The competition review of the proposed joint venture (JV) between BHP Billiton and Rio Tinto could spark an internal tussle between Chinese regulators keen to assert their jurisdiction over the Anti-Monopoly Law (AML), Asialaw can reveal.
As reported yesterday, a senior Chinese official called the tie-up “monopolistic” and many expect the government to employ the country’s Anti-Monopoly Law to thwart the deal.
But due to the complex nature of the law, and the competition between Chinese regulators in implementing it, some believe that the tie-up could create a struggle between the authorities, further complicating the deal.
“Both the National Development and Reform Commission (NDRC) and State Administration of Industry and Commerce (SAIC) will want to be seen to have had a say in this case,” said Kirstie Nicholson, of counsel at Lovells in Shanghai.
“They may wish to make such a high profile case their "first" in which they formally investigate under and enforce the AML."
The reasons for such tenacity are clear. The NDRC, SAIC and the Ministry of Commerce (Mofcom) want jurisdiction over the law, which is proving to be one of China’s most high-profile pieces of legislation.
Mofcom is the most likely regulator to investigate the deal. Although Rio and BHP have not made a filing with the regulator, lawyers believe they should. “JVs are still concentrations so they still increase control. It’s technically a joint acquisition of control, and therefore still subject to merger control,” said one China-based lawyer.
Others believe that Mofcom may adopt the EC’s complicated joint venture assessment. Under the European law, if the tie-up is a “full functioning, long lasting joint venture competing in the open market” then it would not be viewed as operating independently of its parent company, so would be notifiable under the law. It would then be investigated by Mofcom.
Although unconfirmed, there are reports that suggest that under the EC’s guidelines, the Rio-BHP joint venture would not be full functioning and therefore not notifiable.
This may not matter though. Under the AML’s implementing regulations, Mofcom has discretion to investigate deals even if they do not satisfy the turnover thresholds.
In recent draft guidance, Mofcom has appeared also to adopt the EC concept that only full function joint ventures will be considered concentrations that may be notifiable under the AML merger regime. It is not clear whether Mofcom will extend its discretionary power to also review non-full function joint ventures. “Though it would not be surprising if it did", said Nicholson.
If Mofcom does not investigate the joint venture, it may still be reviewed under the ‘Prohibition of Monopolistic Agreements’. If there are pricing restrictions included in the deal then the National Development and Reform Commission (NDRC) will have authority to investigate under this prohibition. If there are non-pricing restrictions, then the State Administration of Industry and Commerce (SAIC) will have jurisdiction.
If there is a mixture of both types of restriction, it is unclear which authority will investigate. For instance, the NDRC investigates price-related agreements but there has been no confirmation as to whether this will include aspects of the deal that simply affect price. Rio and BHP will be collaborating on production of iron ore, but if they decide to slow or speed up production, it will affect the market price.
“The confusion is certainly consistent with the lack of clarity surrounding the law,” said the lawyer.
The government has said informally that whoever gets the case first will investigate it. “But it’s possible that we may end up with situations where both NDRC and SAIC are investigating the same agreement,” said Nicholson
Although Mofcom may insist that it takes on the case, having had more experience, it’s likely that the both the NDRC and SAIC will want involvement, said Nicholson.
Given the high profile nature of the proposed transaction and the fact that the parties are competitors, many believe that both China and the EC will want to review the deal.