Merger control finally gets makeover

On June 6 2014, the Chinese Ministry of Commerce (MOFCOM) published its revised Guiding Opinion on Reporting of Concentrations of Business Operators (关于经营者集中申报的指导意见) (Revised Guidance) which was first adopted on January 5 2009 (2009 Guidance). The Revised Guidance is formulated based on the PRC Anti-monopoly Law (中华人民共和国反垄断法) (AML), the State Council's Provisions on the Reporting Threshold for Concentrations of Business Operators (关于经营者集中申报标准的规定) (Provisions) and the Measures for the Reporting of Concentrations of Business Operators (经营者集中申报办法). Through the Revised Guidance, MOFCOM aims to allow parties to better assess the notifiability of a transaction and prepare notifications.

There have been huge developments from the 2009 Guidance to the new Revised Guidance. The 2009 Guidance had only 12 articles, while the Revised Guidance has 30. Despite some unsolved issues, the Revised Guidance has made considerable improvements for the merger control regime.

Defining control

Article 3 of the Revised Guidance defines “control”. According to Article 3, the following factors are considered when determining the existence of control:
the purpose and future plans of the transaction;

• the changes of the shareholding structure from before and after the transaction;
• the voting matters and mechanism at the general meeting of the post-concentration entity, as well as historical attendance and voting records;
• the composition and voting mechanism of the board or supervisory board of the post-concentration entity;
• the appointment and removal of senior management of the post-concentration entity;
• the relationship between shareholders and directors of the post-concentration entity, such as delegating voting rights or acting in concert; and
• whether the parties have significant commercial relationship or cooperation agreements with the post-concentration entity.

It is the first time since the AML came into effect on August 1 2008 that anti-monopoly authorities have adopted a legislation or guidance which defines control. Comparatively, only Article 3 of the January 20 2009 draft version of the Provisions provides the definition of control. According to the draft, control exists when a company:

• acquires more than 50% of the voting rights of shares or assets of other undertakings; or
• acquires less than 50% of the voting rights of shares or assets of other undertakings, but through the acquisition of the equity or assets or by contract, appoints one or more board members/key management personnel or decides on budget, sales, pricing, significant investments or other important management and operational matters.

Although these provisions are based on the EU guidance, this draft article is too simple and has never been adopted due to the lack of experience in defining control. It has nevertheless been used by lawyers as a starting point. Before the adoption of the Revised Guidance, however, it was difficult to assess whether a transaction was a concentration. In practice, this has also led to a situation where some transactions have not been notified since the parties or their competition lawyers took the broad view that their transactions are not concentrations. Now, some of those transactions may be considered concentrations under the definition provided in the Revised Guidance.

In this respect, Article 3 of the Revised Guidance has offered great clarity and ease to the assessment of notifiability. However, this does not mean that Article 3 is perfect; it could provide more elaboration and detail on assessing control. For example, it does not clarify whether all these factors will be considered to determine whether control exists, or if only one or two factors will be sufficient. In practice, not all factors listed under Article 3 exist. Moreover, different factors do not carry the same weight for assessing the existence of control. It would therefore be useful if Article 3 could clarify the importance of the various factors and whether the presence of some of these factors will be enough to make a judgment on the existence of control.

Newly set-up JVs

Article 4 of the Revised Guidance clarifies that when a newly set-up joint venture (green-field investment) is controlled by one party, the establishment is not considered a concentration. According to Article 4, a newly set-up joint venture is considered as such only if it is controlled by two or more undertakings. This clarification is crucial since about 40% of the notifications in China are joint ventures. Together, Articles 3 and 4 now provide parties with a clearer picture of whether their joint venture constitutes a concentration, without having to go through the pre-notification process in order to get a clear assessment. In practice, it has been common for a newly set-up joint venture to be considered a concentration due to the lack of legal clarification. Article 4 of the Revised Guidance will reduce the number of joint ventures that need to be notified.

Turnover

Article 5 of the Revised Guidance provides that a Chinese turnover is when the buyer of the products or services is from China. Exports to China are considered Chinese turnovers, while exports from China to other countries are not considered Chinese turnovers of a concerned undertaking.

Article 6 of the Revised Guidance clarifies that turnovers do not include those generated from the entity which was sold during the previous financial year. This provision provides great certainty for companies and their in-house counsels, although it merely confirms the existing practice and it is nothing new for experienced PRC competition lawyers. These rules are also in line with EU practice.

