China’s Anti-Monopoly Law (AML), effective August 2008, introduced a new merger control regime in China. China’s Ministry of Commerce (MOFCOM) is the main regulatory authority. Betty Tam provides an overview of the new regime.
Mergers, or in technical terms “concentrations of undertakings”, must be reported to MOFCOM if certain thresholds are met. These thresholds are set out below, following an explanation of the term “concentration of undertakings” and a consideration of exempt transactions.
The AML defines “concentration of undertakings” as any of the following:
(i) merger of undertakings;
(ii) acquisition by an undertaking of control over one or more other undertakings by acquiring their equity or assets; or
(iii) acquisition by an undertaking of control over one or more other undertakings, or of the ability to exercise a decisive influence over one or more other undertakings, by contract or otherwise.
“Undertaking” includes an individual, legal entity or other organisation that engages in the production of or trading in goods or the provision of services.
“Control” is not defined. As a result, MOFCOM is likely to maintain a broad discretion over which concentrations it expects to be reported. Consultations with MOFCOM at an early stage of a concentration may be necessary.
Joint ventures (including Greenfield joint ventures) will be subject to notification if the thresholds are met.
Undertakings need not notify in either of the following cases:
• where one undertaking involved in the concentration holds 50% or more of the voting shares or assets of every other undertaking involved in the concentration; and
• where an undertaking not involved in the concentration holds 50% or more of the voting shares or assets of every undertaking involved in the concentration.
The general thresholds for merger control notification are:
• the aggregate global turnover of all undertakings participating in the concentration exceeded RMB10 billion during the previous financial year, with at least two undertakings each having a turnover of RMB400 million or more within China during the previous financial year; or
• the aggregate turnover within China of all undertakings participating in the concentration exceeded RMB2 billion during the previous financial year, with at least two undertakings each having a turnover of RMB400 million or more within China during the previous financial year.
MOFCOM may also review any other concentration that in its opinion has the effect or potential effect of eliminating or restricting competition.
The turnover of a single undertaking is defined broadly as the sum of the turnovers of:
• the subject undertaking itself;
• the undertakings directly or indirectly controlled by the subject undertaking (ie, the subject’s subsidiaries);
• the undertakings directly or indirectly controlling the subject undertaking (ie, the subject’s parent company);
• other undertakings controlled by the subject’s parent company; and
• any other undertaking jointly controlled by any combination of two or more of the undertakings listed above.
However, the turnover of an undertaking does not include turnover between or among any of the foregoing.
As to the aggregate turnover of all undertakings, turnover between an undertaking that is jointly controlled by the parties to the concentration and a third party should only be counted once. In an acquisition, only the turnovers of the buyer, its affiliates and the target (and not that of the seller and its other affiliates) will be counted.
Separate regulations have been issued for the calculation of turnovers of financial institutions.
Undertakings may request a meeting with MOFCOM to discuss whether filing is necessary. The undertakings must apply in writing for such a meeting, with the application being required to set out certain information.
Merger control reviews
A concentration that must be notified cannot be completed prior to clearance or deemed clearance by MOFCOM.
The merger-control filing must be submitted (in hard copy and on optical disk) by all undertakings in the case of a merger, or by the acquiring party (with assistance from the other undertakings) in other types of concentration. The documents required in a merger-control filing include:
• a notification report (required information includes: the names, addresses and business scopes of the undertakings involved in the transaction; the proposed completion date; notarised and authenticated certificates of incorporation; and other information that may be required);
• a statement regarding the expected impact of the concentration in the relevant market (required information includes: an overview of the concentration; definition of the relevant market; the market shares and controlling powers of the undertakings participating in the concentration in the relevant market; the major competitors and their market shares; market concentration rate; an analysis of market entry barriers; the current development status of the industry; the effect of the concentration on the competitive structure of the market, industry development, technological advancement, national economic development, consumers and other undertakings; and an evaluation of the effect of the concentration on the competition in the relevant market and the basis of such evaluation);
• the concentration agreement (including supplemental and other related documents);
• audited financial reports of each undertaking for the previous financial year; and
• other documents that may be required by MOFCOM.
