China’s simplified M&A rules step in the right direction
By Shannon Ellis
SHANGHAI – After a year of revisions, China’s Ministry of Commerce (MOFCOM) revealed its anticipated new “simple rules” for mergers and acquisitions. The move signals the government’s intentions toward fast-tracking deals that don’t trigger competition issues, but with the caveat that certain conditions apply.
“The Simple Mergers Regulations are a welcome step toward reducing red tape for businesses needing to make merger filings in China,” Yong Bai, senior associate at Clifford Chance LLP, told BioWorld. “Around 50 percent of cases are expected to qualify as “simple” and be cleared within 30 days.”
For foreign companies looking to do M&A deals with Chinese life science companies this new regulation and its implementation are worth watching.
Companies aiming to conduct M&A or joint ventures in China often find themselves facing long and unpredictable review times, much longer than in the U.S. or the EU. Review timelines set out in China’s own Anti-Monopoly Law are often exceeded.
There is a 180-day clock for a three-phase process that does not start ticking until MOFCOM accepts the filing and confirms it is complete. On top of that, a pre-review process has sprung up that in the beginning took two to three weeks and now can last more than two months.
In cases where the deal does not involve complex competition issues, it makes sense for the government to provide a streamlined review process. The new simplified rules offer a path for companies to get there, although legal experts advise taking a wait and see approach for guidance on implementation. The hope is the new process will result in speedier approval times.
The rules are considered to more closely follow the various EU models of competition law.
There are two key factors to consider when qualifying for a simple merger: market share and transaction type. The rules specify three market share thresholds and three types of transactions: offshore joint ventures, outbound acquisitions and change of control between joint venture partners. (See China’s Simple M&A Regulations, below.)
Companies are encouraged to self-assess to see if they qualify as a simple case; the case should then be approved within a specific and shorter time frame. The presumption is that will free up more of the regulator’s time to concentrate on the more complicated cases.
“As for the biopharma/biotech sector,” Bai said, “it may still be too early to predict whether the new rules may make it easier for foreign companies to find local targets to acquire, or for local companies to merge with each other. What is clear though, is that a more predictable and efficient merger review system will contribute to the success of merger cases.”
The biotech industry, a key priority under the government’s 12th Five Year Plan, can often fall prey to some of the complexities of the system. Bai warned that there is an important “national economic development exception” for cases viewed as detrimental to national economic development.
It is important to know that some biopharma products are categorized as restricted industries, such as plasma products and some vaccines, under the Catalogue for the Guidance of Industries for Foreign Investment and “may still be subject to strict scrutiny from MOFCOM and may be difficult to benefit from the new rules on simple cases.”
The catalogue also has a list of “prohibited industries” that need to be protected from foreign buyers, Bai said, and those will become an issue of market entry.
“Under such circumstances, it is unlikely for MOFCOM’s new rules to have any impact on such a deal as it will be prohibited on the basis of industrial policy anyway. Fortunately, under the Catalogue for the Guidance of Industries for Foreign Investment, such ‘prohibited industries’ in the biopharma sector are only limited to very few areas such as stem cells, gene diagnosis and iatrotechnics.”
THERMO FISHER / LIFE SCIENCES – A CASE OF MARKET SHARE
The new rules are also quite specific about market share, a key concern for the authorities that was well highlighted in the recent merger of Thermo Fisher Scientific Inc. – Life Technologies Corp. One of the most complicated M&A transactions ever reviewed by MOFCOM just so happened to be in the life sciences.
On Jan. 14, lab equipment maker Thermo Fisher Scientific, of Waltham, Mass., received MOFCOM approval to merge with Life Technologies, of Carlsbad, Calif., as long as six conditions were met. The deal was valued at $13.6 billion when first announced in April 2013. The merger review lasted more than six months.
The regulators imposed required Thermo Fisher to cut the prices of some products and divest its cell culture and gene adjustment business as well as sell its majority stake in China’s Lanzhou National Hyclone Bio-engineering Co. Ltd.
According to legal experts at Shearman & Sterling, the “the remedies were significantly more onerous than those agreed with the U.S. and EU agencies, which carried out parallel merger reviews.”
The case has been called an important one for revealing the government’s thinking, particularly in its use of economic tools in an assessment that has been described as “a highly structured and sophisticated competitive analysis bringing greater transparency to the process” by legal experts at Mayer, Brown JSM.
Their lawyers also identified greater coordination between Chinese and international regulators that uncovered market share issues such as in the siRNA reagents business. In the China market the merger would only have brought about a low market share, but MOFCOM identified an 80 percent to 90 percent global market share from patents.
The case is directly relevant to biotechs when looking to qualify for a fast-track approach under the simple merger rules.
“In the biopharma sector, MOFCOM’s practice indicates that MOFCOM tends to define the relevant market narrowly,” Bai said. “The parties to a deal in the biopharma sector may need to consider all possible approaches to market definition, and in particular, the narrowest possible market, when assessing whether their deal would be treated as a simple merger.”
Understanding the government’s intentions is a major part of the battle, because most cases are overwhelmingly approved by the regulator and thus don’t require explanations. MOFCOM only publishes decisions in cases where it intervenes in a merger to impose conditions or issue a prohibition. And those are few and far between.
MOFCOM has reviewed 749 filings since Aug. 1, 2008, when the Anti Monopoly Law came in effect at the end of 2013. Of those, the overwhelming majority, 728 were cleared, 20 have been cleared with conditions and only one was blocked.
The Thermo Fisher-Life Sciences case and the new simplified rules go some way to providing more transparency to the government’s M&A decision-making process, where the odds are in favor of a positive result for those with the patience to wait it out.
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