On November 27, 2009, the Anti-monopoly Bureau of the Chinese Ministry of Commerce (MOFCOM) released the Measures on the Notification of Concentrations of Business Operators (the "Notification Measures") and the Measures on the Review of Concentrations of Business Operators (the "Review Measures").[1] Initial drafts of both measures had previously been released for public comment by MOFCOM in January 2009.[2] The Legislative Affairs Office of State Council (SCLAO) circulated revised drafts for further comment in March 2009.[3]
The new measures comport with prevailing international practices on many technical and conceptual issues, often codifying MOFCOM's existing practices or incorporating the suggestions from public comments. The final measures formally resolve many basic questions concerning the applicability and administration of the merger review provisions of the Anti-monopoly Law of the PRC.[4] Nevertheless, many key questions have been deferred to future regulations or case-by-case judgments.
Clarification of Notification Thresholds
The current notification thresholds are keyed to the parties' annual global revenues and revenues "within China."[5] Notification is required if: (1) either (a) the combined global sales revenue of all parties exceeded RMB 10 billion (approximately US$1.46 billion) or (b) the combined sales revenue from within China of all parties exceeded RMB 2 billion (approximately US$293 million); and (2) revenue from within China of at least two parties each exceeded RMB 400 million (approximately US$59 million) during the previous year. The new Notification Measures provide further guidance on applying these revenue thresholds.
Aggregation of Group Revenue
The Notification Rules memorialize MOFCOM's practice of aggregating parties' revenues at the "group" or "ultimate parent entity" level. The revenues for a "business operator" party to the concentration should include the revenues of the party, the party's subsidiaries, the party's ultimate parents (described as "business operators directly or indirectly controlling" the party), and the ultimate parents' other subsidiaries.[6] If transaction parties jointly control an entity, its revenues should be attributed to the parties.[7] Although earlier drafts called for the equal allocation of the revenue between the controlling shareholders, the final version does not specify the basis for allocation.[8] If a party exercises "joint control" over an entity with a third party unrelated to the transaction, the new rules suggest that the entire turnover of the jointly controlled company should be attributed to the transaction party.[9]
Distinguishing Seller and Target Revenues
The Notification Rules specifically provide that "when a concentration includes acquisition of parts of one or more business operators" then "for the seller, only the revenue relevant to the concentration" should be considered.[10] This text may reasonably be construed to follow prevailing international practices with respect to acquisitions by focusing on the revenues of the "target" (i.e., the business being sold) rather than "selling entity" as a whole. [11] To prevent parties from circumventing review by disaggregating large targets into smaller deals, all transactions between the same buyer and seller over the preceding two year period must be aggregated when applying the thresholds.[12]
Measuring Revenue
The Notification Measures clarify that "revenue" means "the income generated from the sales of products and supply of services of the business operator during the previous fiscal year with relevant taxes and add-ons hereof deducted."[13]
Revenue "Within China"
The Notification Measures confirm that China revenues only include transactions in which "the purchaser of products or services provided by the business operator is located in China."[14] Parties have generally focused on sales to customers located in Mainland China. Indeed, earlier drafts provided that "for the purpose of these provisional measures, revenue from Hong Kong Special Administration Region, Macau Special Administration Region, and Taiwan is not regarded as revenue generated within China."[15] The final version, however, omits this explicit carve-out without expressly stating that revenues from these jurisdictions should be regarded as China revenues. Although this deletion may be designed to avoid sensitive issues, it is not difficult to imagine scenarios in which inclusion of Taiwan or Hong Kong revenues might push the parties' "China" revenues above the thresholds.
Definition of Control
The final version of the Notification Rules retreats from the thorny question of defining "control." The AML follows European practice in defining reportable transactions as "concentrations." Article 20 defines concentrations to include mergers of undertakings or acquisitions by one undertaking of control over another undertaking's "equity or assets," or of "control or capability to exercise decisive influence on other undertakings, through contract or other means." The text treats "capability to exercise decisive influence" as a concept distinct from "control" rather than, as under European practice, a clarification of the concept of "control."
MOFCOM's initial draft tackled this issue head-on, defining "control" to include the capability "to make decisions regarding such important management and operational issues of other business operators as the appointment of one or more board members or key management personnel, financial budgets, operation and sales, pricing, material investments, etc."[16]
Foreign commentators emphasized the risks that many customary protections for minority shareholders might be deemed to confer such capability, thereby transforming minority investments into reportable concentrations.[17] In response, the revised SCLAO draft addressed the rights of minority investors. "An acquisition of control shall be determined comprehensively based on the above mentioned factors, but granting middle-small shareholders veto rights over such matters as the amendment of the articles of incorporation, increase of the capital, and liquidation for the purpose of protecting the middle and small shareholders' rights shall not be deemed as acquisition of control."[18] Although this language still might be interpreted expansively, it did provide a textual basis for removing many minority investments from the sweep of Chinese merger review.
