China: MOFCOM Releases New Consultation Drafts Relating to China´s Merger Control Regime – Part I

Last Updated: 23 January 2009

Originally published January 22, 2009

Article by Hannah C. L. Ha , John M. Hickin and Gerry P. O'Brien

Keywords: MOFCOM, China's Ministry of Commerce, new consultation drafts, China's merger control Regime, Anti-monopoly Law, AML, draft notification measures, draft review measures, draft investigation measures, draft evidence collection measures

China's Ministry of Commerce ("MOFCOM") has released four new consultation drafts relating to the country's Anti-monopoly Law ("AML") merger control regime. Those drafts are:

  • Interim Measures for Notification of Concentration of Undertakings ("Draft Notification Measures")
  • Interim Measures for Review of Concentration of Undertaking ("Draft Review Measures")
  • Interim Measures for Investigating and Disposing of Suspected Concentration of Undertakings Failing to File Notification in Accordance with the Law ("Draft Investigation Measures"); and
  • Interim Measures for Collecting Evidence on Suspected Monopolistic Concentration of Undertakings below the Thresholds ("Draft Evidence Collection Measures").

MOFCOM has invited submissions on these drafts, for which the deadline is 16 February 2009.

This client alert highlights key elements of the Draft Notification Measures, which resolve some (but not all) of the uncertainties that have surrounded the mandatory transaction notification obligations in the AML. A further client alert will be issued shortly, containing information regarding the highlights of the Draft Review Measures, Draft Investigation Measures and the Draft Evidence Collection Measures.

Highlights of the Draft Notification Measures

The Draft Notification Measures clarify several issues relating to provisions in the AML which require that certain transactions (referred to as 'concentrations' in the law) be notified to MOFCOM for pre-approval. Examples are provided below.

1. The Draft Notification Measures provide additional clarity regarding which transactions qualify as concentrations under the AML

Under Article 20 of the AML, a concentration is defined as including, inter alia:

  • the acquisition of control over another undertaking via the purchase of shares or assets; and
  • the acquisition of control, or the ability to exercise determinative effects, over an undertaking by contract or other means.

The Draft Notification Measures explain how the phrase "acquisition of control" should be interpreted in this context. Specifically, it provides that an acquisition of control will occur where an undertaking acquires more than 50% of the voting shares or assets of another undertaking. Additionally, it provides that an acquisition of control will occur in other circumstances (such as where less than 50% of the voting share or assets are obtained, or relevant contracts are implemented) where an undertaking gains the ability to, inter alia:

  • decide the nomination of one or more directors or other core members of another undertaking;
  • decide another undertaking's financial budget, operation and sales, product pricing, or significant investment; or
  • make other significant decisions on significant management and operation matters, for another undertaking.

Unfortunately, it is not clear from the Draft Notification Measures:

  • if the existence of just one of the criteria mentioned in the bullet points above will, by itself, be sufficient to constitute an acquisition of control (it may be that MOFCOM will reserve the right to determine this on a case-by-case basis); and
  • whether an undertaking that is already in a position to exercise control over another undertaking will be required to notify MOFCOM of any further transaction that may strengthen or further their control rights (for example, it is unclear how MOFCOM will treat a proposed transaction under which an undertaking holding 51% of the voting shares in another undertaking would acquire the remaining 49% of voting shares).

However, the Draft Notification Measures do confirm that the joint establishment of a new joint venture enterprise by two or more undertakings will qualify as a concentration under the AML.

2. The Draft Notification Measures clarify how the turnover of an undertaking should be calculated for the purposes of applying the relevant mandatory notification thresholds

In August 2008, China's State Council adopted rules that specify when concentrations need to be notified to MOFCOM for competition-related review under the AML. Those rules contain global and China-specific turnover thresholds ("Turnover Thresholds"), and provide that a concentration must be notified if those thresholds are achieved by undertakings involved in a concentration. The Turnover Thresholds were reported in our client alert dated 7 August 2008.

The Draft Notification Measures clarify certain matters relating to how the Turnover Thresholds are applied. In particular, they specify that:

  1. the turnover of an undertaking involved in a concentration includes turnover generated by other members of the undertaking's corporate group, and other affiliates of the group, if they satisfy criteria referenced in the Draft Notification Measures;
  2. the relevant turnover to consider is net of any taxes and surcharges (except any enterprise income tax and value added tax that will be offset, which should not be deducted);
  3. China-specific turnover should not include turnover generated by the supply of products or services to undertakings located in Hong Kong, Macau or Taiwan; and
  4. when a concentration relates to the acquisition of part of one or more undertakings, only the turnover from such part will count in respect of the undertaking(s). It appears this will address situations such as the proposed acquisition of a discrete business division of an undertaking, and would mean that only relevant turnover of that business division needs to be considered - to the exclusion of the rest of the 'seller' undertaking and its corporate group and affiliates.

3. Unclear provisions in the Draft Notification Measures

Unfortunately, the Draft Notification Measures also contain some provisions that may need to be altered to be made clear.

Article 7 is an example. This Article addresses situations where two or more concentrations are conducted between the same undertakings (or relevant members of their corporate group) within a relevant twelve month period, and each concentration assessed in isolation does not achieve the Turnover Thresholds.

The Article appears to allow MOFCOM to effectively treat the successive concentrations as a single transaction, and to aggregate relevant turnover of undertakings involved in the successive concentrations when applying the Turnover Thresholds. It is believed that the Article is directed at the issue of 'creeping acquisitions' (that is, the acquisition of a number of individual assets or businesses over time that may collectively raise competition concerns, but which individually may not qualify for mandatory MOFCOM review). However, the wording used in the Article is ambiguous and unclear, and is likely to be revised as a result of the consultation process so that MOFCOM's relevant requirements and powers can be made clear.

4. Other matters

The Draft Notification Measures also contain provisions:

  • clarifying MOFCOM's procedures, and the rights and obligations of relevant undertakings, in respect of concentrations that do not meet the Turnover Thresholds; and
  • overlapping with finalised Directive Opinions on Notification of Concentration of Undertaking ("Directive Opinions") recently issued by MOFCOM. For example, the Draft Notification Measures specify which party is required to submit a notification to MOFCOM in the context of each of the possible concentration scenarios, and outline some of the documents and information required to be included in notifications submitted to MOFCOM. Both of these matters were addressed in the Directive Opinions summarised in our client alert of 9 January 2009, and there is substantial overlap between the relevant documents.

Next Steps

JSM provided feedback on an earlier version of the Draft Notification Measures, which MOFCOM circulated to a select group of experts and stakeholders. We are pleased to report that a number of the concerns that we raised about this earlier draft have now been addressed by MOFCOM.

JSM will continue to work closely with Chinese authorities in an effort to ensure they address other issues and uncertainties such as those mentioned in this client alert, and any parties who would like to make their views known to MOFCOM are invited to contact JSM for assistance.

Learn more about our Hong Kong office and Antitrust & Competition practice.

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Copyright 2008. JSM, Mayer Brown International LLP and/or Mayer Brown LLP. All rights reserved. Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: JSM, a Hong Kong partnership, and its associated entities in Asia; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and Mayer Brown LLP, a limited liability partnership established in the United States. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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