On June 24, 2022, the new Anti-Monopoly Law (“AML”) was promulgated and will come into effect on August 1, 2022. The new law expands the 8 chapters with 57 articles of the old law to 8 chapters with 70 articles. Two days later, on June 27, the State Administration of Market Regulation (“SAMR”) promptly issued six draft supporting regulations of the AML (231 articles in total) for a month-long call for comments on the legislation. The six supporting regulations, based on the new AML, are revisions of the single existing administrative regulation of the State Council and five departmental regulations of the SAMR, corresponding to the “four pillars” of the AML in China - monopoly agreement, abuse of dominant market position, concentration of undertakings and administrative monopoly. Dentons' China Antitrust team has produced a series of four articles reviewing the upcoming changes brought by the six supporting regulations based on lawyers' practical experience, with a view to helping enterprises manage and control anti-monopoly risks and adjust their market competition strategies in a timely manner.
邓志松/Jet Deng, 戴健民/Ken Dai1
Business operations involve a large number of M&A transactions. The completion of M&A transactions depends on the fulfillment of a series of legal and government regulatory conditions, one of the most important regulatory conditions being the antitrust scrutiny. The AML borrows the term “concentration of undertakings” from EU Competition Law to refer to M&A transactions in the context of antitrust scrutiny, while in the case of companies and their attorneys, it is referred to as “merger filing of concentration of undertakings”. With the growing maturity of China's antitrust law enforcement, merger filing has become a key legal procedure affecting M&A.
On June 27, 2022, in order to thoroughly implement the amended AML, the SAMR issued the Provisions of the State Council on the Threshold for the Declaration of Concentration of Undertakings (Exposure Draft for Revision) and the Provisions on the Review of Concentration of Undertakings (Exposure Draft) (hereinafter collectively called “the Exposure Drafts”), which substantially amend the existing merger filing system. This article will provide a comprehensive explanation of the merger filing system based on the core content of this amendment, with a view to providing practical guidance for corporate M&A transactions.
- Overview of the main amendment of the Exposure Drafts
The amendment of the Exposure Drafts is mainly reflected in the following aspects:
- Raising the turnover criteria of conventional active filing: the requirements for global aggregate turnover, aggregate turnover in China and unilateral turnover in China are raised from the existing RMB 10 billion (same currency below), 2 billion and 400 million to 12 billion, 4 billion and 800 million respectively.
- Two types of non-conventional filing criteria added: for the concentration of transactions of large enterprises, as well as the concentration of transactions that do not meet the turnover criteria, the Exposure Drafts added provisions of the circumstances under which filings are required.
- Clarifying that provincial administrations of market regulation can review the merger filings in accordance with the commission; the SAMR can, according to the needs of work, entrust the provincial administrations of market regulation to implement the review of the concentration of undertakings.
- Clarifying the characterization of control: the Exposure Drafts summarize the past practical experience and clarify that the characterization of control should take into account voting rights or similar rights, executive appointments, financial budgets, business plans, etc.
- Clarifying the application of a differentiated review approach for the classification and grading system: for concentration of undertakings in important fields related to national security and people's livelihood, the SAMR may develop specific review approaches and conduct graded review based on different types of concentration.
- Clarifying the filing procedures for transactions that do not meet the criteria: if the turnover does not meet the criteria listed above, but there is evidence that the transaction has or may have the effect of eliminating or restricting competition, the SAMR may, after verification, require a filing or remedial filing from the enterprise, and the enterprise has a statutory obligation of filing based on the requirements of the SAMR. For transactions that have been implemented at this time, the SAMR may require the enterprise to stop until the review is completed. If the enterprise fails to notify as required, the SAMR may launch an investigation of illegal concentration.
- Clarifying the detailed rules for the application of the “stop-the-clock” procedure; the Exposure Drafts provide further refinement of the application of the “stop-the-clock” procedure in three circumstances, (1) for failure to provide information on time, the SAMR shall notify a deadline for correction in writing; for failure to provide on time again, the calculation of the review period can be suspended, (2) for the emergence of significant new circumstances, new facts, and the review cannot be continued without verification, the SAMR can suspend the calculation of the review period, and the enterprise has the obligation to take the initiative to report on the new circumstances and new facts, (3) for the need of assessment of the restrictive conditions, it should be based on the application of enterprises, and suspend the calculation of the review period.
- Clarifying the characterization of “implementation of concentration” (closing): In addition to formal concentration, the Exposure Drafts clarify the closing including substantive concentration, such as the assignment of senior managers, actual participation in business decisions and management, exchange of sensitive information, substantive integration of business, etc.