The final version, however, omits both the elaboration on the concept of control and the carve-out for minority shareholder rights.
Joint Ventures
In a similar vein, the Notification Measures omit provisions from previous drafts concerning joint ventures. The AML does not specifically address the circumstances in which joint ventures should be analyzed as concentrations, rather than potential "monopoly agreements."[19] MOFCOM's original draft measures stipulated that "the establishment of a new continuously and independently operating enterprise by two or more business operators (hereinafter parent companies) fall into the scope of concentrations of business operators as provided in Article 20 of the Anti-monopoly Law."[20] Foreign commentators responded by emphasizing the distinction between "full-function" joint ventures or more limited collaborations.[21] The SCLAO draft, in turn, incorporated key elements of the concept of full functionality by specifying that such ventures must be "new continuously and independently operating enterprises" and by expressly excluding "special purpose companies which only undertake such specific functions of their parent companies as research and development and sale or production of certain products."[22] These provisions have all been deleted from the final Notification Measures, which include no specific discussion of the treatment of joint ventures.
Notification Materials
Article 10 of the new Notification Measures prescribes the form and contents of merger notifications, largely tracking the official filing guidelines issued by MOFCOM in January 2009.[23]
Notifications must be accompanied by a notification letter introducing the transaction and the parties. Foreign filers must provide notarized copies of their registration instruments (i.e., certificates of incorporation or business license), and filings through counsel must be accompanied by a power of attorney. Notifications must be submitted in electronic form and in hard copy, with separate confidential and non-confidential versions. But, while MOFCOM's previous guidelines permitted the parties to submit Chinese abstracts of foreign language documents, the new Notification Measures simply require "translations" without expressly allowing Chinese summaries.[24] Parties must submit copies of the transaction documents and their audited financial statements, along with other materials requested by MOFCOM.[25]
With respect to the substantive contents, the Notification Measures likewise build on current practice. The notification must explain the concentration's effects on "competition in the relevant market" by addressing the following issues: general information on the parties and the transaction; market definition; the parties' market power; market shares of the parties and competitors in the relevant markets; entry barriers; the transaction's expected impacts on competition, the development of the industry, the improvement of technology, the development of the state economy, consumers and other business operators, and competition. Most of these issues must be addressed under the current guidelines.[26]
Several departures from prior drafts and current practice are noteworthy. While earlier drafts directed the parties to report on the opinions of "relevant authorities" (such as local governments and sectoral regulators), parties are now simply encouraged to provide such information "voluntarily."[27] Deleting this provision reflects MOFCOM's practice of soliciting views directly from other governmental bodies. Similarly, earlier drafts mandated the submission of "all kinds of reports supporting the concentration, including due diligence reports, research reports, and reports on the concentration plan."[28] Commentators objected that many of these sensitive materials are likely irrelevant to competitive effects. In the final measures, parties are encouraged to provide "reports supporting the concentration" voluntarily to aid MOFCOM's consideration.[29] It remains to be seen, however, whether MOFCOM's expectations for disclosure of such materials eventually will obscure the "voluntariness."
Voluntary Notification
MOFCOM has the authority to investigate any concentration that threaten to restrict or eliminate competition, even if the thresholds for mandatory notification by the parties are not satisfied.[30] Previously released draft measures would extend this authority to investigating and potentially unwinding consummated transactions. Accordingly, the Notification Measures permit parties to submit transactions voluntarily to mitigate the risks of subsequent challenges.[31]
Investigation Schedule
The AML prescribes a two-phase review process, much like the bifurcated procedures in the United States, Europe, and many other jurisdictions. The initial 30 day review period commences after a filing is accepted as "complete."[32] The parties may proceed with a transaction if they receive no notification of further review from MOFCOM before the end of the 30-day period.[33] MOFCOM may initiate a second-phase review of up to 90 days, which can be extended for an additional 60 days if the parties' consent, if the submission is deemed inaccurate, or if circumstances have significantly changed.[34]
Ascertaining precisely when the discrete review phases begin and end has often proved challenging, as practices have varied between MOFCOM offices and cases. The new measures, however, require MOFCOM to notify the parties in writing when the notification is deemed "complete" and the initial review period begins and when initiating a second-phase review.[35]
Investigations & Hearings
MOFCOM may investigate a reported transaction by requesting information and documentation from the parties, customers, suppliers, competitors, and other relevant entities or government agencies.[36] Indeed, MOFCOM's recent merger decisions describe MOFCOM's active solicitation of the views of trade associations, market participants, and government authorities.
