- The EU and Chinese merger control regimes can apply to a broad range of corporate transactions involving either an Australian joint venture or a change of control of an existing Australian entity even where the Australian entity does not operate outside of Australia.
- The tests for determining whether either the EU or Chinese regulators must be notified of the Australian transaction depend largely on the turnover of the ‘undertakings concerned’, which includes revenue generated by the relevant investor’s entire corporate group (including investee companies) in the EU and China respectively.
- The nature of the turnover tests means that large global corporates and global private equity and hedge funds can relatively easily trigger the EU or Chinese notification requirements when investing in Australia.
- Failure to notify the EU or Chinese regulators of a notifiable transaction can lead to significant fines. Significant penalties have been imposed on companies for a failure to notify, even where no competition issues are raised.
Recent deal activity demonstrates that Australia continues to attract significant onshore investment from large international entities including global private equity and hedge funds. For a mix of strategic and financial reasons, some of these deals have involved investors forming consortia or investing on a joint venture basis.
In light of this trend, it is important for investors to remember that an Australian joint venture (JV) transaction, whether through the creation of a new JV or change of control over an existing JV, may trigger EU or Chinese merger control obligations, even where the JV in question does not operate outside of Australia. Critically, failure to comply with these regimes can result in fines of up to 10% of worldwide group turnover for the entities concerned.
The nature of the EU and Chinese merger control tests mean that the entities that appear most at risk of having reporting obligations in the context of Australian JVs are multi-national corporations and large global or regional private equity or hedge funds with material investments in the EU or China (or both).
The tests, which are relatively complex, are summarised below. In assessing any reporting requirement, it is important to be aware that an investor can be deemed to have a control interest in an Australian JV if it has the ability to exercise decisive influence over it. Although each case will depend on its own facts, this may occur not just through its equity holding but also through material negative controls such as veto rights over the adoption of a business plan or the appointment of senior management.
The level of fines and reputational risk issues arising from a breach of the EU and Chinese merger control regimes means it is critical that investors are ‘alive’ to this issue when acting for multinational corporates and private equity and hedge funds on Australian JV transactions.
The ‘concentration’ tests
The EU Merger Regulation 139 / 2004 (EUMR) requires ‘concentrations’ having an EU dimension to be notified to the European Commission (Commission). A concentration is deemed to arise where a change of control on a lasting basis results from either:
- the merger of two or more previously independent entities or organisations (described in the EUMR as an ‘undertaking’), or
- the acquisition, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of an entity or organisation.
The EUMR requires notification to the Commission if either (or both) of the following two ‘EU dimension’ tests are satisfied.
The first test is satisfied if:
- the combined worldwide turnover of all undertakings concerned is more than €5 billion (~ A$7 billion), and
- the EU wide turnover of each of at least two of the undertakings is more than €250 million (~ A$350 million).
The second test is satisfied if:
- the combined aggregate worldwide turnover of all the undertakings concerned is more than €2.5 billion (~ A$3.5 billion),
- in at least three EU member states, the combined aggregate turnover of all the undertakings is more than €100 million (~ A$140 million),
- in those three EU member states, the aggregate turnover of each of at least two of the undertakings concerned is more than €25 million (~ A$35 million), and
- the aggregate EU wide turnover of at least two of the undertakings concerned is more than €100 million (~ A$140 million).
Under both tests, the thresholds will be treated as not being met if all of the undertakings concerned achieve more than two-thirds of their EU wide turnover in one and the same EU Member State.
Importantly, the turnover of undertakings does not just include turnover generated by the parent investors in the EU but also the entire corporate group to which the undertakings belong. This will generally include all of the undertaking's parent companies up to the group's ultimate controlling entity, their wholly or majority owned subsidiaries (and their subsidiaries' subsidiaries), and any minority owned subsidiaries in which the parent or any other member of the corporate group has a controlling interest. So in the context of a global corporate or a global private equity or hedge fund, the test will take into account the revenues of the corporate’s / fund’s entire global business (including all investee companies).
The relevant test for determining whether the turnover is generated in an EU member state is usually to identify where the customer is located. This means that offshore undertakings established outside of the EU can still generate significant EU turnover if they make sales to EU customers.
China’s Anti-Monopoly Law has a similar merger control regime which requires notification of certain concentrations of undertakings to China’s Ministry of Commerce (MOFCOM). The two tests for determining whether a notification is required are that either:
- the aggregate global turnover of all undertakings participating in the concentration exceeded RMB 10 billion (~ A$1.7 billion) during the previous financial year, and at least two undertakings each having a turnover of RMB 400 million (~ A$70 million) within China during the previous financial year, or
- the aggregate turnover within China of all undertakings participating in the concentration exceeded RMB 2 billion (~ A$350 million) during the previous financial year, with at least two undertakings each having a turnover of RMB 400 million (~ A$70 million) within China during the previous financial year.
In both the EU and Chinese regimes, the creation of a JV can be deemed to amount to a concentration. However, an important distinction between the regimes is that to fall within the requirements for notification, the EUMR requires the JV to perform ‘all the functions of an autonomous economic entity’ on a ‘lasting basis’. This means that the JV should have management to run its day to day operations, sufficient resources and independent business activities. In contrast, this is not a formal requirement under the Chinese merger control regime, which may therefore capture a broader range of transactions. This may include JVs which have been created for a specific purpose and are not intended to be fully functioning.
The Commission must be notified of any notifiable transactions prior to closing or implementing the transaction.
The notification requires detailed descriptions of the concentration and copies of reports and/or studies on the effect of the proposed transaction on the market. However in certain cases, parties are entitled to submit a short form notification which involves a simplified procedure and less information than the standard notification.
A short form application may be allowed or appropriate in certain circumstances including, in the case of a JV, where the JV has no, or negligible, actual or foreseen activities in the territory of the European Economic Area. Such cases occur where.
- the turnover of the JV or other activities is less than €100 million (~ A$140 million) in the European Economic Area territory, and
- the total value of the assets transferred to the JV are less than €100 million (~ A$140 million) in the European Economic Area territory.
Other transactions may qualify to use the Short Form if the parties are not active in any overlapping or connected markets, or if certain market share thresholds are not exceeded.
One example of an Australian transaction (an ‘offshore’ JV (not active in the EU)) notified to the Commission under the EUMR occurred in March 2011, in relation to an acquisition by a US, a Canadian and a UAE company of joint control over DP World Australia Limited. DP World was active in the development and operation of ports, management of container terminals and stevedoring only in Australia. In this instance the Commission allowed a short form application as it fell within the category of having negligible actual or foreseen activities within the EU.
Similarly MOFCOM’s ‘Standards for Simple Cases’ may apply to offshore joint ventures which have no economic activities in China or which satisfy market share criteria. As in the EU, entities captured by the ‘simple cases’ regime in China can take advantage of an expedited process.
It should be noted that the Commission is considering a number of possible reforms, including an amendment of the EUMR so that transactions involving JVs which have no activities in EU markets and raise no substantive competition issues will no longer require notification. However, the time frame for any necessary amendments to the EUMR is yet to be determined.
Failure to notify the Commission of a notifiable transaction can lead to significant fines of up to 10% of worldwide group turnover as well as causing the transaction to be void under EU law. MOFCOM can impose a fine of up to RMB 500,000 (~ A$87,000) and can similarly cause an unlawfully completed transaction to be void.
In July 2014 the Commission imposed a fine of €20 million (~ A$28 million) on Marine Harvest, a Norwegian company with global operations, for acquiring a 48.5% stake (giving it de facto control) in its competitor Morpol prior to notifying and receiving clearance from the Commission. Similarly, in 2009, the Commission imposed a fine of €20 million (~ A$28 million) on Belgian based company Electrabel for acquiring a minority (but de facto controlling) stake in another entity without notifying the Commission. Importantly, the Commission made it clear that the fines imposed were in no way related to its substantive assessment of the transactions (in fact, whereas Marine Harvest/Morpol raised significant competition issues requiring substantial remedies before clearance could be obtained, no such issues arose in the Electrabel case).
Any global corporate or fund conducting a transaction in Australia should bear in mind the potential impact of EUMR and MOFCOM notification obligations. Practically speaking, even if a proposed transaction poses no substantive competition issues, a number of issues may arise which may impact the timing of a transaction including:
- determining whether the Commission or MOFCOM should be notified (requiring extensive calculations and analysis of turnover and identifying the relevant parties acquiring control of the target),
- preparing any required information for filing, and
- assisting the Commission or MOFCOM in its review, potentially through a number of phases.
As noted above, if proper consideration is not given to this issue prior to completion of the relevant transaction, it can lead to significant financial and reputation issues for the participants in an Australian JV.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021