MOFCOM's review processes explained

Procedure and timeline

According to the AML, there are three phases to review a concentration, with clearance possible in any phase. In Phase I, the review period takes 30 days and begins with the official acceptance of the notification by MOFCOM. During this period, the Ministry will conduct a preliminary review and decide whether the concentration merits an in-depth Phase II review.

However, it has become normal practice that even unproblematic cases enter into Phase II. In Phase II, the review period is extended by 90 days. In cases that give rise to substantial competition concerns Phase II can be extended by another 60 days, which is commonly understood as Phase III.

In practice, the pre-acceptance review effectively constitsutes an additional phase. After the initial notification submission, MOFCOM will accept the filing only if it deems the accompanying documentation complete. The AML does not stipulate a time limit for this pre-acceptance review, thereby leaving it to the sole discretion of MOFCOM whether and when to accept a filing. Moreover, MOFCOM tends to request additional information from the parties at this stage. In particular, there are cases where parties were confronted with several rounds of such requests before their filing was accepted as complete. As the review timeline only begins with the official acceptance of the filing, some cases have already been delayed significantly at this stage. Parties should not underestimate the pre-acceptance review when it comes to the planning and timing of a reportable transaction. It is therefore advisable to file as soon as practicable in China to avoid missing the closing deadlines of the transaction.

In later stages, delays might be caused by MOFCOM's practice to conduct broad and sometimes unnecessary consultations. The Ministry tends to obtain the opinion of various governmental agencies, trade associations, competitors and other players in upstream or downstream markets before rendering a decision. However, these approval delays are caused by the limited experience of MOFCOM and insufficient capacities.

Suspension and penalties

Similar to the EU merger control regime, the AML sets forth a mandatory filing obligation and a suspension obligation. The parties to a reportable transaction are prohibited to close the transaction before a clearance decision is obtained. An infringement of this obligation may result in penalties including fines, the suspension of the transaction or the restoration of the pre-closing status. Although MOFCOM has yet to make any ruling on a violation of the filing or suspension obligation, the increased determination of MOFCOM to enforce these obligations should be taken into consideration. In order to comply with the filing and suspension obligations, a proper closing mechanism, including programs regarding the exchange of sensitive information among the parties, need to be carefully designed and adhered. This will avoid any risk of pre-empting a decision.

Conditional approval decisions

MOFCOM has published four conditional approval decisions since January 2012. The decisions highlight the Ministry's approach to reviews. Understanding these decisions can help parties which may be involved in the merger-control regime in future.

Henkel and Tiande Chemical joint venture

The filing was initially submitted on August 8 2011. MOFCOM gave its decision in Phase III on February 9 2012. MOFCOM found that Tiande Chemical held a market share of 45%-50% of the highly concentrated market for ethyl cyanoacetate. Henkel was not active on this market, but engaged in the production of the downstream product cyanoacrylate monomer. The JV was established to produce the downstream product and intended to source a substantial amount of ethyl cyanoacetate from Tiande Chemical. MOFCOM's investigations showed that, after establishing the JV, Tiande Chemical could pursue a discriminatory strategy in the sale of the raw material and leverage the JV with its dominant position. MOFCOM consequently imposed behavioural remedies requesting Tiande Chemical to supply ethyl cyanoacetate to third customers under fair, reasonable and non-discriminatory terms.

Western Digital's acquisition of Hitachi's hard disk drive business

With a total of 11 months, the review period in this case was the most extensive reported so far. This was largely caused by the fact that the parties withdrew the original submission in Phase III, while the second filing was cleared in Phase II. MOFCOM's conclusion in Western Digital and Hitachi was in line with the Seagate and Samsung case. It was found that both mergers would have adverse effects on the competitive pressure in the hard disk drive market and would thereby increase the risk of coordination between the remaining competitors. The approval was subject to conditions like the divestiture of certain assets of Viviti, Hitachi's hard disk drive subsidiary. Deviating from the clearance decisions in the US and the EU, MOFCOM forced Viviti to temporarily remain an independent entity post-merger, which was considered a temporary prohibition by observers and casts doubt about the closing of this transaction. MOFCOM's decisions in the hard disk drive cases were considered to reflect a more industrial and political approach in its review procedure.

Acquisition of Motorola Mobility by Google

MOFCOM's decision in this case was taken after a total review time of almost eight months at the end of Phase III. While other regulators, particularly the US and EU authorities, approved this transaction unconditionally, MOFCOM imposed behavioural remedies with regard to the licensing conditions of Google's mobile software Android and Motorola's patents. Irrespective of the global nature of the relevant markets, MOFCOM emphasised its focus on the Chinese market. With the third recent conditional approval decision concerning the IT industry in quick succession, it seems safe to conclude that MOFCOM is particularly sensitive to transactions in this sector.

