On 3 June 2011, the Ministry of Commerce (MOFCOM) published, for public comments, draft rules which explain how MOFCOM will evaluate concentrations pursuant to the merger control regime. These rules are entitled "Provisional Rules on the Assessment of the Effects of Concentrations on Competition" (Draft Rules). The public has been invited to submit comments on these Draft Rules by 13 June 2011.
In fact, Article 27 of the Anti-Monopoly Law (AML) outlines a list of factors that MOFCOM would take into account, when assessing concentrations. These are: (a) the market shares of the business operators involved in the concentration and their control over the market; (b) the degree of market concentration; (c) the impact of the concentration of business operators on market entry and technological advancement; (d) the impact of the concentration on consumers and other relevant business operators; (e) the impact of the concentration of business operators on the development of the national economy; and (f) any other factors deemed by MOFCOM to be relevant for consideration. The Draft Rules expand on these factors. There are altogether 14 provisions in the Draft Rules. The following table provides an illustration of how the Draft Rules "expand" on the factors set out in Article 27 of the AML.
|Factors pursuant to Article 27||Draft Rules|
|1||Market share of the business operators involved in the concentration and their control over the market.||MOFCOM considers the market shares of business operators to the concentration (the Parties) as an indication of the operators' market position. In relation to the Parties' "control" in the relevant market, MOFCOM will take into account a number of factors, including: (a) the degree of competition in the relevant market; (b) the extent to which products and services between the Parties are substitutable; and (c) countervailing power of buyers.|
|2||Degree of market concentration||MOFCOM is likely to make use of tools or methods such as the Herfindahl-Hirschman Index (HHI) and the Concentration Ratio (CRN) in order to determine market concentration. However, the Draft Rules do not provide an indication as to the relevant "ranges" or "figures" which would deem a market to be overly concentrated or not concentrated.|
|3||Impact of the transaction on market entry and technological development||
The Draft Rules state that MOFCOM will consider any barriers to entry in the relevant market, including analyzing the state of distribution channels, intellectual property rights and any key facilities controlled by the Parties.
The Draft Rules also state that a concentration may benefit the development of technology by enhancing the Research & Development (R&D) capabilities of the Parties. On the other hand, a concentration may also "negatively impact" the development of technology if it is a situation where the Parties feel less competitive pressure to innovate and invest.
|4||Impact of the concentration on consumers and other relevant business operators||The Draft Rules state that a concentration might benefit consumers by increasing economic efficiency; achieving economies of scale; and by reducing production costs. On the other hand, the Draft Rules state that concentrations may harm consumers in situations where Parties have more "control" of the relevant market and find themselves in a position where they are able to raise prices, lower the quality of products or limit production and sales.|
|5||Impact of the concentration of business operators on the development of the national economy||The Draft Rules state that a concentration may "positively impact" the national economy by enhancing market competitiveness, thereby improving economic efficiency. The Draft Rules also state that concentrations may have an "adverse impact" on the national economy by hindering competition in the relevant market and by hindering the "healthy development of industries".|
|6||Any other factors deemed by MOFCOM to be relevant for consideration||The Draft Rules state that MOFCOM would consider whether Parties are on the "brink of bankruptcy". The Draft Rules also emphasize that MOFCOM will take into account efficiency and public interest considerations (which must outweigh any negative anticompetitive impact) when assessing concentrations.|
Other than the main issues listed above, the Draft Rules also indicate that MOFCOM would take into account: (a) how upstream and downstream industries will be affected by proposed concentrations; (b) the extent to which the creation of strengthening of a single operator would eliminate or restrict competition; or when the concentration involves a handful of operators whether the creation or strengthening of the relevant operators would eliminate or restrict competition; and (c) where the operators participating in the concentration do not belong to the same relevant market, whether adjacent markets would be affected.
These Draft Rules are useful as they shed more light in relation to how MOFCOM will assess concentrations. The provisions in the Draft Rules appear to be deliberately broad - so that MOFCOM would have flexibility to analyse each concentration based on the merits or facts of each case. It would be useful if MOFCOM could explain in greater detail, what HHI thresholds, for instance, would deem a market as concentrated or not concentrated. In addition, it would be useful to know the extent to which "failing firm" factors would be taken into account (including what is deemed to be a firm on the "brink of bankruptcy") – in terms of evaluating a concentration – both substance wise and procedurally.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.