Merger Controls Under Chinese Law
Merger control, as a mechanism to prevent anti-competitive activity or transactions, refers to the review of mergers and acquisitions under antitrust law. The majority of merger control regimes are based on the general principle to prevent the creation of dominant positions that might result in a substantial impediment to competition.
Competition in general is accepted as a necessary condition for the healthy maintenance and coordination of the economy, as it assists in the increase of innovation and the development of new products, services and technologies, providing a greater selection of consumables at more reasonable prices. Therefore, in line with China’s goal of working towards a more efficient, productive and flourishing economy, China employs a strict merger control framework to regulate and review mergers and acquisition to ensure compliance to increase growth for its economy as second largest in the world.
China’s merger control regime
Under the Anti-Monopoly Law of the People’s Republic of China (the ‘AML’), Article 3 defines monopolistic conduct as including the concentration of undertakings that eliminates or restricts competition or might be eliminating or restricting competition. Also, Article 20 provides the definition of concentration, by referring to the following situations:
1. the merger of undertakings;
2. the acquisition by undertakings, whether by purchase of securities or assets, of control of other undertakings; and
3. the acquisition by contract or any other means, of control of other undertakings or of the ability to exercise decisive influence over other undertakings.
The concept ‘control’ lacks a definition under the AML, which provides scope for the authorities to define it as narrow or as broad as it requires in order to catch all necessary transactions. However, on 6 June 2014, the Anti-Monopoly Bureau (AMB) of the Ministry of Commerce (MOFCOM) released the amended Guidelines on Notification of Concentrations of Undertakings (Revised Guidelines), which provided information on the concept of control, Under Article 3 of the Revised Guidelines, the concept of ‘control’ in a concentration includes 'sole control” and “joint control”. Also, the Revised Guidelines suggested a test based on a number of legal and factual factors, where transaction documents and articles of association were the main measurements for the test. Furthermore, the Guidelines provides a series of further factors to be taken into consideration:
1. rationale of the transaction and future business plans;
2. shareholding structure of the target and the changes to that structure;
3. reserved matters and voting mechanism of the shareholders' meeting of the target and its historical attendance rate and voting record;
4. composition and voting mechanism of the board of directors and supervisory board of the target;
5. appointment and dismissal of senior management of the target;
6. the relationship between the shareholders and directors of the target, including whether there is any proxy voting arrangement or persons acting in concert; and
7. existence of any material commercial relationship or cooperation agreement between the target and other undertakings participating in the concentration.
Therefore, under Article 21 of the AML, any concentration that falls under the notification criteria by the State Council must be notified in advance with the antimonopoly authorities, and without notification the concentration shall not be implemented. In accordance with Article 23 of the AML, undertakings notifying a concentration in advance must submit the following documents or materials:
1. a summary of the notification;
2. a report on the effect on competition on the relevant market of the concentration;
3. the concentration agreements;
4. the financial reports and accounting reports, audited by an accounting firm, of the undertakings concerned in the previous accounting year; and
5. other documents or materials required by the antimonopoly authorities.
The following factors are considered in the review of a concentration in accordance with Article 27 of the AML:
1. the market share in the relevant market of the undertakings concerned and their controlling power over that market;
2. the degree of concentration in the relevant market;
3. the influence over access to the market and technology development;
4. the influence over consumers and other undertakings;
5. the influence over national economical development; and
6. other factors that affect the competition being considered by the antimonopoly authorities.
Also, to simplify and accelerate matters, on 11 February 2014, MOFCOM published merger control regulations in relation to simple mergers, the Interim Regulations on Standards Employed for Simple Cases of Concentrations of Undertakings (the ‘Simple Mergers Regulations’), and on 18 April 2014, AMB published procedural rules for the notification of simple mergers in its Guidance Opinions (Interim) on the Notification for Simple Cases of Concentrations. Therefore, in accordance with Article 2 of the Simple Mergers Regulations, the following transactions may qualify for simple case status:
1. horizontal mergers where the combined market share of all business operators falls below 15% in each relevant overlapping market;
2. non-horizontal mergers where each business operator has a market share below 25% in each of the upstream, downstream, or otherwise related markets;
3. offshore acquisitions or joint ventures where the target does not engage in economic activity in China; and
4. a joint venture that is controlled by two or more business operators, or that will be controlled by one or more business operators after the concentration.
