China: Your Guide To Dealing With The New Anti-Monopoly Laws In China

Last Updated: 11 February 2009

Initially published in the February edition of the China-Britain Business Review.

The new laws will impose burdens on business but that is unavoidable, write Niamh Grogan, partner in EU and Competition, SJ Berwin, Susan Ning, Head of International Trade, King & Wood, and Matthew Townsend, trainee solicitor, SJ Berwin.

For the last six months, investors in China have been subject to a new source of regulation which is changing the way in which they go about pursuing mergers and acquisitions in the People's Republic. The rules, which were intended to establish China as a regulatory capital similar in stature to Brussels and Washington DC, have been criticised for incorporating vague clauses and unnecessarily wide administrative powers.

While these fears have been only partially allayed by the publication of the first merger review decision in November 2008 and the provision of further official guidance in early January 2009, 'foreign' (non- Chinese) businesses nevertheless face the reality of complying with the new regime.

Bearing in mind that further implementing regulations are expected in the future, this article lays out the best available answers to the main questions investors will wish to ask about the new rules.

1. How could the new laws affect your transaction?

The Anti Monopoly Law ("AML") came into force on 1st August 2008 and the Provisions of the State Council on Notification Thresholds of Concentrations of Undertakings ("the Regulations") on 3rd August 2008.

These rules, which replaced regulations promulgated in 2006, require businesses to notify the Chinese Ministry of Commerce ("Mofcom") in advance where there is an acquisition of control or decisive influence by one business of another (known as a "concentration"), which meets the notification thresholds.

Businesses, which are planning a merger or acquisition in which there is a Chinese element, should ensure that the completion timetable for the transaction incorporates the period required to gain approval from the authorities.

Such a period, which, in certain circumstances, could last for as long as 180 working days between notification and clearance, will clearly have cost implications for the parties. Of course, businesses should also consider the possibility that the transaction will not be cleared, in which case the transaction cannot go ahead.

Similarly, when considering notifications, Mofcom may decide to allow the concentration but impose restrictive conditions — as it did in its review of InBev's acquisition of Anheuser-Busch (Announcement No.95 of the PRC Ministry of Commerce, 18th November 2008). In this instance the combined entity was prohibited from increasing its existing stakes in several Chinese breweries.

Businesses which fail to notify may face a fine, and possibly forced divestment of the assets transferred.

2. Jurisdiction: will your merger or acquisition fall within the relevant territory?

The AML applies both to transactions taking place inside and outside China. The sole test for jurisdiction under Article 2 is whether the transaction has the effect of eliminating or restricting competition in the Chinese market.

This provision raises the possibility that transactions involving non-Chinese investors, taking place outside of Chinese territory, may still be subject to the law if the thresholds for turnover within the Chinese market are met.

That means that not only businesses which operate within the Chinese geographic area but also those which own or operate assets or subsidiaries located within China or which make extensive sales within China, should be aware that they might need to make a notification.

3. Will your transaction meet the thresholds for review?

Under the regulations, a notification must be made if a merger or acquisition meets one of the following two thresholds:

  • combined global turnover of the undertakings is Yn10bn (approx £1bn) and at least two of the undertakings each have Yn400m (approx £40m) turnover within the PRC; or


  • combined Chinese turnover of the undertakings is Yn2bn and at least two of the undertakings each have Yn400m turnover within the PRC.


This test is significant for foreign businesses operating in China for several reasons:

i. undertakings which have markets in several jurisdictions may, on completing a global transaction, find that they meet the notification requirements in China alone, without meeting those in the EU or America even if their presence in these markets is equally significant.

This is because the "local nexus" thresholds of Yn400m are lower than those in many other developed competition regimes.

Companies should therefore be wary of assuming that because their operations are too small to engage European and American merger control, they will also avoid it in China;

ii. as the review thresholds are higher than those employed in China before the AML came into force, businesses conducting "notifiable" transactions may be caught by the law and therefore potentially be subject to a more tailored and thorough investigation than would have been the case when regulators faced a larger caseload; and

iii. companies involved in transactions which do not meet the thresholds set out in the AML may nevertheless have to undergo administrative review. This is because the AML grants the Authority the right to conduct an investigation solely on the basis that the concentration is one which may eliminate or restrict competition.

Businesses which otherwise meet the notification thresholds may fall within one of the exceptions provided for in the AML: those which are simply undergoing internal restructuring, for example, are not required to notify.

4. Will your transaction be ruled unlawful?

The law currently allows the Authority to consider a wide range of factors when considering whether a transaction is anti-competitive. The test, under Article 28 of the AML, is whether the proposed concentration of business operators eliminates or restricts competition or may eliminate or restrict competition. In applying the test the Authority will examine the following:

i. the market share in the relevant market of the undertakings concerned and their ability to control the market;

ii. the degree of concentration of the relevant market;

iii. the effect of the transaction on market access and technological progress; and

iv. the effect of the transaction on consumers and other undertakings. In addition to these factors, the Authority will be able to have regard to such general considerations as:

v. the effect of the transaction on national economical development; and

vi. any other factors the anti monopoly authorities consider necessary to consider.

