China's Approach to Anti-trust Issues

Some regulations issued by MOFTEC (now the Ministry of Commerce) and other government departments set restrictions on the equity interest held by foreign investors. For example, the equity by foreign investors in FIEs engaged in international logistics businesses shall not exceed 50% and in Chinese-foreign contractual joint ventures for audio-visual product distribution, the rights and benefits enjoyed by foreign investors shall not be exceed 49%.

Other than the above, some regulations also stipulate restrictions on the term of certain FIEs. For instance, the term of Chinese-foreign contractual joint ventures for audio-visual products distribution shall be no longer than 15 years and the term of FIEs engaged in road transportation shall generally not exceed 12 years.

Anti-trust Provisions in Relevant M&A Regulations

Currently the regulations governing M&A by foreign investors in China mainly consist of the Transfer of State Shares and Legal Person Shares in Listed Companies to Foreign Investors Circular, the Use of Foreign Investment to Restructure State-owned Enterprises Tentative Procedures and the Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions (the Tentative Provisions). The first two only offer some details regarding anti-trust, while the Tentative Provisions regulate anti-trust activities in more detail. They include stipulations that a foreign investor must make a report to MOFTEC and the SAIC if (a) the foreign investor involved in the acquisition has a turnover in the Chinese market during the current year that exceeds Rmb1.5 billion; (b) the foreign investor has acquired 10 or more enterprises in related industries in China within one year; (c) the foreign investor in the acquisition already has a market share of 20% in China; or (d) the acquisition will cause the foreign investor to have a market share of 25% in China.

Further, if MOFTEC and the SAIC, at the request of competing domestic enterprises, relevant functional authorities or trade associations, are of the opinion that the acquisition by the foreign investor would involve capture of significant market share or would affect market competition, people's livelihood or national economic security, they will still require the foreign investor to file a report, even though the circumstances described in the proceeding paragraph haven't occurred. MOFTEC and the SAIC will not approve the relevant acquisition after hearings if such acquisition results in over-concentration in a particular market.

The Tentative Provisions also state that MOFTEC and the SAIC will examine the acquisition scheme submitted by the foreign investor to see if it results in over-concentration, thereby prejudicing fair competition and damaging the interests of consumers, and will then make a decision on whether to grant approval if: (a) the foreign investor in the acquisition owns assets in China valued at Rmb3 billion or above; (b) the foreign investor has a turnover of Rmb1.5 billion or above in the Chinese market during the current year; (c) the foreign investor together with its affiliates already has a market share of 20% in China; (d) the acquisition will cause the foreign investor together with its affiliates to have a market share of 25% in China; or (e) the acquisition will cause the number of FIEs directly or indirectly owned by such foreign investor in related industries in China to exceed 15.

The exemption from examination by MOFTEC and the SAIC may be applied for only in the event that the acquisition by the foreign investor can improve the conditions for fair market competition, reorganize loss-making enterprises and guarantee employment, introduce advanced technology, bring in management talent and enhance the international competitiveness of the enterprise, or improve the environment.

Anti-trust Laws

China has not yet enacted a formal anti-trust law. So far, there are only some rules and regulations concerning restriction of competition in specific fields, such as the Restriction of Competition of Utility Enterprises Provisions and the PRC Pricing Law (中华人民共和国价格法). In the latter, monopoly pricing determined through negotiations between enterprises or trade associations is regarded as a violation of law. Generally speaking, the legal framework to regulate monopoly activities in M&A by foreign investors has not been established. In our opinion it is vital that China enacts a formal anti-trust law as soon as possible to regulate issues on anti-trust in relation to M&A by foreign investors, especially given China's accession to WTO and the national treatment conditions for foreign investors that must be met.