By Liang GAO 高梁

 

The ruling on the case of EDF/CGN/NNB Group of Companies by the European Commission (the “Commission”) on 10 March 2016 leads to a significant impact on the merger and acquisition in the EU of Chinese state-owned enterprises (hereinafter the “SOEs”), particularly those controlled by the Central Chinese Assets Supervision and Administrative Commission (the “Central SASAC”). Although following the review of this deal, the Commission concluded that the transaction was compatible with the internal market and the European Economic Area Agreement (EEA Agreement) and finally unconditionally approved this transaction, in respect of the calculation of turnover of the Chinese SOEs concerned, CGN, the Commission, for the first time, regarded CGN and its shareholder, the Central SASAC as the same economic unit, and therefore aggregated the turnover of all SOEs controlled by SASAC in relation to energy industry and considered such number as the turnover of one party of the concentration, namely CGN. If the Commission continues to hold the same positions as it did in the Case of EDF/CGN/NNB Group of Companies, on the calculation of turnover towards Chinese SOEs, especially those under Central SASAC (hereinafter the “central SOEs”), in the future, then the possibility for Chinese SOEs to trigger merger control procedures within the EU would increase significantly. Therefore, the ruling of the case would have a profound impact on M&A deals of Chinese SOEs in the EU at the regulatory level.

 

Background

 

In this case, according to relevant agreements, prior to this transaction, NNB Companies were solely controlled by EDF, a French company. CGN was a Chinese company active in the development, construction and operation of nuclear power plants and renewable energy plants with its 90% shareholdings controlled by Central SASAC, 10% owned by Local Guangdong SASAC.

 

After this transaction, CGN and EDF would exert joint control over NNB Companies. In accordance with the EU Merger Regulation, this transaction fell within the scope of concentration, and the undertakings concerned for this transaction were CGN and EDF. In case that the turnover of this deal reached the threshold of antitrust filing, then it was necessary for the parties to notify the case to the Commission. The parties of the transaction submitted that CGN was independent from Central SASAC and that the transaction was not subject to antitrust review by the Commission according to the Merger Regulation since CGN’s turnover was less than EUR 250 million threshold in the EEA. However, the Commission did not accept the view that CGN was independent from Central SASAC, and proceeded to cast doubt on the approach of the calculation of the turnover of CGN. The Commission held that, CGN did not share independent power of decision vis-à-vis the Central SASAC, and as such the turnover of CGN’s turnover should also cover that of other central SOEs in energy sector, and such an aggregation exceeded the threshold of EUR 250 million EEA-wide, which thus formed the factual basis for the Commission to have jurisdiction to review the case.

 

Legal Analysis

 

According to the relevant regulations concerning SOEs in EU competition law, if two SOEs are regarded as the same economic unit, the turnover of the two enterprises should be aggregated so as to decide whether the transaction meets the threshold of antitrust filing. In deciding whether two SOEs should be considered to be the same economic unit, particular attention needs to be paid to whether the two SOEs’ power of decision is independent from each other and independent from the State. According to the previous merger control cases concerning Chinese SOEs, the Commission did not specifically set out its position on the issue of whether the central SOEs had independent power of decision, vis-à-vis Central SASAC; for instance, in the case of CNRC/PIRELLI, the Commission argued that given the possible vertical links between the Parties and the SOEs were unlikely to give rise to serious doubts as to the Transaction’s compatibility with the internal market, it was not necessary for the Commission to reach a definitive conclusion on the ultimate control of ChemChina; and in the case of CHINA NATIONAL BLUESTAR/ELKEM, the Commission also confirmed that given the limited market position of the companies under Central SASAC, it was not necessary to reach a definitive conclusion on the ultimate control of ChemChina. Therefore in respect of the above two cases concerning Chinese SOEs, the Commission avoided directly answering the question of the ultimate control of Chinese SOEs. Nevertheless, with respect to the case of DSM/SINOCHEM/JV, although the Commission did not directly respond to the issue of whether SOEs had independent decision-making power from Central SASAC, it was inclined to give a very negative answer; in this case, the Commission considered that Central SASAC was actually capable of exerting certain powers to be involved in Sinochem’s strategic commercial conduct, including the right to approve mergers or strategic investment decisions and that commercial decisions of SOEs were likely to be influenced by the Chinese state, and eventually the Commission deemed that it was not possible to decide whether Sinochem shared an independent power of decision in the absence of representations by the Chinese State and accompanying evidence.

 

In the above three typical cases concerning Chinese central SOEs, the Commission shied away from giving a clear answer as to whether China’s SOEs, particularly central SOEs, are independent from Central SASAC. I deem that the Commission mainly took into consideration the following two points. First, for the above three cases, since the turnover of the relevant SOEs which were the undertakings concerned therein had reached the threshold for merger filing as required under the EU Merger Regulation, the issue of whether such SOEs were independent from Central SASAC would be irrelevant to the jurisdiction of the Commission over those cases. Second, as set out in the decisions thereof, the three cases would not be in a position to generate competition concerns at the EU level and the detailed analysis of the issue of independence between Central SOEs and Central SASAC would not influence the decisions per se. As such, the Commission might deem that to date there had been no need to reach a definitive conclusion on the issue of the independence of Chinese SOEs.

 

Nevertheless, in the case of EDF/CGN/NNB Group of Companies, since the turnover of CGN in EEA did not reach the threshold of EURO 250 million for triggering merger control procedures, in case that the Commission confirmed CGN and Central SASAC did not form the same economic unit, then this deal would have not been subject to the jurisdiction of the Commission. As a result, in order to enable itself to have competence to review the case, the Commission had to explicitly set out its position on whether CGN and Central SASAC formed the same economic unit in the first place.

