Fall short of the filing thresholds – The filing thresholds are turnover based. In short, a filing will be needed if: (i) the combined turnover of the undertaking is Rmb10 billion (US$1.46 billion) globally or Rmb2 billion in China; and (ii) at least two of the undertakings each have turnover in China of at least Rmb400 million.

Don't take control – Even if the thresholds are met, a filing is only required if there is a merger or obtaining of control over another undertaking. Draft Mofcom regulations indicate that control means: (i) more than 50% of the voting rights or assets of an another undertaking; or (ii) being able to make decisions regarding the appointment of one or more directors or key management personnel and certain other operational matters. A right of veto for protection of minority shareholders' interest on matters such as a change of the articles of association does not constitute control.

Stagger your investment – Structuring M&A activity into two or more transactions may help. However, draft Mofcom regulations would require multiple M&A transactions between the same undertakings within any one-year period to be aggregated for the purpose of calculating whether the turnover thresholds have been met.

Notwithstanding, M&A activity may still be subject to a merger control review if Mofcom takes the view that it has or might have the effect of excluding or restricting competition.

Karen Ip
Partner
Herbert Smith

The domestic perspective

In selecting an optimal investment vehicle structure, a foreign investor needs to review its own business objectives in China, the business features of its industry or sector, and PRC regulatory requirements. Sino-foreign joint ventures were dominant in China's early opening years for many good reasons, partly because of extensive regulatory market access restrictions or because foreign investors needed Chinese partners to adapt to the economic and commercial environment. From the late 1990s, wholly foreign-owned enterprises (WFOEs) became more and more popular for foreign investors. Nowadays, as a starting point, a foreign investor usually considers setting up a WFOE, unless there are special reasons for adopting a joint-venture structure.

One may need to set up a joint venture if a WFOE in a specific industry (such as automobile and ship manufacturing, civil aviation or mining of certain mineral resources) is not permitted by PRC laws or policies. One may also want to set up a joint venture due to commercial reasons such as to combine complementary resources or capabilities of two entities or forging long term co-operation with a strategic local partner.

A prudent investor will learn diligently from existing cases. The new Anti-monopoly Law carries teeth. The Coca-Cola/Huiyuan case convinces the market that a multinational company must factor potential anti-monopoly implications in structuring and planning a business acquisition in China, and take actions proactively. An investor has a lot to lose (including advisers' fees) if it launches a full-fledged acquisition but finally is blocked by PRC regulators on anti-monopoly grounds.

The Danone/Wahaha case, which has been widely reported and commented on, did not tell me that a joint-venture structure is bad. A joint venture has its own commercial viability; the case reminds people how one can establish and operate a joint venture in some better approaches. You should be careful in engaging a good business partner with the vision of
developing a long term friend. You will want to ascertain legal rights and obligations of the joint-venture parties explicitly from day one. Last but not least, you will want to correct any behavioural deviation of the joint-venture company or the business partner at early stages rather
than later.

Lawrence Guo
Partner
Broad & Bright

The in-house perspective

In the past three decades many multinational companies have set up lots of joint ventures in China due to the restraint of legal regulations. With the lifting of such restraints in the recent years we see a trend of buying out local partners and converting various joint ventures into wholly foreign-owned enterprises by many multinationals. We believe the trend will continue and the WFOE will be the first choice of most of the multinational companies to do business in China to the extent permitted by PRC laws: the advantages of a WFOE are obvious. Approval is quick, it can be executed efficiently, it is an easy way to integrate teams and cultures, and less effort and resources are required for solving internal disputes. Generally speaking, unless setting up a joint venture is a company's strategy for gaining market share or optimising its resources (unfortunately this is usually not the main purpose of setting up joint ventures in China), we do not see many advantages a joint venture could otherwise achieve.

Nevertheless, given the fact that the market here is heavily regulated by the government and the business rules are somehow quite different, government support and familiarisation with the local rules are some of the most important things that multinational companies need to obtain. As a result, newcomers and those companies which are in an intensively-regulated industry may find themselves in a situation where local partners may be of great value to them in achieving their goals quickly, and co-operating with local partners might still be a good idea for them.

Notwithstanding the foregoing, even though a joint venture is eventually set up for the reasons mentioned, it is often proved that such a joint venture could be a multinational company's vehicle to build up its presence and strength in the local market. Once its goal is achieved over the years of operation, or any legal restraints are lifted, the multinational will likely buy out the local partner and convert the joint venture into a WFOE as soon as possible.

Benjamin Huang
Legal counsel
Bayer (China)