The long arm of China's anti-monopoly regulator

China's decision to block a proposed global shipping alliance between three companies highlights its willingness to flex its regulatory muscle in M&A transactions.

China’s anti-monopoly regulator has rejected a proposed global container-shipping alliance, which involves a three-way tie-up between Denmark’s A.P. Moeller-Maersk, Mediterranean Shipping Co and CMA CGM SA.

It is the second time in recent months that Beijing has decided to flex its muscle and project its jurisdiction globally in mergers and acquisitions transactions. Global mining giant Glencore was forced to offload its high-quality copper asset Las Bambas in a bid to overcome Beijing’s reservations about its merger with Xstrata.

The proposed global shipping alliance, to be known as P3, called for three shipping companies to pool together 250 ships in order to address the problem of over-capacity and low charter rates in the industry since the start of GFC.

The three shipping companies would continue to retain their own separate pricing, sales and marketing teams to avoid the potential accusation of price collusion. The arrangement works a bit similar to the code-sharing arrangements between airlines, and the tie-up would allow shipping companies to cut billions in costs every year.

American and European anti-trust regulators both cleared the transaction and it was widely expected that the Chinese regulator would do the same until its ‘surprise’ rejection last week. The Chinese Ministry of Commerce, the anti-monopoly regulator, treated the operational joint venture as an effective merger between the three companies, which differed significantly from the analysis of its international peers.

Many legal experts believe that the Chinese regulator has not convincingly nor fully explained its decision to the parties and international observers.

“In light of MOFCOM’s failure to address the effort to adopt a structure which would preserve competition among the would be alliance partners, its decision already has been interpreted in some quarters as driven by an effort to protect domestic shipping companies from what would have been three more efficient rivals,” according to Davies & Polk, a Wall Street law firm.

A more important lesson that comes out of this decision is Beijing’s willingness and confidence to assert its jurisdiction globally in cases where it involves Chinese interests. Though it is only the second time that Beijing has blocked a deal since the country enacted its anti-monopoly laws in 2008, it is an indication of Beijing’s newfound confidence as well as power.

It was only back in April that Beijing effectively forced Glencore to divest its lucrative copper asset to a Chinese led-consortium before it would give its blessing to a proposed marriage between Glencore and Xstrata.

It is notable that neither Glencore nor Xstrata own or operate any assets in China. Nevertheless, Beijing finds that the combined market power of Glencore and Xstrata in exporting copper concentrate to China would have anti-competitive effect.

Beijing explains that the combined Glencore and Xstrata entity would be the world’s largest supplier of copper, with 9.3 per cent of market share globally and 12.1 per cent in the country. It is a large concern for Beijing as the country is heavily dependent on copper imports and China sources 68.5 per cent of its copper from abroad.

However, many lawyers have questioned Beijing’s willingness to find market power at relatively low levels. For example, the European Commission deems that players with less than 25 per cent of market share as not having an anti-competitive effect.

“The Las Bambas divesture demonstrates MOFCOM’s growing confidence as regulator and willingness to pursue an extraterritorial structural remedy where the case requires in it MOFCOM’s view, and notwithstanding that such a remedy might appear controversial to some,” according to Mayer & Brown, a international law firm.

For years, bankers and lawyers have to live with and take into account the extra-jurisdictional power of American and European regulators when it comes to global transactions. Americans have consistently used the country’s status as the global financial centre to impose its jurisdictions and laws on international banks. Now people have to take notice of a new and powerful kid on the block, China, which has shown a willingness to flex its muscle.

Despite the trend for MOFCOM to introduce more transparency and detailed explanations for its decision-making processes, its recent decisions seem to have differed considerably from its international sister agencies.

China is particularly sensitive about the fact that it is the world’s largest market for many commodities, including copper and iron ore. Any significant mergers between global mining players can expect close scrutiny from China.