Limitations on foreign investments by state-owned enterprises
As of 1 May 2012, State-owned enterprises that are owned by the Chinese central government ("Central SOEs") are no longer permitted to invest in non-core businesses outside of Mainland China. Although they can be exempted from this prohibition in special circumstances, it can result in delays and longer and more difficult negotiations. This new development is therefore especially relevant for clients who plan to attract investments from Central SOEs or sell assets to them.
Central SOEs, such as PetroChina, SinoChem, Chinalco and AVIC, undertake a large part of Chinese outbound investments. In the past six years Central SOEs have made over 100 investments abroad of at least USD100 million each. However, some of these investments have resulted in substantial losses. In order to mitigate these foreign investment risks, Interim Measures have recently been issued by the PRC State-Owned Asset Supervision and Administration Commission ("SASAC").
Under the Interim Measures, Central SOEs - including their wholly owned overseas subsidiaries and companies in which they have a controlling stake - are not allowed to invest in non-core businesses outside of Mainland China. If there is a special circumstance which makes it necessary to make a non-core investment outside of Mainland China, Central SOEs need to obtain prior approval from SASAC. Unfortunately, the Interim Measures do not provide definitions of "non-core businesses" or "special circumstances". This therefore needs to be discussed with the relevant Central SOE, which in turn might need to discuss this with SASAC. Unless properly managed, this can result in delays when implementing a transaction.
In order to request SASAC's approval for a non-core investment outside of Mainland China, a Central SOE needs to file a feasibility and due diligence report, risk control report and such other materials as SASAC deems necessary. SASAC's review will focus on the necessity of the project, influences on the core business and the implementation of risk control measures. Although the approval period officially is 20 working days, in practice SASAC can extend it by asking for more materials.
If a Central SOE invests in a core business outside of Mainland China, it only needs to file certain documents with SASAC. However, SASAC reserves the right to object to transactions that increase the risk profile of the foreign investments. As a result this filing procedure can also effectively become an approval procedure.
Finally, we note that the Interim Measures provide that if a Central SOE violates the provisions thereof and suffers a major loss, the Central SOE and the related responsible individuals will be held liable.
MOFCOM's conditional approval of Western Digital/Hitachi deal
On 2 March 2012, China's Anti-Monopoly Bureau of the Ministry of Commerce ("MOFCOM") conditionally approved Western Digital’s acquisition of Hitachi’s hard disk drive ("HDD") business. Similar to its recent decision in Seagate/Samsung, which also involved an HDD business, MOFCOM took a decision that differs from competition authorities in other countries. As was the case in the Seagate/Samsung deal, MOFCOM defined the relevant market as the global HDD market. It was of the view that the Western Digital/Hitachi transaction could result in the increased likelihood of coordination among competitors and therefore cause competition concerns, as there were only a handful of players in the HDD market and the market is highly concentrated and transparent.
The European Commission required Western Digital to divest Viviti's (the Hitachi subsidiary being acquired) 3.5 inch HDD production. The U.S. Federal Trade Commission also cleared the merger on the condition that Western Digital divests selected Hitachi assets related to the manufacture and sale of 3.5 inch desktop HDD to Toshiba.
MOFCOM went further and for the first time imposed a hybrid of structural and behavioural remedies:
- Western Digital needs to divest the 3.5 inch HDD business currently carried out by Viviti within 6 months of the MOFCOM decision. This is the same remedy imposed by the European and U.S. competition authorities.
- In addition to this divestiture, Western Digital is required to hold the entire Hitachi’s HDD business (operated by Viviti) separate, so as to maintain Viviti as a viable independent competitor on the HDD market. More specifically, Vivita must maintain its independence in aspects including R&D, production, procurement, marketing, after-sales service, administration, finance, investment, personnel appointment, etc., and continue producing and selling its HDD products by using the pre-transaction brands TRAVELSTAR and ULTRASTAR. Further, firewalls must be established to prevent the exchange of competitively sensitive information between Western Digital and Viviti. This is similar to the "hold separate" remedy imposed by MOFCOM in the Seagate/Samsung deal.
- Western Digital and Viviti will reasonably determine the production volume and production capacity in accordance with market demand. The production capacity and volume of Western Digital and Viviti must be reported to the supervisory trustee on a monthly basis.
- To avoid potential foreclosure in the downstream market, Western Digital and Viviti have undertaken not to force their customers to exclusively procure hard disk products from Western Digital or Viviti either overtly or covertly.
- Similar to the Seagate/Samsung deal, as innovation has a significant impact on the HDD industry and competition in the HDD market is key to maintaining product innovation, Western Digital has made undertakings to continue investing in R&D in innovative areas consistent with its practice of recent years. Unlike the Seagate/Samsung deal, no exact dollar figure has been specified.
