Analysis of the Concept of Concentration in the Chinese Anti-monopoly Law

“The phrase 'takeover of a domestic enterprise by a foreign investor' as mentioned in the present provisions means that the foreign investor purchases by agreement the equities of the shareholders of a domestic non-foreign-funded enterprise (hereinafter referred to as 'domestic company') or subscribes to the increased capital of a domestic company, and thus changes the domestic company into a foreign-funded enterprise (hereinafter referred to as 'share right takeover'); or, a foreign investor establishes a foreign-funded enterprise, and through which it purchases by agreement the assets of a domestic enterprise and operates its assets, or, a foreign investor purchases by agreement the assets of a domestic enterprise, and then invest such assets to establish a foreign-funded enterprise and operate the assets.”

Many commentators in the legal profession criticized the above provision because its regulatory scope was too narrow and the definition of share rights and asset takeovers did not adequately provide for the many new emerging forms of concentration in the market.

The Chinese legal definition of merger as used in the Company Law and in other rules and regulations refers to the act of purchasing part of the equity and assets of another company, excluding many other forms of concentration such as acquisition, joint venture, strategic alliance, contractual arrangements for shared rights and obligations, and an interlocking director. Similarly, not all forms of concentration are fully encompassed within the American legal definition of mergers and acquisitions (M&A).

The word “concentration” as it is defined in the European competition law may be the best model for the AML. This is because it focuses on the essential outcome of concentration activity, instead of just describing specific behaviour. It also gives consistency to the law by providing a general term covering many different types of consolidation. Thus, if there are other forms of concentration in future practice, such as certain strategic alliances, joint ventures, or other agreements/undertakings between parties that cannot be categorized as a merger, acquisition, interlocking director, franchise or contractual control, it will still fit within the definition of concentration in the AML.

Article 20(3) of the AML states that concentration occurs where “a business operator acquires control over a business(s) or is able to exert a decisive influence on a business(s) by contract or any other means.” This provision establishes that control may be obtained through contract or any other activity in which a business operator could exert influence on other business operators. Article 217 of the Company Law defines an “actual controller” as “anyone who is not a shareholder but is able to hold actual control over the acts of a company by means of investment relations, agreements or any other method.”

New Draft Provisions on Concentration in the AML

Recently, the Legal Affairs Office of the State Council promulgated the Provisions of the State Council on the Declaration of Concentration (Exposure Draft) for the purpose of collecting comments from the public. This Exposure Draft defines and explains many different types of concentration activities. Article 2 of this provision states that Concentration includes the following commercial actions by a business operator:

“1. Merger with another business(s); 2. Acquiring control over another business(s) by obtaining some or all of its equity or assets; and 3. Acquiring control over another business(s) or receiving the authority to exert decisive influence (meaning the capability to control production and/or management) over another business(s) through contract or other means. Acquiring control over another business includes obtaining 50% or more of its voting shares or assets, becoming the biggest holder of voting shares or assets, actually controlling the majority voting power, achieving the means to appoint at least half of the board of directors, as well as other circumstances recognized by the anti-monopoly regulator of the State Council.”

Although this Exposure Draft has not yet been adopted, it is likely that there will be a clear regulation on concentration before the AML comes into force on August 1, 2008. It is important for this new regulation to properly take into account the increasingly more complex and diverse forms of concentration that are now emerging, and which will continue to be utilized in the market. By focusing on the “outcome” of concentration activities, the European model best achieves this goal.

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