Acquisition of Goodrich by United Technologies Corporation

Both companies are active in the production and sale of aviation equipment on a worldwide basis. MOFCOM's analysis focused on the global market for alternate current (AC) power generators, where the combined market share of the parties amounted to 84%. MOFCOM concluded that the acquisition would further strengthen the market dominance of United Technologies Corporation and would restrict or even eliminate competition in this market. The clearance of the transaction was subject to the divestiture of Goodrich's generator business.

Coming soon: fast-track reviews

Due to its lengthy review procedures, MOFCOM has been criticised for unnecessarily delaying transactions and increasing transaction costs and risks. To counter these concerns and to make its procedures more efficient, the Ministry has been considering proposals for singling-out unproblematic cases for a fast-track review.

So far, MOFCOM has not officially published a draft of the regulation. However, sources reveal that an internal draft has been circulated according to which transactions will be classified in simple, normal and major cases based on criteria such as market share and the Herfindahl-Hirschman Index with different review timelines set for each type (see figure 1). According to this draft, a simple case should be completed in Phase I. However, the threshold to qualify for a simple case under the draft is set relatively high compared to the regimes in the US or the EU. The present draft also indicates that MOFCOM would include industrial or political considerations to determine the type of a case. For example, a transaction will be deemed a major case if it involves the acquisition of well-known trademarks or time-honoured brands (granted by the Ministry of Commerce to enterprises whose brands have stood the test of time and are widely recognised) or if it concerns industries with restrictions for foreign investment.

Last but not the least, an amended filing form published by MOFCOM took effect on July 7 2012. Even though MOFCOM did not issue a form applicable to simple cases, the revised form provides welcome clarifications and streamlines the practice of the regulator. However, the amended form includes certain obligations that could further increase the burden and costs of the transaction parties, especially by requiring the submission of an extensive range of sensitive information.

Perhaps once a fast-track review system is launched MOFCOM will introduce a simplified filing form similar to the Short Form CO in the EU. Without a simplified form, the newly amended form will continue to be a heavy burden on the transaction parties.

Comparisons with the EU and US

The EU law has offered a fast-track merger control for more than a decade and the practical meaning of it is remarkably high, as almost two-thirds of the unrestricted clearance decisions taken since then have been taken in the simplified procedure, according to statistics from the European Commission.

The European Commission considers that a notified concentration may be examined in a simplified procedure, if it does not raise substantive competition concerns. This is presumed to be the case in four categories of concentrations. First, an established joint venture has no or negligible activities within the EEA. Second, the parties' business activities overlap neither horizontally nor vertically on the relevant product or geographical markets. Third, the combined market shares of the undertakings concerned do not exceed 15% on the horizontally overlapping product or geographical markets and, in case of a vertical relationship, the individual or combined market share on neither level exceeds 25%. Finally, a party is to acquire sole control of an undertaking over which it already has joint control.

If these requirements are met, the European Commission adopts a clearance decision within 25 working days from the date of notification. The simplified procedure may be initiated by using the so-called Short Form CO, which in contrast to a Full Form CO does not request for certain overall market information and thereby facilitates the parties' preparations for the merger control procedure.

Unlike European regulations, the US merger control regime offers no distinct short form version of the filing form. But, the information required does vary depending on the notifying party and the nature of the transaction.

The US merger control regime offers a possibility to receive an early clearance from the authorities. Generally, a filing triggers a mandatory initial waiting period of 30 days for reportable transactions or a shortened waiting period of 15 days for acquisitions by means of a cash tender offer or acquisitions subject to certain bankruptcy provisions. If the relevant agencies take no further action until the expiration of the initial waiting period, the parties may close the transaction. Additionally, the parties can request the agencies to terminate the investigation period early, if they are able to conclude that the reported transaction does not raise competition concerns. With this request, the transaction may receive clearance even before expiration of the 30-day waiting period.

Relaxing reviews

It remains to be seen if MOFCOM will align its regime with the fast-track procedures in the EU or the US, or whether it will pursue a third way. For proportionality aspects and the basic freedom of economic activity, the international business community would support further meaningful and necessary steps in this regard. The efforts in the amendments to the filing form and the expected fast-track review systems show that MOFCOM has understood the problems of its current practice and is trying to change the present situation and to improve the efficiency in handling merger control review cases. In consideration of the practical relevance in the EU and the US, it is hoped that a fast-track review procedure is also introduced in China soon. With the new form and the introduction of a fast-track procedure, the legal certainty of the Chinese merger control regime should further enhance and increase the significance of the regime and its attractiveness for international business.

Michael Dietrich, Maria Hou and Johnny Zhao, Taylor Wessing, Beijing