- Clarifying the characterization of the time point: on one hand, for the time point of turnover calculation, it clearly refers to the last fiscal year of the date of signing the concentration agreement; on the other hand, for the time point of turnover calculation in the legal liability of illegal concentration, it clearly refers to the last fiscal year of the date of the illegal implementation of the concentration.
- It is clear that for those who take the initiative to conduct a remedial filing, the SAMR shall give a lighter or mitigated administrative penalty according to Article 32 of the Administrative Penalty Law.
- What kinds of transactions need a merger filing?
In accordance with the new AML and the Exposure Drafts, there are three circumstances triggering the submitting of a merger filing to the SAMR.
- Conventional active filing: in M&A transactions where the combined turnover of the concentrating parties in the previous year exceeds RMB 4 billion (within China) or RMB 12 billion (worldwide), and at least two concentrating parties have a turnover of more than RMB 800 million within China.
- Non-conventional active filing: one concentrating party has a turnover of more than RMB 100 billion in China in the previous year, the market value (or valuation) of the other concentrating parties is no less than RMB 800 million, and more than one-third of the turnover of the latter is generated in China.
- Non-conventional passive filing: when the turnover does not meet the above criteria, but there is evidence that the transaction has or may have the effect of eliminating or restricting competition, the SAMR may require the enterprises to notify.
Conventional filing is the most common kind which accounts for the largest proportion of filings, while non-conventional filings (whether active or passive) account for a relatively small proportion. However, in the context of the Central Government's request to “strengthen anti-monopoly and prevent disorderly expansion of capital” and the SAMR's special attention to mergers and acquisitions that “pinch off young shoots”, non-conventional filings will be subject to more stringent examination.
- At what time point should the merger filing be submitted?
M&A transactions are required to be notified after the agreement is signed and before the transaction is closed, and no substantive closing action is allowed before the approval is obtained. As to what is “closing”, the Exposure Drafts clearly include not only formal operations, such as registration of shareholding changes, obtaining of business licenses, etc., but also substantive concentration, such as the appointment of senior managers, actual participation in business decisions and management, exchange of sensitive information with other undertakings, and substantive integration of business.
This rule of the Exposure Drafts imposes higher compliance requirements for the transitional arrangements of the transaction. In order to avoid substantive concentration of transactions before approval, it is recommended that companies set up clean teams to exchange only necessary information, conduct compliance review of transaction arrangements/integration steps, and introduce antitrust attorneys early in the agreement drafting process to work on transitional arrangements.
- To what authority is the merger filing submitted?
Currently, the sole authority to review merger filings in China is SAMR. According to the Exposure Drafts, the SAMR may, according to the needs of work, entrust provincial administrations of market regulation to implement the review of concentration of undertakings. Therefore, in the near future, in addition to the SAMR, some provincial administrations of market regulation may also become the body to review merger filings. In recent years, the SAMR has repeatedly seconded personnel from local administrations of market regulation to conduct review of filing cases, which has laid the foundation for local authorities to conduct review of concentration.
At the same time, it should be noted that the Exposure Drafts only arrange for the implementation of “review” of concentration by the provincial administrations of market regulation. Therefore, the administrative investigation of illegal concentration will probably continue to be processed by the SAMR.
- Will there be any legal liability if the filing is not conducted?
In accordance with the provisions of the new AML and the Exposure Drafts, enterprises that fail to take the initiative to notify their transactions according to law will face the following legal consequences:
- General transactions: a fine of up to RMB 5 million for a single enterprise.
- Transactions with competitive impairing effect: a fine of up to 10% of the previous year's sales for a single enterprise, and the transaction needs to be restored to its original state, including stopping the implementation of concentration, disposing of shares or assets for a limited period, and transferring business for a limited period.
- Not meeting the filing criteria, but required to notify: It should be noted in particular that if the transaction does not meet the filing criteria, but is required to be notified by the SAMR after the transaction is implemented, at this time, the SAMR may require the enterprise to stop implementing the concentration until the review is completed. In order to avoid the forced suspension of business operations, it is recommended to fully assess and make advance arrangements for competition issues before the transaction which may have an impact on competition, even if the turnover size of the enterprise is relatively small.
The new AML has significantly increased the legal liability for illegal concentrations, while the Exposure Drafts specify that for those who take the initiative to conduct a remedial filing, the law enforcement authority should give a lighter or mitigated administrative penalty as appropriate. Considering that such illegal acts of not filing in accordance with law will not terminate due to the closing of the transaction, but may be regarded as ongoing and continuously illegal, the risk of administrative punishment will exist for a long time, it is recommended that enterprises take the initiative to conduct remedial filings of the past unfiled transactions in a timely manner.