The Review Measures further provide that MOFCOM may convene a hearing at its own initiative or at the request of relevant parties. MOFCOM may invite a broad range of interested parties and experts to participate by delivering written and oral statements and by responding to questions from MOFCOM.[37] Whereas earlier drafts stipulated that hearings would not be public,[38] the final version is silent on the issue. Similarly, draft provisions for the preparation of an official written record of the hearing were omitted.[39]
Statement of Objections & Right of Defense
The Review Measures broadly affirm the transaction parties' rights to submit written statements and defend their interests in the review process, admonishing MOFCOM to "heed" ("tingqu") the parties' views.[40] If MOFCOM determines that a concentration is likely to have the effect of eliminating or restricting competition, it must issue to the parties a written "statement of objections" ("fandui yijian") and set a deadline for the parties to submit a written defense. The parties' written defense should present relevant facts and analysis, supported by evidence. Failure to submit a timely written defense may be construed as conceding to the objections.[41]
The AML requires MOFCOM to "publish in a timely manner" decisions to prohibit or approve conditionally concentrations, thus producing a public record of blocked deals. Publication of decisions clearing transactions is left to MOFCOM's discretion.[42] In most cases, however, MOFCOM provides the parties with a written confirmation of approval.
Remedial Conditions
The Review Measures confirm that remedial conditions may be proposed either by the parties themselves or by MOFCOM. MOFCOM may impose structural conditions (e.g., divestitures), behavioral conditions (e.g., providing access to infrastructure or licensing technology), or both. Remedial conditions must be memorialized in writing and must be capable of reducing or eliminating the transaction's anticompetitive effects.[43] These provisions reflect MOFCOM's reliance on both behavioral and structural remedies in recent rulings. For example, MOFCOM cleared Panasonic's acquisition of Sanyo on the divestiture of entire business lines in the battery sector, including facilities outside China, and restricted Panasonic's exercise of its voting rights in a joint venture with Toyota.[44] Similarly, MOFCOM conditioned its approval of Pfizer's acquisition of Wyeth on the divestiture of Pfizer's swine mycoplasma pneumonia vaccine business in China, including the necessary tangible assets and intellectual property.[45] In clearing General Motors' acquisition of auto parts supplier Delphi, MOFCOM directed GM to abstain from a variety of discriminatory or exclusionary practices in dealings with other carmakers and facilitate transitions to alternate auto parts suppliers.[46]
More Measures in the Pipeline?
MOFCOM likely prioritized the Notification Measures and the Review Measures because these measures address basic questions about the applicability and administration of the merger review scheme. Other draft measures, however, still await finalization. The "Interim Measures for Investigating and Disposing the Suspected Concentration of Business Operators Failed to File a Notification according to Law"[47] outline procedures for investigating and addressing circumstances in which parties fail to report transactions that trigger the applicable notification thresholds. The procedures set forth in the "Interim Measures on Collecting Evidences regarding Suspected Monopolistic Concentrations between Business Operators Not Reaching the Notification Thresholds"[48] and the "Interim Measures on Investigations and Handling of Suspected Monopolistic Concentrations between Business Operators Not Reaching the Notification Thresholds",[49] in contrast, address circumstances in which MOFCOM determines that an otherwise unreportable transaction nevertheless threatens to restrict or eliminate competition. On March 13, 2009, the Legislative Affairs Office of State Council released revised drafts of these measures for further public comment.[50] The final form of these measures remains uncertain, as does the likely timing of their issuance.
Endnotes
[1] See Jingyingzhe Jizhong Shenbao Banfa [Measures on the Notification of Concentrations of Business Operators], promulgated by the Ministry of Commerce on November 21, 2009 and effective on January 1, 2010, available at http://fldj.mofcom.gov.cn/aarticle/c/200911/20091106639149.html (visited December 1, 2009); Jingyingzhe Jizhong Shencha Banfa [Measures on the Review of Concentrations of Business Operators], promulgated by the Ministry of Commerce on November 24, 2009 and effective on January 1, 2010, available at http://fldj.mofcom.gov.cn/aarticle/c/200911/20091106639145.html (visited December 1, 2009).
