China: Chinese Merger Control - New Draft Measures Mean Greater Risk - 11 February 2009

Last Updated: 9 March 2009
Article by Martyn Huckerby, Tingting Cai and Kien Choong

On 6 February 2009, the Chinese Ministry of Commerce's Anti-Monopoly Bureau ("AMB") issued draft interim measures concerning the AMB's merger control procedures. These measures regulate the investigation and disposal of mergers or "concentrations of undertakings" that are below prescribed notification thresholds but suspected to have or may have the effect of eliminating or restricting competition ("New Measures").

These New Measures follow the issuance of a series of other draft interim measures released for comment in early January 2009 that addressed the following queries:

  • Do compulsory pre-merger notification rules apply to a proposed concentration? If yes, what procedures will the AMB follow to review a proposed concentration?
  • What measures will the AMB take to investigate concentrations that meet prescribed merger notification thresholds but have not been notified to the AMB in breach of pre-merger notification rules?
  • What measures will the AMB take to investigate concentrations that neither meet the prescribed merger notification thresholds nor require advance notification but nonetheless are suspected to have or may have the effect of eliminating or restricting competition?

These new measures are currently open for public comment until 6 March 2009.

Highlights

  • Even if pre-merger notification is not compulsory, parties to a merger run the risk of penalties and possibly divestiture if they complete the merger and it is found to contravene the Anti-Monopoly Law.
  • The Anti-Monopoly Bureau confirms that the merger control regime applies to joint ventures.
  • When determining whether pre-merger notification is compulsory, total group turnover of each merging party will be counted. "Group turnover" includes the turnover of all parties controlled (directly or indirectly) by the merging party, and turnover of all parties controlling (directly or indirectly) the merging party.

Background on draft regulations

At the beginning of the year, the AMB issued a series of draft guidelines on the merger control regime, which were discussed in a previous alert (issued 9 January 2009). Continuing its legislative momentum, the AMB revised four of those draft guidelines just prior to Chinese New Year on 19 January and 20 January 2009. The revised draft guidelines are open for public comment until 16 February 2009. Below is a summary of the revised guidelines:

  • Draft Interim Measures for Notification of Concentration of Undertakings ("Draft Interim Measures No. 1"): Explains what "control" means and how to calculate "turnover" for the purpose of applying notification thresholds.
  • Draft Interim Measures for Review of Concentration of Undertakings ("Draft Interim Measures No. 2"): Sets out the process that the AMB will follow to review mergers that are notified for clearance.
  • Draft Interim Measures for Investigating and Disposing of Concentration of Undertakings Failing to File Notification in Accordance with the Law ("Draft Interim Measures No. 3"): Sets out the process for investigating failures to notify the AMB of concentrations.
  • Draft Interim Measures for Collecting Evidence on Suspected Monopolistic Concentration of Undertakings below the Thresholds ("Draft Interim Measures No. 4"): Sets out the process for identifying concentrations that may restrict/eliminate competition even if pre-merger clearance is not compulsory.
  • Draft Interim Measures for Investigating and Disposing Suspected Monopolistic Concentration of Undertakings below the Thresholds ("New Measures"): Sets out the process for investigating and preventing concentrations that are found to restrict/eliminate competition even if pre-merger clearance is not compulsory.

Do compulsory pre-merger notification rules apply to a proposed concentration?

Under the Anti-Monopoly Law, pre-merger notification is compulsory where certain turnover thresholds are met. The Draft Interim Measures No. 1 explain: (a) what counts as a concentration, and (b) what turnover is taken into account to determine whether the turnover thresholds are met.

(a) What counts as a concentration?

Under the AML, any merger or acquisition of control counts as a concentration. The Draft Interim Measures No. 1 explains that a firm acquires "control" whenever that firm acquires:

  • (Voting rights): more than 50% of voting rights in shares (or assets) or
  • (Right to nominate directors): a right to nominate one or more directors, or
  • (Operational control): the right to make operating and investment decisions including financial budgets, pricing and production.

We will be recommending to the AMB that the New Measures be amended to clearly provide that companies should consider each of the factors in relation to operating control on a cumulative basis to determine whether there is operating control, rather than assessing each factor individually (it is currently unclear whether the AMB intends to take the opposite approach).

The establishment of a joint venture by two or more firms, which may involve an acquisition of control by each party to a joint venture, will likely be deemed a concentration. However, the position of "silent partners" to a joint venture is not clear in that the Draft Interim Measures No. 1 do not clearly outline in what circumstances a joint venture is a concentration and what turnover should be counted to determine whether the joint venture meets pre-merger notification thresholds.

