More muscle

The PRC Anti-monopoly Law (中华人民共和国反垄断法) provides for a merger-control regime whereby business transactions qualifying as “concentrations” and meeting specified turnover thresholds are subject to a mandatory notification requirement to Mofcom. According to Article 21, notified transactions cannot be implemented before merger-control clearance has been obtained. Merger-control clearance is required when the relevant turnover thresholds are met irrespective of whether the transaction raises any substantive competition law concern.

Mofcom's Anti-monopoly Bureau is very active. Since the AML came into force in August 2008, it has reviewed hundreds of merger notifications and has issued many guidelines and measures setting out its enforcement policy in more detail. Last December, the head of the Bureau, Shang Ming, announced that the authority will have reviewed more than 179 transactions by the end of 2011, bringing the total number of merger cases close to 400 since the law came into effect. There is no doubt that Mofcom has found its place as one of the world's leading competition merger-control authorities.

When announcing these figures, Shang Ming also hinted at upcoming changes in Mofcom's enforcement priorities. Acknowledging that merger review procedures tend to last longer in China than elsewhere, he explained that his authority was considering procedural changes that may reduce the burden on the notifying parties (notably an amendment of the template notification form and the possibility of a simplified review procedure). These measures may also help free up Mofcom's resources, allowing it to dedicate more attention to one of its other tasks under the AML: investigating those reportable transactions implemented without seeking prior merger-control clearance.

A unique enforcement tool

The adoption of the new Measures introduces a feature into the Chinese merger-control regime that is unique in the world of competition law. Mofcom is now the only significant competition law enforcement agency with specific rules dedicated to the investigation and review of transactions which should have been notified but were not. The Measures have been in the making for two years and their adoption follows two rounds of public consultation. An initial consultation draft was issued in January 2009 and significantly revised in June 2011. It took Mofcom another six months to agree on the final version of the Measures, a clear indication of the importance and the sensitivity of the matter.

During a Minister-level meeting at Mofcom held on December 7 2011, it was publicly acknowledged that a significant number of reportable concentrations have been implemented without undergoing a merger review as required by the AML. In particular there is speculation that some large domestic transactions involving state-owned enterprises (SOEs) may not have been properly notified, notably in the air transport and telecommunications industries. Even though Article 7 of the AML contains somewhat ambiguous language concerning the law's application to SOEs, the majority view is that the law applies equally to all undertakings, irrespective of their public or private ownership status. This view was recently confirmed by Mofcom, which adopted a decision imposing restrictive conditions on Shenhua, a state-owned company. Still, the matter is delicate and it remains to be seen whether the Measures will in practice lead to broader compliance with the merger-control rules, including by Chinese SOEs.

Broad discretion

Under Article 48 of the AML, failure to notify a reportable concentration may lead to the imposition of fines of up to Rmb500,000 (US$78,950) as well as an order to stop the implementation of the transaction, to dispose of shares or assets, to transfer the business or take any other measure to restore pre-existing market conditions. The Measures set out the relevant factors which Mofcom will consider when deciding which of the above sanctions – if any – to impose in each specific case of non-compliance. According to Article 13 of the Measures, this will depend on the nature, the severity and the duration of the infringement as well as on the extent to which the relevant transaction raises any substantive competition concerns. Notwithstanding these criteria, Mofcom retains wide enforcement discretion. In particular, Mofcom could in theory order the reversal of an un-notified transaction even in the absence of any substantive competition concern. The maximum fine of Rmb500,000 for failure to notify is relatively small compared with the amount of fines that may be imposed in other jurisdictions. The threat of a possible reversal order might prove more effective in inducing large companies to comply with the notification rules. Imposing a reversal order to sanction the infringement of a procedural notification requirement would, however, be a big departure from international best practice and remains a remote possibility at this stage. Why would Mofcom order a transaction to be unwound if the parties could legally re-form the transaction in the absence of competition concerns?

