China: MOFCOM publishes draft rules on investigation procedures re failure to notify on concentrations

Last Updated: 21 June 2011
Article by Susan Ning, Shan Lining and Angie Ng

Pursuant to the Anti-Monopoly Law, transactions which are construed as "concentrations" (i.e. mergers, acquisitions and joint ventures) and which meet with specified turnover thresholds 1; must be notified to, and cleared (from an antitrust law perspective) by MOFCOM, before business operators can go ahead with these transactions (notifiable concentrations). 

Article 48 of the AML prohibits business operators from implementing notifiable concentrations, without first seeking clearance from MOFCOM.  Failure to notify MOFCOM of notifiable concentrations could result in the following sanctions: (a) an order to cease implementing the concentration; (b) an order to dispose the shares or assets within a stipulated period; (c)an order to transfer the (relevant) business within a stipulated period; (d) an order to adopt other necessary measures to reinstate the market situation before the concentration; or (e) a fine of not more than RMB500,000. 


On 13 June 2011, the Ministry of Commerce (MOFCOM) published draft rules which outline the investigation procedure, should business operators fail to notify MOFCOM of notifiable concentrations.  These draft rules are entitled "Provisional Measures on Investigating and Penalizing Violation of Notification Obligations for Concentrations between Business Operators" (Draft Rules).  MOFCOM is currently consulting on these Draft Rules; the public has 10 days to submit comments (i.e. by 23 June 2011). 


The following outlines are the salient provisions as set out in the Draft Rules:

  • MOFCOM may investigate and impose remedies on notifiable concentrations which have not been reported to MOFCOM (notification obligation).
  • A violation of this notification obligation means that business operators have implemented a notifiable concentration,without first notifying MOFCOM of this concentration. 
  • MOFCOM may, by itself, investigate into notifiable concentrations which have not been reported.  Third parties may also report a suspected violation of the notification obligation to trigger an investigation (MOFCOM will keep the identifies of these third parties confidential).
  • Business operators will be notified in writing when MOFCOM decides to commence an investigation into their transactions. Upon receipt of this written notice, business operators must submit relevant materials and documents within 15 days afterreceipt of the notice.  Relevant materials and documents include information to do with whether the transaction in question amounts to a concentration; whether the transaction triggers the notification thresholds pursuant to the AML; and whether the transaction has been implemented.
  • If MOFCOM is of the view that business operators have violated the notification obligation and wishes to conduct a further investigation, MOFCOM will once again inform the business operators in writing.  MOFCOM will then commence a further investigation to determine whether the concentration has or may have the effect of restricting or eliminating competition.  Business operators subject to this further investigation must submit relevant materials and documents within 30 days after receipt of the written notice as described above.
  • During the investigation process, MOFCOM may consult with stakeholders such as other government departments, trade associations and other business operators and individuals as required.
  • During the investigation process, MOFCOM will possess full investigative powers (including carry out inspections at the premises of the business operators; compelling information from business operators and making copies of relevant documents) pursuant to Article 39 of the AML.


Comments


The Draft Rules are useful as they provide some clarity as to what happens if a business operator is being investigated for a failure to notify MOFCOM of a notifiable concentration.  It would be useful, though, if MOFCOM could clarify the following:

  • We note that business operators could be found in breach of the notification obligation if they have "implemented" a notifiable concentration.  However the term "implement" has not been defined in the Draft Rules.  It would be useful to obtain some clarity about what this term means.  If this term is construed broadly, certain preparatory work (i.e. preparation for a concentration) might be construed as implementing a concentration.  On the other hand a narrow interpretation of this term would point to "closing" a concentration;
  • In relation to a situation where a notifiable concentration is subject to a further investigation, pursuant to the Draft Rules, whether there would be a maximum statutory period in which MOFCOM would complete its review process; and
  • the Draft Rules contain a provision which sets out the remedies which a business operator may face for a failure to notify MOFCOM of a notifiable concentration.  This provision states "MOFCOM shall order business operators to cease implementing the concentration; dispose shares or assets within a stipulated period; transfer the (relevant) business within a stipulated period; or reinstate the market situation before the concentration.  MOFCOM may also impose a fine of not more than RMB500,000."  This provision is a mirror of Article 48 of the AML, save for the term "shall" which has been omitted from Article 48 of the AML.  It is unclear as to the significance of the addition of this term "shall".  One view is that the addition of the term "shall" shows a stronger compulsion by MOFCOM to impose the above mentioned remedies.  It would be useful if MOFCOM could clarify the addition of the term "shall".


Overall, the publication of these Draft Rules shows MOFCOM's commitment to stepping up enforcement in relation to a failureto notify notifiable concentrations.  Business operators should be aware that a failure to seek antitrust clearance for notifiable concentrations could at best result in a delay in timetable in relation to their transactions (vis-à-vis MOFCOM investigating into the transaction); and at worst result in the sanctions as outlined above being imposed on them.

 

1 Pursuant to Article 3 of the Provisions of State Council on Declaration Threshold for Concentration of Business Operators, where a concentration reaches the following turnover thresholds, the concentration must be cleared (from an antitrust law perspective) by MOFCOM: (a) during the previous fiscal year, the total global turnover of all business operators participating in the concentration exceeded RMB10 billion and at least two of these business operators each had a turnover of more than RMB400 million within China; or (b) during the previous fiscal year, the total turnover within China of all the business operators participating in the concentration exceeded RMB 2 billion and at least two of these business operators each had a turnover of more than RMB400 million within China.

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.

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