China Ministry of Commerce Measures on the Notification of Concentrations of Business Operators

Issuing Body: Ministry of Commerce
Issuing Date: November 24, 2009
Effective Date: January 1, 2010

Continuing its efforts to implement China's landmark Anti-Monopoly Law, which took effect on August 1, 2008, the Ministry of Commerce (MOFCOM) has introduced two sets of regulations that clarify when companies must notify the merger-control regulator of a proposed concentration and how the agency will proceed in evaluating such proposals. While the Measures on the Notification of Concentrations of Business Operators (Notification Measures) and the Measures on the Review of Concentrations of Business Operators (Concentration Review Measures) to some extent merely codify existing practices, the new rules also clarify key terms in the year-and-a-half-old antitrust law and enhance the transparency of regulation by MOFCOM.

While the Ministry of Commerce shares responsibility for enforcing the Anti-Monopoly Law with two other agencies—the National Development and Reform Commission and the State Administration of Industry and Commerce—MOFCOM has been the most active of the three in drafting implementing rules. Since the antitrust law took effect in 2008, MOFCOM has passed such rules as the Guiding Opinions on Merger Control Notification and the Guiding Opinions on Application Materials for Merger Control Notification, while the Anti-Monopoly Commission of the State Council, which oversees those three agencies, has supplemented MOFCOM's regulations with the Guidelines on the Definition of Relevant Market.

Perhaps not coincidentally, the world has followed MOFCOM's decisions closely—especially when the regulator has limited or otherwise imposed conditions on takeovers: the Notice of Decision on the Approval with Conditions of Mitsubishi Rayon's Acquisition of Lucite International, Notice of Decision on the Approval with Conditions of General Motors' Acquisition of Delphi and Notice of Decision on the Approval with Conditions of Pfizer's Acquisition of Wyeth. And MOFCOM's rejection of Coca-Cola's proposed acquisition of Chinese juicemaker Huiyan in March 2009 drew still more attention.

Parties Obligated to Notify MOFCOM

The Notification Measures clearly state which parties are obligated to notify MOFCOM of a proposed concentration. If a concentration of business operators is carried out through merger, all parties to the merger are obliged to notify MOFCOM. If a concentration is effected by other means, such as an acquisition of shares or assets or through contractual arrangements, the party that gains controlling power over the other, or that is able to exert a decisive impact on other operators, is obliged to file notice of the concentration, and the other businesses involved in the concentration are required to cooperate. Should the controlling party fail to properly notify MOFCOM of the proposed concentration, the other participants may do so instead.

Calculation of Turnover

The Anti-Monopoly Law requires advance notification of a proposed concentration when the businesses involved meet certain thresholds pertaining to size. Thresholds are met when the combined global sales revenues of all parties to a proposed concentration exceeded RMB 10 million in the previous year or when the revenue within China of at least two parties each exceeded RMB 400 million. The Notification Measures clarify how that business turnover is to be calculated:

• In aggregating group revenue, the businesses involved in a concentration should include their revenue, subsidiaries' revenue, parent companies' revenue, and the revenue of the parents' other subsidiaries.
• When a concentration involves only a portion of one company (such as a subsidiary), the Notification Measures focus on "revenue relevant to the concentration." In accordance with prevailing international practice, that language, while not explicit, suggests the turnover of the subsidiary or other portion of the business being acquired should be included for the purposes of merger control notification and evaluation, rather than the parent's turnover.
• To prevent businesses from evading the requirements for merger control notification and oversight by acquiring portions of the same company piecemeal, if there are multiple below-threshold transactions among the same businesses within a two-year period, the various participants' turnover will be aggregated.
• For the purposes of calculating turnover, the Notification Measures make clear that "revenue" means income generated from the sale of products and services in the previous year, minus taxes.
• Turnover from transactions between and among already-affiliated businesses is excluded from the calculation of that participant's turnover.

The Notification Measures clarify that for the purposes of triggering notification thresholds, revenue within the People's Republic of China includes transactions in which the purchaser of products or services is located in China. Whether that revenue will include Hong Kong or Macau—or, for that matter, Taiwan—remains unclear.

