Australia: China: MOFCOM adopts Simple Cases Regulation Adoption of simplified merger review rules follows recent European Commission reforms

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Introduction

China's Ministry of Commerce (MOFCOM) announced, on 13 February 2014, that it had adopted the Interim Regulation on the Application of Simple Case Criteria to Concentrations of Undertakings (the Simple Cases Regulation), following a public consultation MOFCOM launched in April 2013.¹ The Simple Cases Regulation took effect on 12 February 2014. China's adoption of simplified merger review rules followed the European Commission's (the Commission's) adoption of a package of reform measures to revise the existing rules, thus further simplifying the procedures for notifying transactions under the EU Merger Regulation.²

The Simple Cases Regulation is intended to identify mergers raising no substantive antitrust issues. The Regulation does not specify the consequences of a merger case being classified as "simple"; in particular, notifying parties do not benefit from a less burdensome notification form or an expedited review process for simple cases. In practice, therefore, the regulation's practical effect is unclear. It seems likely, however, that MOFCOM will endeavour to accept notifications and grant approvals more quickly for simple transactions, hopefully approving such transactions within the initial 30-day review period.

The Simple Cases Regulation

The Simple Cases Regulation is essentially the same as the consultation draft published in April 2013. According to the Simple Cases Regulation, the following transactions will qualify as "simple cases":

• Where the undertakings participating in the concentration are active in the same markets, their combined market share on the overlap markets is below 15 per cent;
• Where the undertakings participating in the concentration are in a vertical relationship, their market share in the relevant upstream and downstream markets is below 25 per cent;
• Where there is no horizontal or vertical relationship between the undertakings participating in the concentration, their market share in the markets on which each is active is below 25 per cent;
• Where a joint venture is being established outside China, the joint venture will not engage in any business activities in China;
• Where the equity or assets of a foreign enterprise are being acquired, that foreign enterprise does not engage in any business activities in China; and
• Where one or more controlling shareholders of a joint venture exits the joint venture and the joint venture will be controlled by the remaining shareholder or shareholders.

The Simple Cases Regulation sets out certain exceptions to the simple cases defined above. A transaction is not considered simple if it satisfies any of the following criteria: (1) one or more controlling shareholders of a joint venture exits the joint venture without acquisition of joint control by any new shareholders, and the remaining controlling shareholder is active in the same relevant market as the joint venture; (2) the relevant market is difficult to define; (3) the transaction may have a negative impact on market entry or technological progress; (4) the transaction may have a negative impact on consumers or other undertakings; (5) the transaction may have a negative impact on Chinese economic development; or (6) other situations MOFCOM considers to have a negative impact on competition.

During the review process, MOFCOM may revoke a determination that a transaction is simple under three conditions: (1) the notifying parties conceal important information or provide false or misleading information to MOFCOM; (2) third parties submit evidence that the transaction has or may have an effect of eliminating or restricting competition; or (3) there are important changes to the transaction or to the conditions of competition in the relevant market.

Comment

The Simple Cases Regulation is welcome as the first step in establishing a simplified procedure. Unfortunately, as was the case for the consultation draft, the Simple Cases Regulation provides no guidance as to how qualification as a simple case will affect MOFCOM's notification and review process. At this stage, the notification form and thus the amount of information required for simple cases remains the same as for other cases. Similarly, the Simple Cases Regulation does not contemplate any expedited treatment for simple cases. Thus, the impact of the Simple Cases Regulation on the Chinese merger notification process is unclear and is likely to remain so until MOFCOM issues new procedural rules.³

The Simple Cases Regulation is also unclear in certain respects as to whether a transaction qualifies as a simple case. For example, if the parties to a transaction do not compete in any relevant market and are not active in vertically related or neighbouring markets, but one of the parties has a share of over 25 per cent in a market, it appears that the transaction would not qualify as simple even though the transaction would not seem to present any risk of a substantive antitrust concern. In addition, the definition suggests that a reduction in the number of joint venture partners to two or more may give rise to a reportable transaction, in contrast to the EU Merger Regulation, under which no new notification is required where the departure of one or more joint venture shareholders does not lead to a change in the quality of the remaining shareholders' control from joint to sole control. Certain exceptions to the application of a simple case are also vague; in particular, there is no guidance as to what circumstances make a market difficult to define.

Notwithstanding these uncertainties, the adoption of this Regulation should be welcomed as a sign that MOFCOM is aiming to streamline its merger review procedure for simple cases. However, the implementation of a simplified review procedure will only be complete once MOFCOM issues further guidance on the procedural treatment of simple cases.

Footnotes

¹See report. Interim regulations are not unusual in China. They generally have the same effect as a "final" regulation as long as they remain in force.
²For further details of the EU measures, please refer to our January 2014 issue of Competition World.
³On 18 April 2014, MOFCOM issued a Guidance Note on Notifications of Simple Cases of Concentrations of Undertakings on a trial basis, which provide for a simplified notification procedure. Notably, the new guidance was accompanied by a simplified notification form. See guidance note.