 

In the case of EDF/CGN/NNB Group of Companies, the Commission confirmed that in determining whether two SOEs have an independent decision-making power, the following two aspects should be considered. First, do the SOEs have autonomy independent from the State in the enterprise strategy, business plans and budgets? Second, is that possible for the State to implement coordination of commercial conducts by imposing or facilitating coordination between enterprises. As regards the first aspect, the Commission believes that basically it needs to confirm whether the SOEs have independent decision-making power. In assessing the second aspect, the Commission would take into account a number of factors, by way of example, the extent of interlocking directorships, and if there exist protective measures to prevent the sharing of the sensitive business information between SOEs.

 

With reference to the first aspect, the Commission believed that Article 6 of the Law of the People's Republic of China on the State-Owned Assets of Enterprises only made a very broad interpretation of the principle of separation of government bodies and enterprises, and non-interference in the business of enterprises. And the Commission argued that a number of provisions in the Law of the People's Republic of China on the State-Owned Assets of Enterprises and the Interim Measures for the Supervision and Management of Central Enterprise Investment indicated that Central SASAC could exert significant influence over the major decision-making process of Central SOEs. For example, according to Article 27 of the Law of the People's Republic of China on the State-Owned Assets of Enterprises, Central SASAC conducts “annual and office term assessments of the enterprise managers appointed by it, and decides the rewards and punishments to the enterprise managers according to the assessment results”; according to Article 8 of the Interim Measures for the Supervision and Administration of the Investments by Central Enterprises, SOEs that report to Central SASAC should “submit their annual investment plan” to Central SASAC. As a result, in the present case, the Commission concluded that Central SASAC was in a position to impose significant influence on major decision-making process of CGN; and accordingly in term of the issues of enterprise strategy, business plan and budget, CGN should not be considered to enjoy autonomy from the State.

 

In addition, the Commission deemed that the non-existence of interlocking directorship between CGN and Central SASAC or between CGN and other SOEs did not mean CGN owned an independent power of decision from Central SASAC, and that exerting influence on the commercial strategy of CGN by Central SASAC could not be precluded in view of the above-mentioned powers of Central SASAC and of the existence of confidentiality provisions per se.

 

In accordance with Article 7 of the Law of the People's Republic of China on the State-Owned Assets of Enterprises, ”the state shall take measures to promote the centralization of state-owned capital to the important industries and key fields that have bearings on the national economic lifeline and state security, optimize the layout and structure of the state-owned economy, promote the reform and development of state-owned enterprises, improve the overall quality of the state-owned economy, and strengthen the control force and influence of the state-owned economy”. The Commission believed that CGN was active in the energy sector which was an important industry that had bearings on the national economic lifeline and state security. At the same time, the EC gave examples to prove Chinese government had coordinated the conduct of the enterprises in energy sector, especially nuclear sector through Central SASAC.

 

In the end, the Commission argued that Central SASAC was in a position to intervene in the decision-making of strategic investments and to coordinate the conducts between central SOEs in energy sector, and as such, CGN and other central SOEs in energy sector did not enjoy autonomy from Central SASAC. As a consequence, the turnover of all enterprises active in energy industry under Central SASAC should be aggregated.

 

Impact on Chinese SOEs, particularly Central SOEs

 

In respect of the Case M. 7850-EDF/CGN/NNB Group of Companies, it was the first time ever that the Commission clearly set out its position on the issue of independence between Chinese SOEs and Central SASAC; and the examination method and conclusion of the Commission in this case will have a significant impact on the transactions of Chinese SOEs in the jurisdiction of the EU.

 

First, even if the turnover of a Chinese central SOE does not meet the threshold for triggering merger control procedures, it is still necessary for it to communicate with the Commission in the first place, so as to confirm whether or not the turnover of other central SOEs needs to be aggregated. And if this is the case, the deal would be more likely to subject itself to the review by the Commission.

 

Second, China's SOEs active in energy industry shall pay more attention to antitrust filing with respect to transactions in the EU. In this case, the Commission understood that Central SASAC had the ability to influence and coordinate the major commercial decision-making of central SOEs; as a result, at the EU level, the possibility that the deals in which Chinese SOEs active in energy industry at least are involved would have to be subject to merger control review by the Commission, would increase significantly.

 

Third, the Commission’s antitrust review position will have a significant impact on the competition authorities of the EU Member States. Therefore, in respect of notifications of antitrust filing in the Member State, Chinese SOEs should also need to have a closer look at potential investigations on the issue of independence between SASAC and themselves.

 

Fourth, because the Commission is likely to scrutinize the independence of Chinese SOEs, especially central SOEs, and therefore would potentially postpone the period of review, it is recommended that the parties should communicate with the Commission as early as possible, and seek to cooperate with it in the relevant investigations so as to facilitate the approval of the deals in a timely manner.

 

Finally, during the course of merger filing review by the Commission, Chinese SOEs should take account of the potential approval barriers facing the deals. As set out above, in case that the Commission is of the view that one Chinese central SOE and Central SASAC form the same economic unit, then the whole enterprises under Central SASAC active in the relevant market shall be considered to be the same economic unit; and this in turn would be likely to lead to the situation where the market share of the Chinese central SOE in the EU market will strongly increase; and a higher likelihood of raising competition concerns in this case would be expected. Therefore, prior to notification of one deal and over the course of the review of the merger filing, Chinese central SOEs should not only focus on their own market shares and the information of relevant upstream and downstream markets in the EU market, but also consider the competition structure of other central SOEs active in the relevant market in the EU; and they should be well prepared for potential obstacles which could arise, particularly aware of the possibility that the deals would be cleared subject to conditions.