However, it still remains unclear how to calculate the turnover of a joint venture when the parent companies set up another joint venture with joint control. For example, Company A and Company B have a jointly-controlled Company C, and Company A and Company B want to set up a new joint venture, Company D. The Revised Guidance fails to clarify how to calculate the relevant turnovers. It only provides that Company C's turnover will be calculated and only calculated once. However, it does not provide how Company C's turnover shall be calculated in detail. In theory, Company C's turnover can be allocated to:

• Company A;
• Company B; or
• evenly divided into two parts, allocating 50% each to Company A and Company B (the EU currently adopts this method).

Such different allocation methods will have a huge impact on the assessment of notifiability. For example, if the combined global turnover (including Company C) of Company A and Company B is more than Rmb10 billion, Company A's Chinese turnover (which does not include the turnover of Company C) is less than Rmb400 million and the Chinese turnover of Company C is more than Rmb400 million, the transaction will not be notifiable under the second method since Company A's Chinese turnover is less than Rmb400 million. The transaction will instead be notifiable under the first method since Company A's Chinese turnover will be more than Rmb400 million after combining the turnover of Company C.

This scenario not only exists in theory, but also in real-life transactions. It would therefore have been valuable if MOFCOM had tackled this issue in the Revised Guidance.

Pre-notification consultation meeting

The Revised Guidance provides detail on “pre-notification consultation meeting[s]” which has been helpful for companies in considering applying for them. Previous guidance and legislations have never provided such detail on the pre-notification consultation procedure.

The Revised Guidance provides that applications for pre-notification consultation meetings can be sent to the anti-monopoly bureau through fax or post. The application must include:

• the background information of the transaction, the parties' information and relevant documents;
• the questions that the parties would like to discuss with MOFCOM;
• the name, nationality, company and position of the person who will participate in the pre-notification consultation meeting; and
• the contact person and information.

The Revised Guidance requires that the transaction involved must be real. In other words, MOFCOM will not accept no-name based consultations. The questions for pre-notification consultation meetings, which must be directly relevant to the potential notification, can involve:

• whether the transaction is notifiable;
• the documents that need to be provided in the notification;
• relevant legal and fact issues, such as how to define the relevant market or whether the transaction is qualified for the simplified procedure;
• procedural issues, such the notification time, the notifying party, the review period and the simplified procedure; or
• other questions, such as whether a transaction was not notified but shall be notified.

Articles under the Revised Guidance for pre-notification consultation meetings greatly clarify and standardise the existing practice. It also makes external counsels' lives easier because they are always asked to make no-name based enquiries and Article 11 of the Revised Guidance now states MOFCOM will not accept them.

Obligation and time for notification

Article 13 of the Revised Guidance provides that the notifying parties can delegate one party to be responsible. However, if the delegated party fails to perform its duty, the other notifying parties shall not be exempted from their legal duty.

The notifying parties must notify the authorities after the transaction agreement has been signed and before the transaction is executed. Where a listed company will be acquired through a public tender offer, the announced public tender offer is considered the signed agreement of the concentration. This explanation is useful for these types of transactions.

Unlike the UK and Australia, China adopts a mandatory pre-filing system. This means that a failure to notify a transaction and obtain clearance before the execution of the concentration will lead to a violation of AML (the so-called “gun-jumping”). Under Article 48 of AML, the anti-monopoly authority can order the companies concerned to cease doing so, dispose of shares or assets, transfer the business or take other necessary measures to restore the market situation before the concentration within a given time limit and may impose a fine of less than Rmb500,000. The timing for executing a concentration is very important for the parties involved. However, the Revised Guidance fails to clarify what circumstances constitute the execution of a transaction or concentration.

Number of document copies

Article 24 of the Revised Guidance reduces the number of filing document copies to one copy each of the confidential and non-confidential versions. Previously, two copies of each of the confidential and non-confidential versions were required. These requirements originate from the old merger control regime before the AML came into effect under which both MOFCOM and the State Administration for Industry and Commerce (SAIC) were the two authorities for merger control (which is why two copies were required). Since August 1 2008, MOFCOM has been the sole authority for merger control so only one copy has been needed. Although it comes nearly six years late, the change under Article 24 is highly practical as the hard copies of the filing documents are huge.

More to come

On one hand, the Revised Guidance clarifies a number of uncertain issues and updates the previous unnecessary requirements based on MOFCOM's six-year practice experience and the practices in major competition regimes, such as the EU and US. Nevertheless, some issues have been left unclear, such as the method of allocating joint ventures' turnovers. This may be because MOFCOM has not faced such problems in its enforcement and thus no alarm has been raised. With the increase in cases, it is inevitable that MOFCOM will face issues that have not been clarified in the Revised Guidance. This leaves room for the next round of amendments.


Zhaofeng Zhou, Taylor Wessing, Beijing


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