Twenty-four months after the implementation of MOFCOM's decision, Western Digital will be eligible for applying to MOFCOM for removal of the second and third remedies. MOFCOM will then decide whether to grant such removal based on the market competition conditions at the time.
The different approach between MOFCOM and the EU and U.S. competition authorities can in part be explained by the fact that MOFCOM does not purely focus on competition law issues. It also takes the effect of concentrations on the Chinese national economic development into account.
By taking 297 days, the Western Digital/Hitachi deal underwent the longest China merger review period among all published cases. This is longer than the mandatory maximum review period of 180 days because of the withdrawal/re-submission strategy adopted by the notifying parties.
If you would like to receive the original Chinese version or an English translation of the MOFCOM decision, please send us an email by clicking here. You can also find our discussion of the Seagate/Samsung merger clearance in our China Update January 2012 by clicking here.
New CIETAC arbitration rules 2012
CIETAC, the preeminent arbitration commission for foreign-related arbitrations in China, has issued new arbitration rules that will become effective as of 1 May 2012 (the 2012 Rules). The inclusion of interim measures and consolidation are among the highlights.
This is the first time that the CIETAC arbitration rules have allowed an arbitral tribunal to grant interim measures. Under Article 21(2) of the 2012 Rules, the arbitral tribunal now has the express authority, at the request of a party, to order "any interim measure it deems necessary or proper in accordance with the applicable law". The interim measure may take the form of a procedural order or an interlocutory award.
However, the Civil Procedure Law of the PRC only provides for two interim measures, being preservation of property and protection of evidence. Only the competent court has the power to grant these two orders. It therefore appears that the arbitral tribunal's power to grant interim measures will not include these two types of interim measures.
Instead, it seems that the tribunal's power will mainly be aimed at suspending, or preventing, a party from carrying on certain conduct during the process of the arbitration. For example, an arbitral tribunal could grant a procedural order or make an interlocutory award to suspend or prohibit a party from carrying out certain acts, such as intellectual property infringement. Further, the arbitral tribunal is also empowered to require the requesting party to provide appropriate security in connection with the measure.
Unlike, for instance, the ICC Rules or the SIAC Rules, the 2012 Rules do not adopt an emergency arbitrator regime. It remains unclear what CIETAC would do if a party requests interim measures prior to the constitution of the arbitral tribunal.
Consolidation of Arbitrations
Another first for CIETAC is that the 2012 Rules provide for the concept of consolidation of arbitrations. Article 17(1) allows CIETAC to consolidate two or more cases with the agreement of all the other parties concerned. Yet this also means that one dissenting party can prevent consolidation. The consolidation provisions are nevertheless considered a major step forward for CIETAC, in view of the increased number of multi-party and multi-contract disputes over the last few years. It is believed that in the cases which are consolidated, the arbitral process will be more time efficient and less costly. But unfortunately the CIETAC does not go as far as the ICC, LCIA, HKIAC, and SIAC rules in including joinder provisions.
In conclusion, the 2012 Rules contain some new innovations such as consolidation of arbitrations and interim measures. These measures should increase the efficiency of CIETAC proceedings and make CIETAC arbitration more attractive to the international community.
China's advance tax ruling regime in place
China has implemented an advance tax ruling system starting from 1 March 2012. This is an important development as it enables taxpayers to obtain certainty in advance on their tax positions.
According to the Trial Guidelines, a competent tax authority may, upon request, issue an opinion to a taxpayer on how the tax laws, regulations and circulars should be interpreted and applied in the case at hand. The Trial Guidelines stipulate that a tax authority may not issue an opinion if:
- the opinion concerns tax matters subject to permission or approval of the tax authorities;
- the tax authority is not competent in respect of the relevant tax matter;
- the opinion would be contrary to the rules of a higher authority; or
- the opinion would be obviously unfair to other taxpayers in a similar situation.
A request for a tax opinion on a specific tax matter should be filed by the relevant taxpayer with the competent tax authority, i.e. the tax office in charge of the taxpayer's tax affairs, and the Trial Guidelines provide detailed procedures for issuing the opinions. Within 30 days after the tax opinion has been issued, it will be made publicly available by the tax authority. However, the Trial Guidelines do not specify whether the name of the applicant will be made publicly available and, more importantly, whether the tax authorities and the taxpayer are bound by the opinion. Although the Trial Guidelines are considered a big step forward, it is expected that issues will arise in the actual procedure for obtaining a tax opinion. The State Administration of Taxation is therefore expected to issue supplemental rules and guidance in the future.