China: Slow Down! Follow Merger Filing Procedures Step By Step

Last Updated: 1 February 2016
Article by Michael Gu and Bai Chen


On 29 September 2015, the Ministry of Commerce of the People's Republic of China ("MOFCOM") issued four penalty decisions on parties involved in four merger cases that failed to fulfill their notification obligations under the Anti-Monopoly Law ("AML"). It is the second time that MOFCOM has announced penalties on non-filers following the penalty decision for Tsinghua Unigroup's failure to notify its acquisition of RDA Microelectronics in December 2014.


The four penalties are:

  • Bestv New Media and Microsoft were each fined RMB 200,000 for their failure to make a merger filing prior to the establishment of a joint venture;
  • Bombardier Transportation Sweden and CSR Nanjing Puzhen were each fined RMB 150,000 for their failure to submit a merger filing prior to the establishment of a joint venture;
  • Fujian Electronics & Information (Group) Co Ltd was fined RMB 150,000 for its failure to submit a merger filing prior to its acquisition of a 35% stake in Shenzhen CHINO-E Communication;
  • Shanghai Fosun Pharmaceutical Industrial Development was fined RMB 200,000 for its failure to submit a merger filing prior to its acquisition of a 35% stake in Suzhou Erye Pharmaceutical.

1. The joint venture of Bestv New Media ("Bestv") and Microsoft

Bestv and Microsoft signed a contract on 17 September 2013 to establish a joint entity named E-Home Entertainment Development, with an ownership ratio of 51:49, in the Shanghai Pilot Free Trade Zone. The JV was established on 1 October 2013, and is mainly engaged in design, development, manufacturing and sales of game entertainment application software.

MOFCOM started its investigation of the deal on 6 January 2015 under the AML following a complaint received in June 2014. After six months of evaluation, MOFCOM determined that the deal had reached the notification threshold prescribed in the AML but the two parties had failed to file with MOFCOM beforehand.

MOFCOM conducted an assessment of the impact of the deal on market competition and concluded that the deal would not restrict or eliminate competition. Since both parties made supplemental filing after the complaint had been filed and actively cooperated with MOFCOM during the investigation, MOFCOM imposed fines of RMB 200,000 on each of them (the maximum monetary penalty being RMB 500,000).

2. The joint venture of Bombardier Transportation Sweden and CSR Nanjing Puzhen

On 3 November 2014, Bombardier Transportation Sweden and CSR Nanjing Puzhen signed an agreement to establish a joint venture, with an ownership ratio of 50:50, manufacturing monorail and automated people mover (APM) cars. Both companies appointed board members and management executives to the JV. The JV subsequently obtained a business license on 11 November 2014 without notifying MOFCOM.

On 29 December 2014, after being aware of the possible violation, both parties hoped that they could make up for their wrongdoing by making a remedy filing. They therefore notified MOFCOM on their own initiative.

Even though the JV presented no negative impact on competition, failure to notify MOFCOM of a notifiable deal was in violation of the AML and as a result, MOFCOM decided to fine the two companies RMB 150,000 each.

3. Fujian Electronics & Information (Group) Co Ltd ("Fujian Electronics")'s equity acquisition in Shenzhen CHINO-E Communication ("CHINO-E")

On 16 July 2014, Fujian Electronics signed a share transfer agreement with certain shareholders of CHINO-E to acquire a 35% stake in the latter.

On 31 July 2014, Fujian Furi Electronics, a company owned by Fujian Electronics through an indirect holding, signed an agreement with all shareholders of CHINO-E to purchase 100% shares of CHINO-E through a non-public offering of shares, and subsequently filed this deal with MOFCOM on 12 August 2014. However, an anonymous third party informed MOFCOM during the public notice period that Fujian Electronics had already gained control of CHINO-E through the previous 35% stake acquisition which should have been filed with MOFCOM in the first place. MOFCOM determined that Fujian Electronics' previous 35% stake acquisition had reached the notification threshold, and Fujian Electronics' failure to notify MOFCOM before completion had violated Article 21 of the AML.

