Simple cases cut the queue

China's Ministry of Commerce (MOFCOM), which is responsible for merger control, published the Tentative Provisions on the Criteria Applicable to Simple Cases of Concentrations of Business Operators (关于经营者集中简易案件适用标准的暂行规定) (Provisions) on February 11 2014. The Provisions list six cases where a notified transaction can be treated as a simple case. The Guiding Opinions on the Notification of Simple Cases of Concentrations of Business Operators (Trial Implementation) (关于经营者集中简易案件申报的指导意见（试行）) (Opinions), published on April 18 2014, provide much-awaited guidance on the procedure MOFCOM will follow and required information in simple cases.

The adoption of the simplified procedure reflects MOFCOM's efforts to streamline its merger review process. This is a significant and positive step intended to reduce the administrative burden on notifying parties and expedite the review process in transactions that raise no substantive competition concerns in China. However, they stop short of a commitment to review simple cases on a timely basis and/or within Phase I, which is MOFCOM's 30-day initial review period. MOFCOM has a total statutory review period of 180 calendar days once MOFCOM confirms that the notification is complete, which triggers the review period. Phase I can be extended for 90 days (Phase II), which can be further extended by up to 60 days in certain cases, including with the parties' consent.

MOFCOM's review process

The review process in China is often protracted and fraught with unpredictable approval timetables compared with other major jurisdictions. The approval process often lasts four to five months from notification to approval – even in non-problematic deals. The main drivers for the long review process lie in the nature and design of China's merger control regime.

First, the statutory review period does not start until MOFCOM is satisfied that the notification is complete (pre-acceptance review). There are no statutory deadlines for this pre-acceptance review phase, and in practice this period can take up to eight weeks for various reasons such as deal complexity, the nature of the products, services or sectors involved, market definition and internal priorities and resources.

Second, MOFCOM tends to consult a significant number of stakeholders during its review, including other government agencies and departments, trade associations, competitors, customers and suppliers. The consultation may involve issues that go beyond assessment of a transaction's impact on competition such as industrial policy, foreign investment, national security or security of supply and sourcing of products or services key to China's development. The consultation process can be long and the speed with which stakeholders – especially other government agencies – revert with comments is typically not within MOFCOM's control.

Last, there are significant constraints on MOFCOM's resources. The number of transactions notified to MOFCOM has steadily increased since the PRC Anti-monopoly Law (AML) came into force. In the past year, MOFCOM approved 207 transactions, four of which resulted in remedies. However, the Anti-monopoly Bureau within MOFCOM, which is responsible for processing notifications, reportedly has a small pool of only 30-40 officials.

A simplified procedure

MOFCOM started formulating a simplified review procedure in 2012. It consulted with a few university professors and law firms, amongst others, regarding an earlier iteration of the simplified review procedure. The consultation process culminated in the publication of Tentative Provisions on the Criteria Applicable to Simple Cases of Concentrations of Business Operators (Draft for Comments) (商务部关于经营者集中简易案件适用标准的暂行规定 (征求意见稿)) (Draft Provisions) in April 2013.

The Draft Provisions identified transactions that can be treated as a simple case – transactions that present no significant competition concerns in China – but did not explain the benefits of simple case treatment. They provided exceptions to simple case treatment and indicated when a simple case determination can be withdrawn. Likewise, the Provisions identify simple cases (Article 2), establish exceptions to simple case treatment (Article 3), and identify circumstances where MOFCOM may withdraw a simple case determination. There are no substantive differences between the Draft Provisions and Provisions.

Qualifying transactions

Article 2 of the Provisions identifies six categories of cases that MOFCOM considers are unlikely to have significant anti-competitive effects in China. A principal criterion is market share. A transaction is simple if the following market share tests are satisfied:

• in the case of a horizontal merger, if the parties have a combined market share of less than 15% in the relevant market;
• in the case of a vertical merger, if the parties' respective market share is less than 25% in the relevant upstream or downstream market; and
• in the absence of a horizontal or vertical relationship, the parties' respective market share in a market relevant to the transaction is less than 25%.