Higher risks of detection

The Measures aim to facilitate the discovery of un-notified transactions by formalising a whistle-blowing procedure and allowing for a decentralised enforcement regime. Article 4 of the Measures provides that anyone has the right to report a suspect transaction and that the informant's identity will be kept confidential. Mofcom will carry out verifications where the informant provides a written report specifying the identity of the relevant parties as well as relevant facts and evidence in support of its suspicions. Whereas the possibility to report suspected illegal conduct to Mofcom is not new, the formalisation of this process might lead to more complaints about un-notified transactions. Article 3 of the Measures for its part provides that, where necessary, Mofcom may entrust provincial commerce authorities with investigating suspect transactions within their territory. This decentralised enforcement – a first under China's merger-control regime – could in theory make it easier for Mofcom to identify transactions that have not been notified. Given the substantial role played by provincial authorities in the Chinese economy, involving them in the enforcement of the merger-control rules may also have an educational objective, leading officials in the provinces to advocate compliance with the merger rules when dealing with the provincial SOEs they control.

The evidentiary threshold for opening an investigation is relatively low. Article 5 of the Measures provides that where there are preliminary facts and evidence showing that a transaction may not have been notified in accordance with the law, Mofcom will open a case and notify the parties under investigation in writing. The Measures suggest that Mofcom has a duty to open an investigation as soon as this threshold is met. In practice, Mofcom is likely to retain a degree of discretion in particular since the Measures do not further elaborate on what evidence may qualify for this purpose.

Two-step enforcement

The Measures provide for a two-step enforcement process: Mofcom will first conduct a preliminary investigation to determine whether the transaction under investigation was subject to a notification requirement. If so, in a second step Mofcom will proceed to a substantive review of the transaction and decide whether to impose a fine and order a reversal of the transaction. The Measures set out in a remarkable level of detail the procedural steps (including the specific timetable) applicable at each stage.

For the preliminary investigation, investigated parties have 30 days to respond to Mofcom's initial inquiry. Mofcom then has 60 days to determine whether or not the transaction should have been notified. If it turns out that the transaction was not subject to a notification requirement, it will close the case and inform the parties accordingly. According to Article 7 of the Measures, if the transaction should have been notified, Mofcom will notify the relevant parties and the implementation of the transaction must be suspended. Such suspension obligation – which presumably would apply until Mofcom adopts a final decision in the case – applies to all un-notified transactions. In practice, it might prove very difficult to enforce this obligation with regard to transactions that have already been implemented.

If Mofcom determines that a transaction should have been notified, parties must submit a notification within 30 days and Mofcom has 180 days to complete its investigation and evaluate whether the transaction may have the effect of eliminating or restricting competition. The information to be provided to Mofcom is likely to be similar to what would be required for a regular merger filing although in the case of transactions already implemented, Mofcom might also want to obtain information about the relevant market conditions post-transaction. Before adopting a final decision (which can be made public) on whether to impose fines or order a reversal of the transaction, Mofcom will give the parties under investigation an opportunity to submit a written response on its findings.

In line with the AML, the Measures confirm that Mofcom has broad enforcement powers to carry out investigations. Parties under investigation and third parties must co-operate, and obstructions of the investigation may lead to sanctions. Some issues, including the applicable limitation period, remain unclear, however. The Measures and the AML are silent on this point. In the absence of specific rules, the principles set out in the PRC Law on Administrative Penalties are likely to apply. This law provides for a two-year limitation period from the date of an infringement, or, in the case of continuous infringements, from the date the infringement ceased. It remains to be seen what Mofcom's enforcement approach will be on this point and in particular whether it might consider that non-compliance with the merger rules is a continuous infringement and therefore that its power to investigate and sanction failures to notify is not limited in time.

A welcome addition

The Measures provide a useful clarification on how Mofcom intends to go about investigating and sanctioning failures to comply with the merger notification rules. Their adoption is a clear signal that Mofcom intends the law to be complied with, and that it is ready to enforce the notification obligation vigorously.

M&A practitioners involved in China may also see a change in transaction dynamics. The first challenge in Sino-foreign transactions is often to convince the Chinese party to take the merger-control rules seriously. Sometimes foreign parties must make commercial concessions in return for the Chinese party's agreement to comply with merger notification requirements in China. Time will tell whether this will change as a result of the adoption of the Measures.

Marc Waha and Maxime Vanhollebeke, Norton Rose Hong Kong (with thanks to Sun Hong, Ruth Cowley, Zhao Jingjing and Ai Tong for their contributions)