(b) What turnover is counted?

There are two turnover thresholds where pre-merger notification is compulsory:

  • (China turnover): the aggregate turnover in China of all parties to the concentration exceeds RMB 2 billion (around USD 0.3 billion) and the China connection test* is met, or
  • (Global turnover): the aggregate turnover worldwide of all parties to the concentration exceeds RMB 10 billion (around USD 1.5 billion) and the China connection test* is met.

* The China connection test is met if at least two parties to the concentration each have turnover in China exceeding RMB 400 million (around USD 60 million).

The Draft Interim Measures No. 1 state that the turnover of a party must include the turnover of all other firms controlled (directly or indirectly) by that party, the turnover of all firms that control (directly or indirectly) that party, and the turnover of all firms controlled (directly or indirectly) by the firms that control that party. In short, the entire Group turnover will be counted to determine whether pre-merger notification is compulsory.

What merger clearance procedures will the AMB follow?

The Anti-Monopoly Law envisages a two-stage process for reviewing concentrations: (a) a 30 day "preliminary review" and (b) a "further review" up to a further 150 days. Under "further review", the party notifying the AMB of a concentration will be given an opportunity to make written submissions on any opposition to the concentration, and seek merger clearance subject to conditions. The following diagram illustrates the process for reviewing mergers notified to the AMB, and merger control under the Anti-Monopoly Law more generally:

What measures will the AMB take to investigate concentrations that have not been notified to the AMB in breach of pre-merger notification rules?

The Draft Interim Measures No. 3 make it clear that the AMB will proactively investigate concentrations that meet the merger notification thresholds but have not been notified for clearance. Where there is a failure to seek merger clearance in contravention of the pre-merger notification rules, the AMB may, in addition to requiring concerned parties to file a merger notification, suspend the concentration, impose penalties or demand that parties divest assets in accordance with the relevant provisions of the Anti-Monopoly Law. At present, neither the provisions in the Anti-Monopoly Law nor the Draft Interim Measures No. 3 provide a clear understanding as to how the AMB will implement divestitures. This is an area that the authorities will need to address especially in light of its highly intrusive nature.

What measures will the AMB take to investigate concentrations that are suspected to eliminate or restrict competition (even though pre-merger notification is not compulsory)?

The AMB may collect evidence to determine whether there are grounds to suspect that a concentration eliminates or restricts competition. If grounds for such suspicion exist, the AMB may notify the parties concerned that it will investigate the concentration fully.

The process that the AMB will take to investigate such concentrations are set out in the New Measures. The process is broadly the same as the process that the AMB will take when reviewing concentrations that have been notified for clearance. The fact that pre-merger notification thresholds do not apply to a concentration will not affect the way the AMB will review the concentration to determine whether its initial suspicion that the concentration is anti-competitive is confirmed.

The merging parties may undertake to suspend completion of the concentration for a period agreed with the AMB, in which case the AMB must use its best efforts to complete its investigation within the agreed period. If the transacting parties nevertheless proceed to complete the concentration, they assume the risk that the AMB may determine that the concentration restricts or eliminates competition in contravention of the Anti-Monopoly Law.

As is the case with the standard process for reviewing mergers that have been notified, the AMB may suspend its investigation if the parties agree to take specific measures to address the AMB's concerns within an AMB approved time period. If the AMB determines that a concentration has or may have the effect of eliminating or restricting competition, the AMB may decide to prohibit the concentration, impose penalties or order the parties to divest their assets. However, as noted above, no detail has been provided on when divestiture is an appropriate remedy and how a divestiture should be implemented.

Merging parties should not assume that concentrations will not be blocked just because pre-merger clearance is not compulsory

To conclude, the New Measures confirm that the AMB may investigate concentrations that it suspects may eliminate or restrict competition even if pre-merger notification is not compulsory. Consequently merging parties cannot assume that a proposed concentration will not be blocked just because it is not compulsory to seek pre-merger clearance.

What can merging parties do to mitigate risk?

In some cases, it may be prudent for parties to proactively and informally consult with the AMB to reduce the likelihood of a surprise investigation by the AMB. The draft interim measures allow for the possibility of "voluntary" merger notification. We will recommend to the AMB that final version of the guidelines include a provision allowing parties to seek an informal indication from the AMB that it is unlikely to investigate the concentration on suspicions that the concentration is anti-competitive. If this recommendation is accepted, it may be preferable to seek "informal clearance" rather than submit a "voluntary" merger notification which may hold up a proposed concentration for longer than strictly necessary.

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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