China: China´s Merger Control Laws - An Event Of Olympic Proportions - 22 August 2008

Last Updated: 15 October 2008
Article by Dave Poddar and John Shi

China's new Anti-Monopoly Law (AML), including its new merger control regime, recently came into effect. Under the new merger control regime, transactions that meet specified turnover thresholds must be notified to, and cannot be closed until they are cleared by, the Chinese merger control authority.

In April this year, we issued an alert which provided an early indication of the new merger control regulations that were likely to come into effect upon the commencement of the AML. This Alert was intended to provide clients undertaking M&A activity in the Asia-Pacific region with advance notice of the proposed law and how it may affect their business transactions.

Companies that contravene the requirement to notify mergers to the Chinese authority may be subject to penalties, including fines of up to RMB500,000 and divestiture orders.

The turnover thresholds which trigger the mandatory notification requirements were published by the State Council on 3 August 2008 (see below). However, a number of additional regulations and guidelines in relation to merger control procedures are yet to be published.

It is contemplated that approximately 20-40 implementing rules, guidelines and regulations may be issued in relation to the various provisions of the AML. In addition to the merger control regime, the provisions of the AML relate to:

  • anti-competitive monopoly agreements,
  • abuse of dominant position, and
  • abuse of administrative power.

As the Chinese authorities have significant power to impose penalties for contraventions of the new competition rules (between 1% and 10% of sales revenue in the preceding year), the issuing of new regulations and guidelines will be eagerly awaited.

The Notification Thresholds

The State Council's Rules on Notification Thresholds for Concentrations of Undertakings (Rules on Notification Thresholds) require the notification of transactions that meet either of the following two criteria:

  • Threshold 1 - The combined aggregate worldwide turnover of all undertakings to the concentration in the last financial year is more than RMB10 billion (approximately US$1.32 billion) and the turnover within the People's Republic of China (PRC) of each of at least 2 of the undertakings to the concentration in the last financial year is over RMB0.4 billion (approximately US$52.6 million), or
  • Threshold 2 - The combined aggregate PRC turnover of all the undertakings to the concentration in the last financial year is more than RMB2 billion (approximately US$263 million) and the PRC turnover of at least two undertakings to the concentration in the last financial year is over RMB0.4 billion (approximately US$52.6 million).

These notification thresholds are higher than those proposed by the State Council during its consultation earlier in the year. Following that consultation process, the State Council has also removed a proposed third limb of the notification threshold relating to market shares. The removal of this third requirement is a welcome development, given the legal uncertainty which can arise as a result of potentially differing views as to the appropriate market delineation. However, a degree of uncertainty remains as, under the AML, the Ministry of Commerce (MOFCOM) retains a discretion to examine transactions which fall short of the notification thresholds but which it nevertheless considers may have the effect of eliminating or restricting competition. This discretion has been criticised by some commentators as creating uncertainty and decreasing transparency in merger control.

Once notified, MOFCOM can prohibit a merger or acquisition if it has or may have the effect of eliminating or restricting competition.

AML enforcement structure

MOFCOM, the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC) will each have responsibility for administering aspects of the AML. However, recent indications are that MOFCOM will take sole responsibility for merger control, with an antitrust investigation bureau to be established within MOFCOM as well as an anti-monopoly committee to provide policy guidance.

It is also reported that SAIC will have responsibility for non-price related behaviour such as anti-competitive agreements, administrative monopolies and abuse of dominance, with a special bureau to be established under the NDRC to be responsible for dealing with price-related monopoly agreements.

Issues remaining to be resolved

Earlier drafts of the Rules on Notification Thresholds provided guidance on a range of associated issues relating to merger control in the PRC. However, the final Rules on Notification Thresholds issued on 3 August 2008 relate only to the merger notification thresholds. As a result, guidance is still required in relation to a number of issues, including:

  • the calculation of turnover thresholds, particularly in different industry segments such as banking, insurance, securities and futures,
  • the definition of a "concentration". This is important as, although the AML and Rules on Notification Thresholds provide that any of the following can give rise to a "concentration":
  • a merger among undertakings,
  • acquisition of control through acquiring assets or shares,
  • the acquisition of control by contract or other means to exercise decisive influence,

neither the AML nor the Rules on Notification Thresholds provide any guidance as to what will constitute the acquisition of control or the ability to exercise decisive influence,

  • any simplified or expedited procedures for review of non-problematic mergers. While the previous draft provided such a procedure, it is not included in the Rules on Notification Thresholds,
  • the application of the merger control provisions and procedures to public company takeovers and certain acquisitions by institutional investors, and
  • the application of commercial confidentiality regimes to the contents of merger filings.

Conclusion

Merger control is an area that warrants close attention by companies undertaking M&A activity in the Asia-Pacific region. A number of countries in the region already have merger control regimes including Australia, China, Japan, Korea, New Zealand, Singapore, Taiwan and Thailand. India has recently announced a proposed regime and the Hong Kong Bureau of Commerce and Economic Development is also currently consulting in relation to the introduction of a competition law, with merger control being one of the issues under consideration.

Given that the new Chinese merger control rules -- and the merger control rules in a number of other Asian countries -- involve a mandatory notification and suspension obligation, companies considering acquisitions of businesses which are active in those countries will need to consider the relevant merger control rules at an early stage, and factor the notification and review periods into the transaction planning process. Careful preparation is also critical to minimise the risk of unforseen delays to the transaction process.

View our unofficial English translation of the Regulations

View the Chinese text of the Regulations

The views set out in this publication are based on our experience as international counsel representing clients in their business activities in China. As is the case for all international law firms licensed in China, we are authorised to provide information concerning the effect of the Chinese legal environment. However we are not admitted to practice Chinese law and so are unable to issue opinions on matters of Chinese law.

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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