Simple case standards for merger review

Nate Bush
[email protected]

China's Ministry of Commerce (MOFCOM) took a major step towards more efficient docket management on February 11 2014 by releasing the Tentative Provisions on the Criteria Applicable to Simple Cases of Concentrations of Business Operators (商务部关于经营者集中简易案件适用标准的暂行规定) (Simple Case Standards). The Simple Case Standards distinguish between “simple” transactions unlikely to impact competition in China from other deals meriting closer antitrust scrutiny under the Anti-monopoly Law (AML). Whether these new measures actually expedite MOFCOM's review process, however, remains to be seen.

The Simple Case Standards address concerns about MOFCOM's swelling caseload, and the resulting lengthy merger review periods in China. The AML took effect on August 1 2008 – the eve of the global financial crisis. MOFCOM received just 17 notifications during the remainder of 2008, and just 77 notifications for the WHOLE of 2009. As M&A activity recovered, MOFCOM's docket grew to 136 notifications in 2010, 205 in 2011, 207 in 2012, and 185 during the first ten months of 2013. However, MOFCOM's Anti-monopoly Bureau (AMB) has not grown to keep pace with its caseload; its headcount remains fewer than 40 case officers, leadership, and staff.

MOFCOM reviews often last several months, even for non-controversial transactions. Reported transactions face a lengthy preliminary review by the small intake office before a second team conducts the formal review. MOFCOM routinely solicits input from other government agencies and official trade associations, which also causes delay.

Simple case criteria

MOFCOM has responded by separating simple cases from other transactions, consistent with the practices of many other competition authorities. The simplified procedures of the European Commission, for example, includes a shorter notification form and expedited handling of certain categories of concentrations that do not raise competition concerns.

Under Article 2 of the Simple Case Standards, the following categories of transactions are considered simple cases: a horizontal concentration where the combined market share is less than 15% in each horizontally-related market; a vertical integration where the individual or combined market shares is less than 25% in each vertically-related market; a transaction other than a vertical or horizontal concentration where the individual market share of the parties is less than 25% in each market; an establishment of a greenfield joint venture outside China that will not engage in economic activities within China; an acquisition of non-Chinese company that does not conduct economic activities in China; or a reduction in the number of controlling shareholders in a joint venture.

However, these transactions are disqualified under Article 3 if: the transaction results in one party acquiring sole control of a company over which it already has joint control where the acquirer and the target compete in the same market; the relevant market is difficult to define; the concentration may negatively impact market entry or technology progress; the concentration may negatively impact consumers and other companies; the concentration may negatively impact the national economy; the concentration may otherwise negatively impact market competition.

Under Article 4, MOFCOM may revoke its determination to treat a transaction as a simple case if: the notifying parties withhold important information or provide false or misleading information; a third party raises substantiated competition concerns; or MOFCOM finds a substantial change of circumstances in the transaction per se or the market competition landscape.

MOFCOM's criteria appear more stringent than the European Commission's simplified procedures. The latter sets wider boundaries for simple mergers, allowing horizontal concentrations with combined market shares less than 20%, vertical concentrations with market shares less than 30%, and all conglomerate concentrations regardless of the parties' market shares.

Waiting for procedures

Many key procedural issues remain unresolved. MOFCOM has not clarified how so-called “simple cases” will be treated differently from other cases. The mechanisms and timelines for requesting simple case treatment, for determining whether a transaction qualifies, or revoking such determinations remain unclear. It may follow other competition authorities in curbing requirements for detailed analysis of competitive effects in affected markets as well as streamline its review process by curtailing its market investigation. A frequent source of delay is due to conferring with other government bodies and trade associations.

MOFCOM is reportedly drafting new procedural rules for simple cases. Applying the new standards to incoming cases requires prompt judgments on market definition and potential threat to competition. Regulators in all jurisdictions confront these challenges, but MOFCOM faces the added challenge of ensuring that “simple” transactions do not impair other Chinese government policies. The Simple Case Standards will only expedite the Chinese merger review if MOFCOM proves it has the organisation and manpower to clear simple cases swiftly with minimal scrutiny.