Market share based tests are common. The European Commission has an established record of applying market share criteria (amongst others) to determine whether a transaction is unlikely to raise competition concerns. The extent to which market share based tests can be used conveniently in China – at least at this stage of the AML's development – deserves a closer look. Determining market share can be difficult given some of the challenges associated with gathering reliable data and information in China. Market share calculations also require the relevant market to be defined correctly, which can be difficult given the limited number of precedents in China. Since MOFCOM is required to publish only prohibition and conditional approval decisions, there are few precedents on market definition in China on which notifying parties can rely. MOFCOM has published only 24 prohibition and conditional clearance decisions so far, but has reviewed more than 740 transactions based on recent statistics.

MOFCOM's current practice is to define relevant markets and to not leave this open even in non-problematic cases. It tends to define markets narrowly and explore alternative market definitions. There is a risk that notifying parties may be required to consider all plausible alternative market definitions to satisfy MOFCOM that simple case treatment is appropriate. This could prove time-consuming, leading at least some notifying parties to opt for the non-simple case route to avoid possible delays.

Article 2 also provides non-market share tests for simple case treatment:

• in the case of acquiring the shares or assets of a non-Chinese entity, if the non-Chinese entity does not engage in economic activity in China;
• in the case of the creation of an offshore joint venture (JV), if the JV does not engage in economic activity in China; and
• where a JV is jointly controlled by two or more undertakings and one or more of them seeks to acquire sole or joint control over the JV via the transaction.

The treatment of JVs and foreign-to-foreign transactions with no economic impact on China as simple is welcome given the number of such cases notified to MOFCOM. The concept of “engaging in economic activity” is not defined in the Provisions, the Draft Provisions, the Opinions, the AML or the AML's implementing rules. This will need to be clarified, as experience with the simple review procedure evolves. In particular, it is unclear whether any level of economic activity in China (e.g. nominal sales or assets, or a sales rep office) would preclude simple treatment, or whether a transaction can still benefit from simple treatment if the market share thresholds are not exceeded.

Excluded transactions

Article 3 of the Provisions establishes six broad exceptions to simple treatment in cases where the Article 2 tests are met.

First, a change from joint to sole control over a JV is not considered simple if the parent and the JV are competitors in the relevant market. This exception potentially excludes a transaction between a parent and its JV resulting in a post-merger combined market share below 15%. This seems counter-intuitive, as a merger between a parent and its JV should raise no greater competition concerns than a horizontal merger between previously independent competitors leading to an equally low post-merger combined share.

Second, a case is not simple if the relevant market is difficult to define. With the limited number of Chinese precedents and MOFCOM's tendency to drill down market definition, this could mean that a number of non-problematic deals will remain subject to the normal review procedure given the challenges with market definition in China.

Third, a case is not simple if it is likely to have a detrimental impact on market access, technological progress, consumers or other third parties, national economic development or competition. Article 3 does not explain the specific circumstances in which an otherwise simple case may have such an effect, nor do the AML or related implementation rules shed any further light. This leaves considerable discretion to MOFCOM in determining when not to apply the simple case procedure. That said, the new notification form for simple cases, published on April 18, requires notifying parties to confirm that a notified simple case does not have any of the effects outlined in Article 3. This suggests that this exception may apply only in exceptional circumstances.

Withdrawal

Finally, Article 4 enables MOFCOM to withdraw a simple case designation if:

• a notifying party provides incomplete, false or misleading information;
• a third party complains that the notified transaction has or may have the effect of restricting or eliminating competition; or
• there are material changes to the notified transaction or to market conditions.

This leaves considerable discretion to MOFCOM, as Article 4 does not set a time limit within which it may withdraw simple status and revert to the non-simple case route. In theory, MOFCOM could do so at any time during the review process based on its own findings or driven by a third party complaint.