- How long does it take to obtain approval for merger filing?
The time required for merger filing varies depending on the review procedures and the circumstances of the case. In terms of the statutory review stage and deadline, the filing review process includes three stages with a statutory deadline of 30, 90 and 60 days respectively (all natural days). Among them, the summary procedure filing cases can generally be approved within the first stage.
For general procedure cases with competitive effect, the review may take longer than the above 180-day time limit. To address this issue, the new AML has introduced the “stop-the-clock” procedure, which provides for the suspension of the review period under certain circumstances. The Exposure Drafts further clarify that if the enterprise fails to provide supplementary information in a timely manner, the SAMR will notify the undertaking in writing with a deadline to make a remedy. For a late submission, the SAMR will make a written decision to suspend the calculation of the review period.
At the same time, the Exposure Drafts provide that for enterprises that know or should know the occurrence of significant new circumstances and new facts of the transaction or market, they shall take the initiative to report to the SAMR. According to the amendment, for enterprise which refuses to provide information or provides false information, it shall be fined less than 1% of the previous year's sales or RMB 5 million, and the individual shall be fined less than RMB 500,000.
- Issues yet to be clarified
The Exposure Drafts provide comprehensive stipulations on the merger filing system, some rules are still need to be further clarified.
- Market value/valuation characterization
In the case of non-conventional active filing, the Exposure Drafts stipulate that the market value/valuation of other concentrating parties should be no less than RMB 800 million and more than one-third of the turnover should be generated in China. In terms of the characterization of market value / valuation, the Exposure Drafts do not clarify.
Specifically, the market value of an enterprise is constantly changing over time, and there are often significant differences in market value at different time points. The time point to calculate the market value has a great impact on whether the concentrating transactions need to be filed. For valuation, different valuation methods can be applied, including income approach, market approach, cost approach, etc., and in certain circumstances, an enterprise may need to apply more than two valuation methods at the same time. It is yet to be further clarified what valuation methods can be applied under different circumstances, whether the valuation requires a valuation report issued by a third party, and whether more than two valuation methods are required.
- How to deal with past unnotified transactions in accordance with law？
On one hand, this amendment does not establish transition period provisions. On the other hand, in practice, illegal concentration is traceable over the long-term. In this case, there is uncertainty about how to apply the new turnover criteria and the new legal responsibilities, especially about how to deal with past unfiled transactions in accordance with law. Issues that remain to be further clarified include as follow.
- For the filing review, at what point is the transaction deemed to be subject to the new turnover criteria? The time of signing the concentration agreement or the time of closing of the transaction?
- For past unnotified transactions in accordance with law, is it not considered illegal if the new turnover criteria are not met?
- Do legal liabilities for illegal concentration under the new AML apply to illegal transactions before August 1, 2022? Does the closing of a transaction serve as the time point for application of the old and new laws?
- If the new fines of 5 million and less than 10% of turnover are also applied to the past unnotified transactions in accordance with law, will it violate the principle of non-retroactivity of the law? Does the time point of the formal case registration of the investigation of failure to notify in accordance with law acts as a criterion for judgment?
The above issues have yet to be interpreted by the SAMR in the subsequent formulation of supporting regulations, or to be explored in law enforcement. When the above issues have not yet been clarified by the supporting regulations and practice, for past unnotified transactions, it is recommended that enterprises can assessed them through the following steps:
Step 1: Assess whether restitution has been made for the past unnotified transactions. For those that restitution has been made, a different treatment can be considered from transactions that restitution has not been made.
Step 2: Assess whether the transaction has met the new turnover criteria. In this regard, it should be clarified that the new criteria are still in the stage of exposure draft, so the promulgation timing and content of the final criteria are subject to uncertainty.
Step 3: Assess whether the transactions cause competitive impairing consequence or effect. Based on whether the transaction has competitive effect, there is a significant difference in the penalties that may be imposed on the enterprise. For those that do not have competitive effect, the enterprise may be fined less than RMB 5 million, and for those that may have competitive effect, the enterprise may be required to make reinstitution for the transaction, in addition to a fine of up to 10% of turnover.
Considering that the new AML will come into effect on August 1, 2022, after the assessment listed above, the enterprise may consider taking the initiative to conduct a remedial filing as early as possible if needed, to reduce the legal risk to the enterprise caused by the failure to notify in accordance with law.
1 Jet Deng and Ken Dai are Partners with Dentons' China Antitrust team, respectively based in Beijing and Shanghai. They can be reached via firstname.lastname@example.org and email@example.com. The authors would like to thank Dentons' China Antitrust team, particularly Edith Qu and Rangi He for their valuable contribution.
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.