[2] See Jingyingzhe Jizhong Shenbao Zanxing Banfa (Zhengqiu Yijian Gao) [Provisional Measures on the Notification of Concentrations of Business Operators (Draft for Comments)] ("MOFCOM Draft Notification Measures"), January 20, 2009, available at http://fldj.mofcom.gov.cn/aarticle/zcfb/200901/20090106011461.html (visited December 2, 2009); Jingyingzhe Jizhong Shencha Zanxing Banfa (Zhengqiu Yijian Gao) [Provisional Measures on the Review of Concentrations of Business Operators (Draft for Comments)] ("MOFCOM Draft Review Measures"), January 20, 2009, available at http://fldj.mofcom.gov.cn/aarticle/zcfb/200901/20090106011511.html (visited December 2, 2009).
[3] See Jingyingzhe Jizhong Shenbao Zanxing Banfa (Caoan) [Provisional Measures on the Notification of Concentrations of Business Operators (Draft)] ("SCLAO Draft Notification Measures"), March 13, 2009, available at http://bmyj.chinalaw.gov.cn/lismsPro/law_download/fulltext/1236930767681.doc (visited December 2, 2009); Jingyingzhe Jizhong Shencha Zanxing Banfa (Caoan) [Provisional Measures on the Review of Concentrations of Business Operators (Draft)] ("SCLAO Draft Review Measures"), March 13, 2009, available at http://bmyj.chinalaw.gov.cn/lismsPro/law_download/fulltext/1236930796575.doc (visited December 2, 2009).
[4] Zhonghua Renmin Gongheguo Fanlongduan Fa [Antimonopoly Law of the People's Republic of China], promulgated by the Standing Committee of the National People's Congress on Aug. 30, 2007 and effective on Aug. 1, 2008, available at http://www.gov.cn/flfg/2007-08/30/content_732591.htm (visited November 26, 2009)("AML").
[5] See Guowuyuan Guanyu Jingyingzhe Jizhong Shenbao Biaozhun De Guiding [Rules of the State Council on Notification Thresholds for Concentrations of Undertakings] ("Notification Thresholds"), adopted and effective on August 1, 2008, available at http://www.gov.cn/zwgk/2008-08/04/content_1063769.htm (visited August 4, 2008).
[6] See Notification Measures, art. 5.
[7] See Notification Measures, art. 5.
[8] See MOFCOM Draft Notification Measures, art. 6; SCLAO Draft Notification Measures, art. 6.
[9] See Notification Measures, art. 5.
[10] See Notification Measures, art. 7.
[11] Considering the revenues of the selling entity rather than the target would bring many foreign deals with no meaningful impact on China within the AML's ambit. Still, some Chinese observers suggest that the term "revenue relevant to the concentration" might technically reach "relevant" businesses retained by the seller group.
[12] See Notification Measures, art. 7.
[13] See Notification Measures, art. 4.
[14] See Notification Measures, art. 4.
[15] See MOFCOM Draft Notification Measures, art. 4; SCLAO Draft Notification Measures, art. 4.
[16] See MOFCOM Draft Notification Measures, art. 3.
[17] See AMERICAN CHAMBER OF COMMERCE IN THE PRC, "COMMENTS OF THE AMERICAN CHAMBER OF COMMERCE IN CHINA ON PROVISIONAL MEASURES FOR THE REVIEW OF CONCENTRATIONS (2009). ("AmCham 2009 Comments")
[18] See SCLAO Draft Notification Measures, art. 3.
[19] See AML, Chapter II (addressing restraints of trade as "monopoly agreements").
[20] See MOFCOM Draft Notification Measures, art. 3.
[21] See AmCham 2009 Comments.
[22] See SCLAO Draft Notification Measures, art. 3.
[23] Guanyu Dui Jingyingzhe Jizhong Shenbao Wenjian Ziliao De Zhidao Yijian [Guiding Opinions on the Notification Materials of Concentrations of Business Operators], released by MOFCOM on Jan. 7, 2009, available at http://fldj.mofcom.gov.cn/aarticle/xgxz/200901/20090105993841.html (visited December 2, 2009).
[24] See Notification Measures, art. 12.
[25] See Notification Measures, art. 10.
[26] See Notification Measures, art. 10.
[27] See Notification Measures, art. 11.
[28] See MOFCOM Draft Notification Measures, art. 11; SCLAO Draft Notification Measures, art. 11.
[29] See Notification Measures, art. 11.
[30] See State Council on Notification Thresholds, art. 4.
[31] See Notification Measures, art. 11.
[32] AML, art. 25.
[33] AML, art. 25.
[34] AML, art. 26.
[35] See Notification Measures, art. 14.; Review Measures, art. 9.
[36] See Review Measures, art. 6.
[37] See Review Measures, art. 7.
[38] See MOFCOM Draft Review Measures, art. 7; SCLAO Draft Review Measures, art. 7.
[39] See MOFCOM Draft Review Measures, art. 8; SCLAO Draft Review Measures, art. 8.
