In 2017, when EDF and China General Nuclear Group (CGN) jointly acquired NNB group of companies, the EU proposed that Chinese central enterprises should make consolidated declarations in some fields. Recently, the authors have encountered similar challenges in some emerging markets, where the independence of central enterprises controlled by the State-owned Assets Supervision and Administration Commission (SASAC) has been questioned. In an anti-monopoly review, the market share of all related enterprises in a certain field is usually calculated in combination to determine whether the merger will have an impact on competition. The scope of the related enterprises is usually defined by equity and/or control linkages.
Since the SASAC performs investor duties on behalf of the state over central enterprises, it is the ultimate controller of these central enterprises from the perspective of equity structure. Moreover, out of the needs of public policy, the SASAC has the right to guide certain activities of central enterprises from a strategic perspective.
Therefore, in extreme cases, anti-monopoly authorities in some countries will regard the central enterprises subordinate to the SASAC as a single entity under the competition law, calculate the asset scale, turnover and market share of all central enterprises together, and deny the independence between central enterprises. This will have a substantial adverse impact on the anti-monopoly review of overseas M&A by Chinese enterprises.
In the case of the acquisition of Pirelli by Sinochem Rubber in 2015, the EU first raised the issue of whether central enterprises need to make consolidated declarations. In this case, the EU made it clear that the criteria to determine whether central enterprises have independence, and thus should make consolidated declarations, are: (1) whether the central enterprises have independent decision-making power; and (2) the overlap of board members between the central enterprises, and between the central enterprises and the SASAC, and whether there is a sufficient mechanism between central enterprises to ensure that commercially sensitive information is not shared.
However, in this case, the EU did not respond positively to whether the central enterprises were independent of each other under the EU’s anti-monopoly law. It only indicated that even if the turnover of all the central enterprises were calculated together, the results of the review would not be affected, thus approving the transaction.
In the 2017 CGN case, the EU made it clear for the first time that, at least in the energy sector, the SASAC has the ability to influence the strategic investment decisions of central enterprises, and to conduct or promote synergies between central enterprises. Therefore, the SASAC should be regarded as the ultimate controller of CGN and other central enterprises in the energy sector, which means all energy enterprises controlled by the SASAC should be regarded as a single entity under the competition law to make consolidated declaration.
Although the European Commission is cautious in its wording in the CGN case (only for central state-owned energy enterprises, and ultimately it did not require CGN to provide a complete list of the operations of central enterprises in Europe), its conclusion has far-reaching implications on the anti-monopoly declaration of central enterprises in the EU.
Following the EU, some emerging countries have recently proposed that central enterprises should make consolidated declarations. For example, the authors encountered this problem in the anti-monopoly declaration in an African country.
According to the declaration requirements of the country’s competition law, the scope of related enterprises should include all enterprises connected through direct or indirect control. Under this definition, all central enterprises should be regarded as related enterprises to make consolidated declarations. Compared with the EU, the country has not set aside exceptions for central enterprises. Even if the independence of the central enterprises can be proved, there is a possibility that central enterprises will need to make consolidated declarations because of the same ultimate controller.
In this case, the declaring parties repeatedly explained to the anti-monopoly authority in the country, trying to prove: (1) The SASAC needs to strictly abide by the requirements of separation of administrative functions and investor functions in relevant laws and regulations in its supervision of central enterprises, respecting the self-management power of central enterprises. The SASAC only exercises very limited supervision over central enterprises, does not directly control operational matters including the budget of central enterprises, and does not enjoy the general sense of “control” over central enterprises. Therefore, central enterprises should not be considered as related enterprises under the competition law to make consolidated declarations; and (2) there is no exchange of commercially sensitive information between the central enterprises, so it is impossible to obtain sensitive information such as the local turnover and asset scale of another central enterprise.
After listening to the explanations from the two parties, the anti-monopoly authority of the country agreed that a certain central enterprise does not hold commercially sensitive information of other central enterprises, but still believes that central enterprises are subject to the control of the SASAC and need to make consolidated declarations, and that the anti-monopoly authority can obtain the above information directly through the SASAC, or the Chinese embassy or consulate in the region.
After the Chinese embassy in the country met with the anti-monopoly authority of the country, the authority finally agreed not to request consolidated declarations of all central enterprises in the region, but it still did not expressly recognize the independence between the central enterprises.
Recently, the SASAC issued the List of authorization and delegation of power by SASAC of the State Council (2019 Edition) to further authorize and delegate power to central enterprises, hoping to minimize direct intervention in the production and operation activities of central enterprises.
This is a key step for the further independence of central enterprises and the realization of market-oriented operations. However, the authors believe that at the present stage the independence of central enterprises is still a major challenge for them to enter the international market, and the above cases need to be well considered. Since anti-monopoly declarations have become an unavoidable problem in M&A transactions, central enterprises should hire professional lawyers to learn about the declaration requirements and relevant cases of the countries (regions) involved in the transaction.
Wang Jihong is a partner, and Zhao Huiqi is an associate at Zhong Lun Law Firm