Submission of Application Documents to MOFCOM

The Notification Measures reiterate requirements for the application documents that must be submitted to MOFCOM in a merger control notification. After receiving the application documents, MOFCOM will first conduct a preliminary review to ascertain the completeness of the application. If an applicant has not completely submitted all required documents, MOFCOM is entitled to set a reasonable time limit for the submission of missing documents. If the applicant fails to submit the missing documents within that time, the application will be deemed invalid.

If an applicant intentionally conceals significant facts or provides false information in an application, MOFCOM will not put the case on file, meaning the agency will not even conduct a preliminary review of the documents.

Withdrawal of a Notification

If, after filing an application with MOFCOM, the parties to a proposed concentration abandon or significantly change their plans, such that the concentration no longer meets the threshold requirements for notification, the responsible party or parties must notify MOFCOM.

If the proposed concentration is canceled, a written statement must be submitted to MOFCOM explaining the reasons why. The submission of such a statement withdraws the notification. In the event the concentration changes and no longer meets threshold requirements (for example, there are fewer participants—and thus lower combined turnover—in the reconfigured transaction), a written statement detailing the material changes must be submitted to MOFCOM. In that situation, approval from MOFCOM must be obtained before the notification of a proposed concentration can be withdrawn.

It is noteworthy that MOFCOM's approval of a withdrawal of notification will not be deemed an approval of the concentration. Any concentration that meets notification thresholds may only proceed with the approval of MOFCOM.

Concentration Review Measures; Businesses' Rights to State and Defend Their Point of View; Public Hearings

The Concentration Review Measures broadly grant businesses proposing to engage in a concentration the right to present and defend their perspective on the concentration during MOFCOM's review process. In order to make the review process more transparent and fair, MOFCOM may hold public hearings to investigate and collect evidence as well as listen to the opinions of different parties, including the businesses involved in the proposed concentration, their business rivals, upstream and downstream enterprises, relevant experts, government officials and customers.

Objections to a Concentration and Restrictive Conditions

If MOFCOM determines during its substantive review process that a proposed concentration will have the effect of eliminating or restricting competition, the agency must notify the parties of its objections and give the operators a reasonable amount of time in which to submit a written response.

The Concentration Review Measures provide for three types of restrictive conditions that MOFCOM may impose while allowing a proposed concentration to proceed:

• Structural conditions, such as divestiture of partial assets or businesses owned by one or more of the operators seeking to engage in a concentration;
• Behavioral conditions such as requiring the opening of infrastructure, including networks or platforms, the licensing of key technology or termination of exclusive agreements;
• Comprehensive conditions, with a combination of both structural and behavioral remedies.

In 2009 MOFCOM several times imposed precisely these sorts of conditions on deals such as General Motors' acquisition of Delphi and Pfizer's acquisition of Wyeth.

Both MOFCOM and business operators are by law entitled to propose restrictive conditions, and both may put forward opinions and suggestions regarding proposed conditions. Business operators may propose restrictive conditions on the proposed concentration even if MOFCOM has not itself raised objections or suggested conditions.

MOFCOM is responsible for monitoring the enforcement of restrictive conditions imposed on a concentration. In case business operators fail to perform the obligations stipulated in restrictive conditions, MOFCOM may order them to correct such failures within a certain time frame. If operators fail to make such corrections within the designated time, MOFCOM may order operators to terminate the concentration and/or impose a fine of up to RMB 500,000.

Conclusion

These new rules reflect MOFCOM's determination to strengthen its regulation of and oversight over merger control aspects of China's still-evolving Anti-Monopoly Law. Meanwhile, MOFCOM is also making an effort to increase the transparency of its review process and strengthen its capacity to enforce both antitrust laws and restrictions imposed on concentrations. With mergers and acquisitions as well as restructurings expected to increase in China, compliance with the requirements of merger control notification will likely draw more attention from market participants and become more important in market activities.