[40] See Review Measures, art. 5.
[41] See Review Measures, art. 10.
[42] See AML, art. 30 and 44.
[43] See Review Measures, art. 11.
[44] See Zhonghua Renmin Gongheguo Shangwubu Gonggao 2009 Nian Di 82 Hao Gonggao (Guanyu Fu Tiaojian Pizhun Songxia Gongsi Shougou Sanyang Gongsi Fanlongduan Shencha Jueding De Gonggao) [Ministry of Commerce of the People's Republic of China No.82 of 2009 Notice on Anti-Monopoly Review Decision of Approving with Conditions Acquisition of Sanyo by Panasonic], October 30, 2009, available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200910/20091006593175.html (visited November 24, 2009).
[45] See Zhonghua Renmin Gongheguo Shangwubu Gonggao 2009 Di 77 Hao (Guanyu Fu Tiaojian Pizhun Huirui Gongsi Shougou Huishi Gongsi Fanlongduan Shencha Jueding De Gonggao) [Ministry of Commerce of the People's Republic of China No.77 of 2009 Notice on Anti-Monopoly Review Decision of Approving with Conditions Acquisition of Wyeth by Pfizer], September 29, 2009, available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200909/20090906541443.html?4103766617=1142016402 (visited November 24, 2009).
[46] See Zhonghua Renmin Gongheguo Shangwubu Gonggao 2009 Nian Di 76 Hao [Ministry of Commerce of the People's Republic of China No.76 of 2009], September 28, 2009, available at http://fldj.mofcom.gov.cn/aarticle/ztxx/200909/20090906540211.html (visited November 24, 2009).
[47] Guanyu Dui Weiyifa Shenbao De Jingyingzhe Jizhong Diaocha Chuli De Zanxing Banfa (Caoan) [Interim Measures for Investigating and Disposing the Suspected Concentration of Business Operators Failed to File a Notification according to Law (Draft)], released by MOFCOM, Jan. 19, 2009, available at http://fldj.mofcom.gov.cn/aarticle/zcfb/200901/20090106010073.html (visited December 2, 2009).
[48] Guanyu Dui Weida Shenbao Biaozhun Shexian Longduan De Jingyingzhe Jizhong Zhengju Shouji De Zanxing Banfa (Caoan) [Interim Measures on Collecting Evidences regarding Suspected Monopolistic Concentrations between Business Operators Not Reaching the Notification Thresholds (Draft) ], released by MOFCOM, Jan. 19, 2009, available at http://fldj.mofcom.gov.cn/aarticle/zcfb/200901/20090106010097.html (visited December 2, 2009).
[49] Guanyu Weida Shenbao Biaozhun Shexian Longduan De Jingyingzhe Jizhong Diaocha Chuli De Zanxing Banfa (Caoan) [Interim Measures on Investigations and Handling of Suspected Monopolistic Concentrations between Business Operators Not Reaching the Notification Thresholds (Draft)], released by MOFCOM, Feb. 6, 2009, available at http://fldj.mofcom.gov.cn/aarticle/zcfb/200902/20090206031314.html (visited December 2, 2009).
[50] See Guanyu Dui Weiyifa Shenbao De Jingyingzhe Jizhong Diaocha Chuli De Zanxing Banfa (Caoan) [Interim Measures for Investigating and Disposing the Suspected Concentration of Business Operators Failed to File a Notification according to Law (Draft)], released by SCLAO, Mar. 13, 2009, available at http://bmyj.chinalaw.gov.cn/lismsPro/law_download/fulltext/1236930319604.doc (visited December 2, 2009); Guanyu Dui Weida Shenbao Biaozhun Shexian Longduan De Jingyingzhe Jizhong Zhengju Shouji De Zanxing Banfa (Caoan) [Interim Measures on Collecting Evidences regarding Suspected Monopolistic Concentrations between Business Operators Not Reaching the Notification Thresholds (Draft) ], released by SCLAO, Mar. 13, 2009, available at http://bmyj.chinalaw.gov.cn/lismsPro/law_download/fulltext/1236930501132.doc (visited December 2, 2009); Guanyu Weida Shenbao Biaozhun Shexian Longduan De Jingyingzhe Jizhong Diaocha Chuli De Zanxing Banfa (Caoan) [Interim Measures on Investigations and Handling of Suspected Monopolistic Concentrations between Business Operators Not Reaching the Notification Thresholds (Draft)], released by SCLAO, Mar. 13, 2009, available at http://bmyj.chinalaw.gov.cn/lismsPro/law_download/fulltext/1236930170064.doc (visited December 2, 2009).
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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.
