Control Structure over Chinese State-Owned Enterprises

Introduction
On March 5, 2014, the Secretary of Commerce (the “Secretary”) issued Resolution No. 25, which authorized the proposed transaction between TIPTOP ENERGY LIMITED (“TIPTOP”) and VINTAGE PETROLEUM SOUTH AMERICA HOLDINGS INC., whereby TIPTOP acquired 100% of the capital stock and voting rights of OCCIDENTAL ARGENTINA EXPLORATION AND PRODUCTION INC., 97% of the shares of CADIPSA S.A., 95% of the equity in VINTAGE PETROLEUM ARGENTINA S.A., and 95% of the shares of VINTAGE ARGENTINA EXPLORATION AND PRODUCTION S.A. (the “Transaction”) (1).
As a result of the Transaction, since TIPTOP is controlled by SINOPEC INTERNATIONAL PETROLEUM EXPLORATION AND PRODUCTION CORPORATION (“SINOPEC”), the latter acquired indirect control over all the acquired companies. SINOPEC itself is controlled by CHINA PETROCHEMICAL CORPORATION (“CHPC”), which, as explained below, is ultimately controlled by the government of the People’s Republic of China.

Analysis
First of all, the Commission investigated CHPC’s situation, the company to acquire indirect control over all the acquired companies. CHPC is incorporated in China and is one of the world´s largest companies in the hydrocarbon exploration and exploitation market. CHPC is controlled by the Supervision and Administration of State-Owned Assets Commission (“SASAC”); China’s monitoring body of State Owned Enterprises (“SOEs”). As explained in the Commission’s opinion, the SASAC was created to redefine the relationship between the Chinese government and the “vital companies” (the SOEs that are selected by the government, related or linked to national security or the economy, in order to lay the foundation for the future vital companies of China).
CHPC is part of one of China’s key industries, is the third largest company in the country, and specializes in the offshore Exploration and Production (“E&P”) business. The Commission emphasized China’s broad power and responsibility over the SASAC, especially in regard to its control over the SOEs. The Commission described this power over the SASAC as “state tools to maintain control over the SOEs.” Utilizing the SASAC, China is able to make day-to-day decisions of the SOEs, including deciding divisions, dissolutions, or investment strategies. . Therefore, the Commission concluded that China controls CHPC. Reinforcing its decision, the Commission referred to similarly decided cases by the European Commission (2).
The Commission also noted that the SASAC controls, among others, CHINA NATIONAL OFFSHORE OIL CORPORATION (“CNOOC”), which indirectly controls and participates in companies that conduct business in Argentina (some of which are also incorporated in the country), their main objective being exploration, development, production and other activities related to hydrocarbons (the same activity performed by the acquired companies).
As such, both the economic group controlled by China and the companies included in the Transaction were involved in the exploration and exploitation of oil and gas, resulting in horizontal and vertical relationships. Regarding the identification of the relevant markets, the Commission analyzed four separate markets.
First, regarding the relevant E&P market of oil and gas, the Commission, using the previous criteria, (3) concluded that both crude oil and natural gas (which are mainly used for fuel) are each relevant markets individually. As for the relevant geographic market, the relevant geographic scope was nationwide. Second, regarding petroleum products, the Commission considered the development of each product, extracted from the buyer’s refinery as individual relevant markets. The Commission also defined the relevant geographic market as nationwide. Third, the Commission considered the sale of compressed natural gas as a relevant market, and the local market as the relevant geographic scope. Finally, regarding well drilling services, the Commission considered it in itself a relevant market, associated with a nationwide geographic scope.
Thus, after analyzing the economic effects of the Transaction in the mentioned markets and concluding that it did not decrease, restrict, or distort competition in any way that could result in harm to the general economic interest, the Commission authorized the Transaction.

Conclusion
This new case reaffirms the Commission’s position regarding the control exercised by China over SOEs through the SASAC. Accordingly, the Commission reiterates its analysis that CHPC is part of a conglomerate, owned and controlled by China.
This analysis is of particular importance to cases regarding the first landing exemption, since Chinese companies will have to duly show that the Chinese Government does not control the undertaking, should they want to exercise said exemption. In addition to this, Chinese companies will also have to carry out a competitive assessment of other Government owned companies in the country when carrying out a competitive analysis of a transaction subject to merger control in Argentina.
 
 
 

1. Resolution No. 25 of the Secretary of Commerce, March 5, 2014, Case “Winfirst International Petroleum Spain S.A.; Tiptop Energy Limited and Vintage Petroleum South America Holdings Inc. s/Notification Article 8 of Law 25.156 (Conc. 883)”, Docket No. 0064762/2011.
2. Case No. COMP/M.6113, Case No. COMP/M.6082 and Case No. COMP/M.6141.
3. File No. S01: 0257793/02 (C. 388) and File No. S01: 0100141/2011 (Conc. 887), CNDC.