Investors should therefore be aware of the increased risk of their merger or acquisition being rejected if they operate in a sector which is unpopular with government authorities or is otherwise under public scrutiny in China.

Businesses should also take note of growing evidence that the Authority, as expected, is taking a strong line in the early enforcement of the law in order to "make examples" of early infringers.

That said, investors will, if they are able to make their case persuasively, have an opportunity to influence the Regulator's decision.

Under Article 28 of the AML, businesses are entitled to make representations that the positive effects of the transaction will outweigh the negative. Investors should bear in mind, at an early stage of notification, that they may need to instruct experts to make their case for them.

5. Will your transaction be rejected for reasons of national security?

Article 31 of the AML provides for a national security review when non-Chinese businesses merge with or acquire Chinese companies, or by other means become involved in a concentration. It is clear that this represents a separate level of review operating over and above the normal competition assessment.

The specific provisions governing the review are not contained within the AML and the scope of the national security exception is not clear.

Investors should be aware of the extra risk associated with the national security review, a risk which will vary depending on the size of the business, the sensitivity of the industry involved and the timing of the transaction.

6. Which documents will your business be required to produce?

Businesses will not need to produce significantly different documents to those required under the old regime. Article 23 of the AML lays out a list of documents that must be supplied as part of the notification process. These include:

i. summary of notification;

ii. explanation of the concentration's effect on competition on the relevant market of the concentration;

iii. agreement of concentration;

iv. the financial reports and accounting reports of the proceeding accounting year of the undertakings concerned, audited by a certified public accountant; and

v. other documents or materials stipulated by the anti monopoly authorities.

Mofcom requires a standard application form to be filled in for all transactions. Investors should also pay attention to recent guidance given by Mofcom on documentation requirements, and on how the agency will define product markets for more detailed information when preparing the notification document.

7. What delays should your business expect the review to require?

The anti monopoly authorities are obligated under Article 25 of the AML to review the documents and materials submitted within 30 days. If, however, they reach a decision that further examination is needed then they may continue the review process for a further 90 days.

Although the issue has not been officially clarified we understand that these periods refer to "working" rather than "calendar" days. A further extension of 60 (working) days can be added in exceptional circumstances (for example with the consent of both parties to a transaction).

The time limit for review under the AML is not significantly different to that under the old regime.

Moreover, the process is very similar to the EC procedure which allows for a 25 working days phase I scrutiny stage and 90 working days phase II stage. Parties to multinational deals which require EC review in addition to notification in China may find that the addition of a filing requirement in China does not significantly lengthen the timetable for completion.

Businesses which will face notification requirements in China alone and suspect that issues could be raised should allow for such a potential delay. Such a period can be minimised with effective planning — for example by notifying the authorities at the earliest possible time after a binding agreement is made (or a sufficient intention to enter an agreement has been reached or announced).

If parties see the delay associated with "phase II" scrutiny as unacceptable they may consider drafting the contract in such a way as to allow the parties to withdraw from the deal in such an event.

8. What are the penalties for noncompliance?

Before the AML came into effect, the M&A Regulations and the 2007 Guidance did not expressly provide for any fines or sanctions in case of failure to notify a controllable transaction to the merger control authorities or for carrying out the transaction before clearance of the notification.

The AML, however, expressly provides for such sanctions and thereby gives the law more "teeth" than its predecessors. If investors implement a transaction without having obtained prior approval, the Authority is authorised to suspend the transaction, order the parties to dispose of the shares and/or assets transferred, and impose a fine of up to Yn500,000.

The Bureau of Antitrust Investigation of Mofcom has established six divisions, including a special division to supervise undertakings that have failed to notify a notifiable transaction. As we have already indicated, the Authorities are expected to enforce the new rules emphatically.

Conclusion

So what does all this mean for businesses that may at some point find their businesses fall within the legislation?

First, increased costs. Preparing submissions and notifications is bound to add to costs. Businesses will find themselves having to conform to strictly enforced rules requiring the instruction of experts and the factoring of time delays into their transactions.

Second, uncertainty and risk for businesses attempting transactions in the short term. This is because new guidance, including rules governing turnover calculations, public hearings, the applicants' rights and obligations, and many other important matters, are still in the pipeline.

Third, uncertainty arising from the regulator's ability to dismiss transactions on a wide variety of grounds, and, as demonstrated in the InBev/Anheuser- Busch review, to impose conditions on transactions.

And, fourth, increased vigilance and toughness on the part of the authorities — again potentially increasing the cost of compliance.

While it is hoped that the AML will, in the long term, increase the legal certainty for investors into China, despite the gradual appearance of further regulations and guidance, the risk associated with doing business in China may have increased. Nevertheless, businesses cannot afford to ignore the AML which has become another element of doing business in 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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions