Since China’s Anti-Monopoly Law (AML) took effect in 2008, its Ministry of Commerce (MOFCOM), one of the country’s three competition agencies, has taken the lead on merger control, reviewing more than 250 proposed transactions. MOFCOM has cleared most of them, seven with conditions, but it has blocked only one.

MOFCOM’s March 2009 prohibition of The Coca-Cola Co.’s closely watched proposed acquisition of Huiyuan Juice Group Ltd., China’s largest juice company, ignited a furor. Some members of the foreign investment community saw the rejection as a sign of protectionism on China’s part, of the country’s merger control agency bowing to political pressure.

Coca-Cola has faced similar obstacles to acquisitions before. In 2003, Australia’s competition commission shot down the company’s proposed acquisition of Australian juice company Berri Ltd. on the grounds that it would have anti-competitive effects. But the Australian prohibition did not face the same criticism as the China deal, in part because Australian authorities issued a 40-page ruling that gave a detailed outline of its reasoning. MOFCOM’s one-page rejection of the Coca-Cola-Huiyuan deal left much to the imagination—and commentators speculated away, some working themselves into an outrage.

Legal practitioners hope that such murky rulings are a thing of the past following a Memorandum of Understanding (MOU) that China and the U.S.’s competition agencies signed into effect July 27. The MOU sets forth a framework for cooperation between the two countries on two levels: At the senior official level, it proposes a joint dialogue between the authorities on competition policy. And at the agency level, it calls for communication and cooperation on competition law enforcement and policy.

The MOU is broadly worded, typical of a MOU, and its ultimate effects are yet to be seen. But antitrust experts expect the most immediate effect of the agreement will be greater transparency—and, it follows, less room for rampant speculation about why some transactions pass muster and others don’t.

“The hopeful thing to come out of the MOU is more transparency,” says David Dahlquist, a partner at Winston & Strawn. “We know more about how China looks at antitrust issues today than at any time in our history, and we’ll continue to learn more as each deal is brought to the Chinese authorities and is either approved or denied. There’s still a lot we don’t know, but we’re certainly headed in the right direction.”

Starting Point

The MOU is the latest step in China’s evolving antitrust enforcement and the continuing dialogue between China and the U.S. on competition issues. The U.S., for example, was active in helping China shape its AML, a process that stretched back nearly a decade.

“Relatively early in this drafting process, U.S. antitrust authorities began providing comments and technical assistance on a routine basis to the AML drafters regarding not only substantive antitrust topics, but also on building effective enforcement agencies,” says Christine Wilson, a partner at Kirkland & Ellis and former chief of staff to the chairman of the Federal Trade Commission. “This MOU erects a formal framework around the dialogue that has been ongoing for years, and paves the way for broader and deeper cooperation between the two jurisdictions.”

In the MOU, the countries’ competition authorities recognize it is “in their common interest” to work together on keeping each other informed on significant policy and enforcement developments; enhancing agency capabilities through activities such as training programs, workshops, study missions and internships; exchanging experiences on competition law enforcement; seeking information or advice; providing comments on proposed changes to laws, regulations, rules and guidelines; exchanging views on multilateral competition law and policy; and exchanging experiences on awareness-raising.

“You look at the practical provisions of the MOU … and these are general objectives,” says Lucas Niedolistek, a DLA Piper lawyer practicing in Hong Kong. “It could be a great and significant starting point … but this is just a framework agreement, so a lot will depend on how, on a daily basis, these authorities cooperate.”

Transparent Processes

It is practically assured that the MOU’s effects will include a better exchange and flow of information from both sides, and a better understanding of each country’s goals in antitrust enforcement. For companies, the most hopeful and immediate effect will come from greater transparency, particularly on merger control.

“Because it will be more transparent, both the Chinese and U.S. enforcers will feel compelled to dot their I’s and cross their T’s and make sure they have very thorough reasons for coming to the conclusions they come to,” says John Gibson, a Winston & Strawn partner.

U.S. companies should therefore feel more confident about how MOFCOM treats their transactions, and they should get a better window into the approval process—and more predictability—as MOFCOM issues more detailed rulings in future large proposed transactions.

Behavioral Scrutiny

However, when it comes to behavioral enforcement aimed at stomping out anti-competitive practices such as pricefixing and monopolization, the MOU could mean more scrutiny and pressure on companies. Since China’s AML took effect, behavioral enforcement has been limited, with activity focused around very localized cartels and with few fines imposed. Increased information-sharing with the U.S. could lead to more early detection.

“The agencies are talking to each other,” Niedolistek says. “Companies should take that into account and realize the chances of their infringements being discovered is greater now because of this agreement.”

Wilson says the MOU eventually could lead to deeper cooperation if the two countries encourage parties to provide waivers so the agencies can exchange confidential information on their analysis of proposed transactions, or if they enter into an antitrust mutual assistance agreement, which would allow them to exchange evidence regarding potential violations. In the long term, it could even lead to more harmonized and consistent enforcement policies between the U.S. and China.

For now, legal practitioners in the antitrust realm are waiting to see how the MOU’s framework is fleshed out and how Chinese competition policy continues to evolve.

“The manner in which cooperation unfolds as a practical matter will be driven by antitrust enforcement trends, emerging patterns of conduct in the marketplace and developments in the economic analysis that undergirds sound competition policy,” Wilson says.

Sidebar: Unifying Goals

It’s likely that the U.S. and Chinese competition authorities will take longer to reach consensus on issues under their Memorandum of Understanding than in agreements with countries that have only one antitrust agency. The U.S. has two antitrust agencies at the national level—the Federal Trade Commission and the Justice Department. China is unique in that three separate agencies split antitrust enforcement responsibilities at the national level: The State Administration for Industry and Commerce, the National Development and Reform Commission and the Ministry of Commerce.

“To understand what antitrust enforcement in China will look like going forward, it is important to understand the state of antitrust enforcement in China under its old (pre-AML) competition law regime,” says Christine Wilson, a partner at Kirkland & Ellis. “Each agency has its own unique history, constituencies and agenda, and each plays a role in enforcing the new Anti-Monopoly Law.”

The AML is aimed at unifying the antitrust goals of the three agencies.

But Wilson points out, “Remnants of the agencies’ previous agendas may permit nontraditional competition goals—advancing industrial policy goals, protecting national champions—to creep into China’s antitrust regime.”