Determining simple status

The Opinions provide further guidance on the procedure MOFCOM will follow in simple cases, but stop short of a commitment to review simple cases on an expedited basis and/or within Phase I (i.e. within 30 days of case acceptance). This is unfortunate given the business community's concerns over the predictability of the merger review timetable, especially in cases that raise no substantive competition concerns. It is unclear whether MOFCOM will continue to consult the same number of stakeholders, modify this step or eliminate it entirely.

Notifying parties will need to apply for simple case treatment, otherwise the transaction will be reviewed under the non-simple case route. A new form is available for this. If accepted, MOFCOM will publish a notice of acceptance on its website for 10 days. This will include a summary of the transaction, the parties involved and the reasons for simple treatment. Notifying parties may consult with MOFCOM to discuss whether a transaction qualifies for simple treatment before notification.

The procedure proposed by MOFCOM for simple cases, unveiled on April 18, seems structured to resolve the merits of simple status during the pre-acceptance review phase while clarifying that it may withdraw simple status even after case acceptance and require notifying parties to re-notify the transaction as a non-simple case. In practice, questions on simple status will very likely be settled during the pre-acceptance review phase or shortly thereafter. For instance, third parties that challenge a transaction's simple status must do so within 10 days of publication of MOFCOM's notice of acceptance of the transaction as simple. Given the design of China's merger review process, simple status is ideally best settled during the pre-acceptance review phase. Early determination of simple status will give notifying parties the necessary comfort that their transaction does not raise significant competition concerns and will be reviewed on a timely and expedited basis.

The Opinions and related simple case notification form also explain the information notifying parties will need to provide in simple cases. In a positive step, the information required in simple cases is reduced, lessening the administrative burden on notifying parties. The new simple case notification form does not require information on, for example, the structure of supply and demand in the relevant market, market entry, horizontal or vertical cooperation agreements or efficiencies. Foreign companies may also submit a copy of a notarised and legalised certificate of incorporation (COI) rather than the original if they have notified a prior transaction within the past three years and there is no change to the original COI filed earlier.

Impact on businesses

The Provisions identify categories of cases that are unlikely to have significant anti-competitive effects and can presumably be reviewed on an expedited basis. This is a significant and positive development in MOFCOM's merger control process.

If a transaction qualifies as simple, notifying parties should certainly consider applying for simple case treatment to facilitate the review process and timely completion of their transaction. If the application is successful, parties may reasonably expect their transaction to be cleared within Phase I or shortly thereafter following case acceptance.

There is, of course, no formal commitment to review simple cases on this basis and, as before, the actual time taken for review may be influenced by MOFCOM's ever-increasing caseload and limited resources. The clearance timetable will also depend on whether MOFCOM rejects a transaction as simple or withdraws simple status in which case parties may be required to gather additional information to supplement the notification and, in a worst case scenario, re-notify the transaction – raising the prospect of a long regulatory process. The broad exceptions to simple treatment and the scenarios in which simple status can be withdrawn risk undermining the effectiveness of the simple case regime. The prospect for third parties to challenge a simple case determination, albeit within a finite 10-day period, may also impact the effectiveness of the new system. Nonetheless, the simplified procedure is welcome as it offers a genuine opportunity to shorten the review process for transactions that raise no substantive issues.

From MOFCOM's perspective, the Provisions also provide helpful guidance for them to identify non-problematic cases and thus allocate administrative resources more efficiently. This should facilitate MOFCOM's review process in non-problematic cases.

In order to maximise the anticipated benefits of simple case qualification, it is hoped that as the simplified review procedure evolves, there will be increased levels of predictability and certainty with the merger review process and further lessening of the administrative burden on notifying parties. With time, it is hoped that the simple treatment will be extended to capture additional categories of cases.


Ninette Dodoo, Freshfields Bruckhaus Deringer, Hong Kong


More from CLP:
Tentative Provisions on the Criteria Applicable to Simple Cases of Concentrations of Business Operators
MOFCOM doles out preventative medicine
Simple cases cut the queue
A new era in antitrust enforcement
MOFCOM speeds up simple mergers
MOFCOM's review processes explained
Simple Case Standards for merger review
Failing to define the relevant market