MOFCOM evaluated the competitive impact of the transaction and determined that the transaction would not eliminate or restrict competition, and therefore decided to fine Fujian Electronics RMB 150,000.

4. Shanghai Fosun Pharmaceutical Industrial Development ("Fosun Industrial Development")'s equity acquisition in Suzhou Erye Pharmaceutical ("Erye Pharmaceutical")

Fosun Industrial Development's parent company, Fosun Pharmaceutical, initially filed with MOFCOM its acquisition of a 65% stake in Erye Pharmaceutical in December 2014, with Fosun Industrial Development acquiring a 35% stake and Fosun Pharmaceutical's overseas subsidiary taking the remaining 30% stake.

However, MOFCOM initiated an investigation on 16 March 2015 and found that Fosun Industrial Development had in fact completed the acquisition of the 35% stake in Erye Pharmaceutical during the consultation period and before obtaining clearance from MOFCOM.

Based on the competition assessment, MOFCOM concluded that the 35% share transaction met the notification threshold, but would not eliminate or restrict competition. Considering that Fosun Industrial Development's parent company, Fosun Pharmaceutical, had filed the merger notification of the 65% stake acquisition with MOFCOM before its completion, MOFCOM fined Fosun Industrial Development RMB 200,000.


It has been almost a year since MOFCOM last issued a penalty decision against a non-filer. Compared with the fine imposed on Tsinghua Unigroup (i.e. RMB 300,000), these four penalty decisions seem relatively light, probably because of the involved parties' more active and cooperative attitude. For example, in the two JV deals, all involved parties made remedy filings voluntarily. In Fujian Electronics' case and Fosun Industrial Development's case, both companies took the initiative to file with MOFCOM their acquisition deals, although they had somewhat twisted the normal course of events and failed to follow the legitimate procedure.

Nevertheless, publishing four penalty decisions in one day conveys a strong message to companies attempting to get away from a notifiable merger that MOFCOM is closely monitoring merger controls in China and is determined to enhance law enforcement. While Bestv and Microsoft established the JV on 1 October 2013, MOFCOM started its investigation on the JV deal almost one and a half years later in January 2015 following a complaint, sending a warning that non-filers will be punished eventually no matter how far they have run. Even if MOFCOM did not pick up on the deal at first, a complaint from somewhere else would usually bring the deal into MOFCOM's line of sight. Any company hopes to avoid this fully integrated network of supervision need to think twice before moving forward.

Interestingly, these four cases feature distinctive cause and time point. As previously mentioned, with respect to the two JV deals, one was after a complaint had been filed with MOFCOM, and the other was completely out of self-correction reasons, and for the two acquisition deals, illegal conduct was exposed during the public notice period and the consultation period respectively.

The two acquisition deals imply that acquiring 35% stake could be deemed as gaining control over the target company in MOFCOM's opinion. Although whether a company can exercise control over another company is to be determined based on several factors apart from the shareholding, a 35% stake may be a crucial factor in merger review cases.

Generally speaking, the involved parties are fortunate since they only suffered monetary damages, without being compelled to conduct divesture or spin-offs of their businesses. However, these wrongful behaviors also brought dents to their reputations. It is not clear whether the involved parties had carelessly missed out on their filing obligations or they had violated the merger filing rules on purpose given that the maximum RMB 500,000 fine seems overly insufficient to have any deterrent effect on companies with multi-million annual revenues and big-ticket deals. Time is of the essence in the business world and RMB 500,000 is a small price to pay when compared to the damages a lengthy merger review process would bring on their deals.

Undertakings are advised to be cautious in fulfilling their pre-merger notification obligations to avoid penalty, and in particular, reputational damage. However, given that the cost of violating the law is much lower in comparison with the costs (including the opportunity cost) associated with the potential delay in implementing the merger due to the long review process, some enterprises might rather take a more aggressive approach to implement the merger before securing clearance from MOFCOM. A more stringent penalty system would need to be put in place. Among other measures, the monetary penalty of non-filing should at least be significantly increased, so that companies would be truly "scared" and more willing to follow filing procedures accordingly.

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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