Chinese translations are required for original documents that are not in Chinese, although in some instances it may be sufficient to provide a Chinese-language abstract of the main provisions. MOFCOM has an obligation to keep confidential any trade secrets and other confidential information. If a notification includes confidential materials, then the undertakings should prepare two notification packages: one with the confidential materials (marked “confidential”) and one without the confidential materials.
As a practical matter, MOFCOM determines when a notification package is complete, and has the power to request supplementary materials before deciding to accept a package. The discretion as to whether to accept a notification package is not subject to any time limits.
Preparation of notification materials may take some time, and should be commenced early.
Notifications may be withdrawn; however, any attempted withdrawal is subject to MOFCOM’s consent.
Review phase 1 – 30 days
The initial review period is 30 days from acceptance by MOFCOM of a complete notification. MOFCOM may request additional materials within a specified time. Failure to supply the additional materials will result in the notification being deemed to have not been submitted.
The undertakings may voluntarily submit additional materials to assist MOFCOM to reach a decision. MOFCOM may also seek opinions from relevant governmental authorities, trade associations, competitors, other undertakings, consumers, and individuals. Hearings may be convened.
Within the initial 30-day review period MOFCOM must decide whether to (i) proceed to review phase 2 for more in-depth investigations, or (ii) approve the concentration. If it fails to notify the parties within the 30-day period, then the concentration is deemed to have been cleared.
Review phase 2 – 120 to 180 days (cumulative)
If MOFCOM gives notice of an in-depth investigation within the initial 30-day review period, then it automatically has another 90 days in which to investigate and decide whether or not to permit the concentration. The 90-day period may be extended by an additional 60 days in certain circumstances,.
MOFCOM is required to give written notice of its decision, together with reasons being given for any prohibition. Decisions to prohibit a concentration must be published.
Failure to make a decision within review phases 1 or 2 is a deemed clearance.
Factors that MOFCOM may consider during an examination include:
• the relevant market shares held by the undertakings participating in the concentration;
• the degree of concentration in the relevant market; and
• the impact of the concentration on (i) market entry and technological advancement, (ii) consumers and other undertakings, (iii) Chinese national economic development.
During the examination process, the undertakings may propose restrictive conditions that eliminate or mitigate anti-competitive effects of the concentration. Restrictive conditions may include:
• structural conditions, such as the divestiture of a part of the assets or business of an undertaking;
• behavioural conditions, such as an undertaking opening up its network, platform or other facilities, licensing technology or intellectual property, or termination of an exclusive arrangement; and
• a combination of structural and behavioural conditions.
Decisions to grant conditional approvals must be published. MOFCOM will supervise subsequent compliance.
If a concentration is completed before clearance or deemed clearance, then depending on the circumstances of the transaction MOFCOM may:
• impose a fine of up to RMB500,000 (approx. US$73,500) on the parties; and
• order that the concentration be terminated, that assets, businesses or equity be divested within a specific period of time, or that any other measure be taken to restore the status quo.
National M&A security review
Scope of transactions
M&A security reviews are required for foreign-invested acquisitions of military enterprises and foreign invested acquisitions resulting in foreign “control” over “key domestic enterprises”.
Military enterprises are those that are: (i) owned by or support the military; (ii) involved in national defence; and (iii) located near key and sensitive military facilities.
Key domestic enterprises include those in agriculture, energy and resources, infrastructure, transportation, technology and major equipment manufacturing.
Both equity and asset deals are covered. Acquisitions of foreign-invested enterprises are also covered.
Review process and timing
Foreign investors engaging in M&A deals within the above scope of transactions must give notice to MOFCOM. MOFCOM will then decide whether to initiate an M&A security review.
An inter-ministerial panel, principally run by the NDRC and MOFCOM, will be established to conduct M&A security reviews and issue decisions.
The Ministerial Panel will consider the impact of the M&A transaction on: national security; stability of the state economy; social order; and R&D capacity for key national-security technology.
An M&A security review process takes between 15 working days (if no review is conducted) and 115 working days (if a full review is conducted).
If an M&A transaction has exerted, or is likely to exert, a major impact on national security, then the Ministerial Panel is required to order MOFCOM (and other relevant departments) to either terminate or appropriately modify the transaction. Unlike merger control decisions, there is no obligation for the Ministerial Panel to publish conditional approvals or prohibitions.