M&A transactions involving a concentration of undertakings can be deemed as a monopoly. The Provision on the Review of Concentrations of Undertakings clarifies several definitions and sets a standarised legal basis.
Effective from 15 April 2023, the State Administration of Market Regulation issued four Provisions supplementing the Anti-Trust Law of the People's Republic of China ('Anti-Trust Law').
- Provisions on the Review of Concentrations of Undertakings;
- Provisions on the Prohibition of the Abuse of Administrative Power to Exclude or Restrict Competition;
- Provisions on the Prohibition of Monopoly Agreements; and
- Provisions on the Prohibition of the Abuse of a Dominant Market Position.
The four provisions clarifies legal provisions to supplement the Anti-Trust Law. Below, we outline the main takeaways from the Provisions on the Review of Concentrations of Undertakings ("Provisions").
Under Article 25 of Anti-Trust Law, M&A transactions involving a concentration of undertakings are defined as the following:
- a merger of undertakings;
- an acquisition of control over another undertaking by an undertaking through acquiring equity or assets; or
- an acquisition of control or the ability to exert a decisive influence over another undertaking by an undertaking through contract or other means.
From Article 25, control is a key factor in determining a concentration of undertakings. In the Provisions, the scope of factors that define "control" is expanded by including:
- purpose of the transaction and future plan;
- equity structure of that other undertaking and changes thereof before and after the transaction;
- matters subject to voting at a shareholders' meeting/general meeting of shareholders of that another undertaking and its voting mechanism, as well as its past attendance rate and voting records;
- composition and voting mechanism of the decision-making or management body such as the board of directors of that another undertaking, as well as its past attendance rate and voting records;
- information such as the appointment and removal of senior management of that another undertaking;
- relationship between shareholders or directors of that another undertaking, whether there is proxy voting or persons acting in concert, etc.;
- whether there is any material business relationship or cooperation agreement between the undertaking and that another undertaking; and
- other factors that should be considered.
- acquisition of control or the ability to exert a decisive influence over any other undertaking by two or more undertakings constitutes joint control over that other undertaking.
Under Article 26 of Anti-Trust Law, if the concentration of undertakings meet the threshold set by the State Council, the authority shall be notified in advance. If the notification is not made, the concentration is prohibited. Violations can result in legal liabilities.
For affected companies understanding what constitutes as concentration implementation is necessary.
Under the Provisions, concentration implementation includes (but are not limited to):
- whether the registration of the market entity registration of right changes has been completed;
- whether senior management have been appointed;
- whether there is actual participation in the business decision-making and management of another undertaking; and
- whether any sensitive information has exchanged or whether the business has substantially merged.
Under the Provision, a summary case procedure is introduced. Any concentration of undertakings in the following circumstances shall be classed as a summary case and subject to the summary case procedure:
- where, in the same relevant market, the combined market shares of all parties in the concentration is less than 15%; in the upstream or downstream market, the market share of each party in the concentration is less than 25%; and the market share of each party in the concentration who are neither in the same relevant market nor having an upstream-downstream relationship is less than 25% in each of the markets related to the transaction;
- where the parties to the concentration are to establish a joint venture outside of China which will not engage in economic activities within China;
- where the party/parties to the concentration are to acquire the equity or assets of an overseas enterprise that is not engaged in economic activities within China; or
- where a joint venture jointly controlled by two or more undertakings is to be controlled by one or more of the undertakings through the concentration.
When evaluating the market control power of operators in the concentration, "the ability to possess and process data" is introduced in the Provisions (Article 33). And when evaluating the influence of concentration, operators' influence in the market entry via the controlled "data" is included.
Restrictive conditions of the parties to a concentration to reduce the effect of excluding or restricting the competition include behavioral conditions such as:
- provision of access to any network and platform;
- other infrastructure, licensing of any key technology (including patents, know-how;other intellectual property);
- termination of any exclusive or monopolistic agreement, maintenance of operational independence, amendment of any platform rules; or
- algorithms, that have been listed to avoid monopoly.
The Provisions increase the amount of fines for illegal concentrations and the refusal or obstruction of law enforcement. The fine may be increased to more than two times and less than five times under the following:
- the circumstances are particularly severe;
- the impact is particularly bad; and
- the consequences are particularly serious.
For companies, the Provisions clarify several definitions for M&A transactions involving a concentration of undertakings. Equally, it sets a more standardised, scientific and reasonable legal basis for the authorities' administration to evaluate a concentration of undertakings. Overall, Anti-Trust regulations reforms pave fair competition, stimulate market vitality, and create a market-oriented business environment.
Originally published 09 June 2023.
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.