, including those in price law ,Interim Provisions on Preventing the Acts of Price Monopoly, Law of the People's Republic of China Against Unfair Competition  Law of the People's Republic of China on the Protection of Consumer Rights and Interests ,into one law-------Anti-Monopoly law of People’s Republic of China.

[1] Phillip Areeda , Louis Kaplow, antitrust analysis ,problems,text,and cases(fifth edition),Pg.45

[2] KONG XIANG JUN ,the principles of anti-monopoly law,Pg194

[3] KONG XIANG JUN ,the principles of anti-monopoly law,Pg211

[4] Phillip Areeda , Louis Kaplow, antitrust analysis ,problems,text,and cases(fifth edition),Pg.792

[5] Phillip Areeda , Louis Kaplow, antitrust analysis ,problems,text,and cases(fifth edition),Pg.806

[6] SUN NAN SHEN ,China’s economic and law system after the entrance of WTO,Pg.438

[7] SUN NAN SHEN ,China’s economic and law system after the entrance of WTO,Pg.440

[8]KONG XIANG JUN ,the principles of anti-monopoly law,Pg9