Finally, the Provisions of the State Council on Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council on 3 August 2008, provides that a concentration that meets the following turnover thresholds cannot be completed without MOFCOM approval:
1. aggregate global turnover of all the undertakings to the concentration exceeds RMB 10 billion, with at least two of the undertakings each having a turnover of at least RMB 400 million in China in the previous financial year; or
2. aggregate Chinese turnover of all the undertakings to the concentration exceeds RMB 2 billion, with at least two of the undertakings each having a turnover of at least RMB 400 million in China in the previous financial year.
Article 22 of the AML provides for an exemption where undertakings need not file a concentration notification to the Anti-Monopoly authorities if one the following situations apply:
1. one undertaking which is a party to the concentration has the power to exercise more than half the voting rights of every other undertaking, whether of the equity or the asset; or
2. one undertaking which is not a party to the concentration has the power to exercise more than half the voting rights of every undertaking concerned, whether of the equity or the asset.
Merger control enforcement
MOFCOM has established itself as a major merger control enforcement authority worldwide, with the AMB responsible for administering the regime. In accordance with Article 48 of the AML, an undertakings concentration in violation of the AML can result in the anti-monopoly authorities ordering the undertakings to cease implementing the concentration, dispose of equities or assets within a limited time, transfer the operation, and conduct any other necessary measures to regain the status before the concentration, as well as imposing a fine up to RMB 500,000. Furthermore, since 1 May 2014, MOFCOM has adopted a practice whereby it publicly announces its decision in relation to parties to be penalised for failing to notify of their transactions in order to increase awareness and create deterrence of further similar actions. However, in accordance with Article 53 of the AML, undertakings that do not accept the decision made by the anti-monopoly authorities may apply for administration reconsiderations, and then further file an administrative lawsuit.
Also, AMB consistently liaises with other jurisdictions in order to ensure full and necessary investigation and completeness. For example, MOFCOM engages with the European Commission under the Declaration on the Start of a Dialogue on Competition by the European Union and China, and also cooperates with the United States and its antitrust agencies, to create the Memorandum of Understanding on Antitrust and Antimonopoly Cooperation Between the United States Department of Justice and Federal Trade Commission, and MOFCOM, NDRC, and SAIC. Therefore, China’s regulation and authority on merger control review and enforcement has grown and advanced quickly to ensure its economy is kept in line accordingly to ensure the maintenance of and future success.
Recently, MOFCOM published on its official websites a review of its enforcement success in the first quarter of 2016. It appears the number of cases has increased by 30.6% in comparison to the first quarter of 2015. This included a clearing of 81 cases, indicating an increase in compliance with the AML and a keen awareness to keep in line with assisting China reach its goals for a greater economy fuelled by competition and innovation. Also, the introduction of the Simple Mergers Regulations and its allowance for those classified as simple case have enhanced efficiency in case review, with the authorities accepting 64 cases under the simplified procedure, in comparison to 59 cases in the first quarter of 2015, therefore with an increase in the number of cases accepted to be 8.47%.
Finally, in the AML’s years of operation up to January 2016, MOFCOM has received 56 complaints of transactions failing to notify MOFCOM of their activity. Of these 56 complaints, 32 were investigated, 24 were closed. Of the 32 that were investigated, 15 cases were sanctioned, and 9 were penalized in 2015. Therefore, MOFCOM intends to be harsher with those that fail to file a notification in accordance with the AML in order to create deterrence and encourage honesty and transparency in the process. On this path, it can be expected that there will be a steady decline of unreported transactions, as well as an increase of cases abiding with the AML, therefore furthering competition interests in China.
China’s control merger review is extensive and widely employed in order to regulate concentrations threatening competition in China. This is done in order to protect the efficiency and smooth running of the economy in China, which is currently second largest in the world, and still growing at a rapid pace. The merger control enforcement under the AML has grown to be an efficient and effective machine, especially in relation to discouraging any failure to notify of any relevant activity. Therefore, China has taken a great interest and a strict outlook on the preservation and advancement of its economy, and has employed the mechanism of merger control review as one of many to achieve its purpose.
AUTHOR: Sarah Xuan and Joyce Chng
Copyright MMLC Group
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.