Navigating Chinese Outbound Investment in the EU: Merger Control Ninette Dodoo Head of Antitrust Practice, China 16 – 17 September 2013 ABA Section of

Navigating Chinese Outbound Investment in the EU: Merger Control

Ninette DodooHead of Antitrust Practice, China

16 – 17 September 2013

ABA Section of International Law China Inside and Out

Overview

• China’s ODI in Perspective• China’s ODI and Challenges• Dealing with SOEs: An EU Perspective• Lessons for Chinese SOEs

2Navigating Chinese Outbound Investment: Merger Control

China’s ODI in Perspective (1)

• Chinese ODI is an objective under China’s 12th Five Year Plan (2011-2015)• In 2012, China’s non-financial ODI rose to US$ 77.22 billion, an increase

from US$ 68.58 billion on the previous year whilst FDI has decreased– The main destinations include Australia, Brazil, Canada, Indonesia, Kazakhstan,

Russia, the UK and the US according to the Heritage Foundation– The main sectors include mining, manufacturing, power generation and

supply, transport– Investment in other sectors is increasing such as in healthcare,

communications, chemicals, machinery, automotive

• In the first 11 months of 2012, cross-border M&A activity accounted for approximately 25% of China’s total direct investment overseas



Foreign Direct Investment vs. Overseas Direct Investmentflow and stock, US$, 1979-2011

Source: Chinese Outbound Investment in the European Union, European Union Chamber of Commerce in China, January 2013

Based on UNCTADstat, extracted 14 November 2012



China and FDI/ODI, flow and stock, millions of Euros, 2004-2011

Source: Chinese Outbound Investment in the European Union, European Union Chamber of Commerce in China, January 2013

Based on EUROSTAT, extracted 14 November 2012


China’s ODI and Challenges

• The main recipients of China’s ODI in the EU include countries with a structured approach to investment such as Germany, Sweden, and the UK

• China’s ODI raises special questions for EU governments and regulators in part because State-owned enterprises, supervised by SASAC, lead this

• The share of private companies is increasing, accounting for approximately 9.5% of China’s ODI in 2012

• The special questions often revolve around:– Merger control, including notification requirements and substantive analyses– Compliance with competition laws– Foreign investment controls, and related national security/public interest

considerations– Trade matters involving anti-dumping issues– Perceived market distortions arising from preferential access to finance, export

credits or guarantees, or government support


Dealing with SOEs: An EU Perspective (1)

• Increasing outbound investment led by China’s SOEs is necessitating assessment of how SOEs are managed and operated

• Like private companies, SOEs are subject to the EU Merger Regulation• The European Commission has recently reviewed a number of

transactions involving China’s SOEs, including:– China National Bluestar/Elkem– China Shipbuilding/Mitsubishi/Wärtsilä/JV– China National Agrochemical Corporation/Koor Industries/Makhteshim Agan

Industries– DSM/Sinochem/JV– Huaneng/OTPPB/Intergen – PetroChina/Ineos/JV

• More cases involving SOEs can be expected as China’s ODI increases



• The EU Merger Regulation recognises the principle of non-discrimination between public and private undertakings

– For public sector undertakings, the relevant question for turnover calculation is whether the SOE is an economic unit “with independent power of decision”

– This is irrespective of the manner in which the SOE’s capital is held or of the rules of administrative supervision applicable to that SOE

• Principles developed in cases involving European SOEs – Does the SOE set its own business plan, budget and/or business strategy independently

of the State and from other undertakings owned by the State?– Are the directors of the SOE appointed by the State and are there any interlocking

directorships between undertakings owned by the State? – To what extent does the SOE effectively compete with other SOEs in the sector?– Legal or contractual provisions establishing independence without more are unlikely to

suffice for the “independent power of decision” test



• The assessment is essentially two-pronged– Is the SOE managed and operated in a manner independent of the State i.e. does the

State have the ability to influence the SOE’s commercial strategy?– Is there a risk of coordination between the SOE concerned and other State enterprises in

the sector i.e. does the State coordinate the commercial behaviour of SOEs in the sector concerned?

• The European Commission will consider, inter alia– The SOE’s actual conduct in the marketplace– The competitive dynamics of the relevant market– Economic evidence pointing to the SOE’s reduced incentives to compete with other SOEs

or private domestic companies active in the same market– The SOE’s business documents, including internal business documents, if available, in

order to evaluate internal decision-making procedures– Any anecdotal evidence that establishes the SOE’s independence



• The European Commission will also consider whether– There are interlocking directorships between SOEs active in the same sector and owned

by the State– There are adequate safeguards that ensure competitively sensitive information is not

exchanged between SOEs active in the same sector– The market is conducive to coordination, which includes assessing whether

• Other SOEs are active in the sector concerned• There are horizontally or vertically affected markets involving SOEs in the same sector• The revenues derived from overlapping products are significant• SOEs owned at central level and those owned at regional level actually coordinate conduct• SOE(s) coordinate conduct with private companies in the same sector• The structure of the market facilitates coordination

• Central to the European Commission’s assessment is if, through the State, companies in the same sector act as one or different entities


Lessons for China’s SOEs• The view of the Vice President of the European Commission

responsible for Competition Policy, Joaquín Almunia:

“In the first months of 2011 we have looked into mergers involving Chinese state-owned companies […]. In the cases that we have examined, we have used the same criteria we adopt to assess mergers involving companies controlled by the Member States. Among other things, we try to determine whether the companies manage their business strategy independently; whether the decision-making power lies with the controlling entity above them, at central or regional level, and to what extent they effectively compete with other public companies. In other words, we look carefully at whether, through the State, companies in the same sector act as one or different entities. This is not because they are foreign or we have a prejudice against State control, but because it is a relevant aspect for assessing if competition will be significantly reduced or not (emphasis added).”

Speech of Joaquín AlmuniaRecent developments and future priorities in EU competition policyInternational Competition Law Forum St. Gallen, 8 April 2011


Conclusions

12

China has emerged as one of the major outbound investors in the world, although it remains behind countries such as Japan, Germany, UK and the US

China’s ODI is expected to increase, with private companies accounting for an increasing share of overseas investment

The treatment of SOEs and assessment of transactions involving SOEs is still evolving in the EU, and analyses proceed on a sector-by-sector basis

Identifying factors that establish an SOE’s independence is key for determining jurisdiction, analysing competition effects and, in the case of a JV, assessing whether the JV is full-function

Ruling out possible coordination between SOEs (or between SOEs and private companies) active in the same sector is a key component in the assessment of how SOEs operate

Conclusions

Navigating Chinese Outbound Investment: Merger Control

Clifford Chance, 3326 China World Tower 1, No. 1 Jianguomenwai Dajie, Chaoyang District , Beijing 100004, People’s Republic of China

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Navigating Chinese Outbound Investment in the EU: Merger Control

Ninette DodooEmail: [email protected]

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Navigating Chinese Outbound Investment in the EU: Merger Control Ninette Dodoo Head of Antitrust Practice, China 16 – 17 September 2013 ABA Section of