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What legislation applies to the control of mergers?
China has a preliminarily comprehensive legal framework to regulate the control of mergers. There are important rules spread across several laws and regulations that should be considered when doing business in China. The Anti-monopoly Law 2008 is the primary law governing merger control. Article 28 of that law prohibits merger transactions that are potentially anti-competitive (ie, that may eliminate or restrict competition in the relevant market). The following regulations also apply when government authorities are dealing with merger control:
- Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators – issued on and effective from August 3 2008;
- Guiding Opinions of the Anti-monopoly Bureau of the Ministry of Commerce on the Declaration of the Concentration of Business Operators – issued on and effective from January 5 2009 and revised on June 6 2014;
- Guiding Opinions of the Anti-monopoly Bureau of the Ministry of Commerce on the Declaration Documents and Materials of the Concentration of Business Operators – issued on and effective from January 5 2009;
- Guideline of the Anti-monopoly Committee of the State Council for the Definition of the Relevant Market – issued on and effective from May 24 2009;
- Measures for Undertaking Concentration Notification – issued on November 21 2009 and effective from January 1 2010;
- Measures for Undertaking Concentration Review – issued on November 24 2009 and effective from January 1 2010;
- Interim Provisions Regarding the Assessment of the Effects of Mergers – issued on August 29 2011 and effective from September 5 2011;
- Interim Measures for Investigating and Handling Failure to Legally Declare the Concentration of Business Operators – issued on December 30 2011 and effective from February 1 2012;
- Interim Provisions on Standards Applicable to Simple Cases of the Concentration of Undertakings – issued on February 11 2014 and effective from February 12 2014;
- Guiding Opinions of the Anti-monopoly Bureau of the Ministry of Commerce on Streamlined Declaration of Market Concentration Cases (for Trial Implementation) – issued on April 18 2014 and effective from April 18 2014; and
- Provisions on Imposing Additional Restrictive Conditions on the Concentration of Business Operators (for Trial Implementation) – issued on December 4 2014 and effective from January 5 2015.
Under what circumstances is a transaction caught by merger control legislation?
Under Article 3 of the Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators 2008, if a transaction meets the following turnover thresholds then the parties to the transaction must seek clearance from the Ministry of Commerce:
- In the last financial year the aggregate global turnover (which includes turnover in mainland China) of all parties to the transaction exceeds Rmb10 billion and at least two of the parties to the transaction have a Chinese turnover of at least Rmb400 million – turnover in mainland China includes products or services (including exports from foreign countries into mainland China) that are sold to buyers located in mainland China. It excludes products or services exported from mainland China to foreign countries or regions.
- In the last financial year the aggregate Chinese turnover of all parties to the transaction exceeds Rmb2 billion and at least two of the parties to the transaction have a Chinese turnover of at least Rmb400 million.
Transactions identified as suitable for notification
The above thresholds are applicable to the following types of transaction that are identified in the Anti-monopoly Law 2008 as suitable for notification and thus must be cleared by the Ministry of Commerce before they can be consummated:
- mergers between companies;
- the acquisition of another company’s shares or assets that results in gaining control over that company; and
- contracts or other means that result in gaining control over another company or that enable one company to exert decisive influence over the other company
Because the Anti-monopoly Law 2008 did not define ‘control’, there was much ambiguity regarding the term. The June 2014 Revised Merger Notification Guidelines define control in a way that reflects how the Ministry of Commerce dealt with control issues in its merger reviews in the past. Gaining control or having the power to exert decisive influence are collectively referred to as ‘control’, which includes both sole and joint control. The June 2014 Revised Merger Notification Guidelines list factors to consider when one firm might gain control or decisive influence. Gaining control can be both direct and indirect. Factors include:
- the purpose of the transaction;
- change of the shareholder structure before and after the transaction;
- issues related to voting;
- the appointment and dismissal of senior management officers;
- the relationship between shareholders and directors; and
- whether there is a material commercial relationship and cooperative agreement between the companies – the term ‘material commercial relationship’ is not defined.
Although the law and subsequent guidelines do not specifically mention cases with only minority shares, the tools are implicit in the June 2014 Revised Merger Notification Guidelines. The impact or strength of minority shares can be analysed, focusing on the extent to which the shares exert decisive influence over another company. Minority shares can be an issue because they can alter the relationship between the parties depending on the power that can be exercised through the minority shares. For example, a company can have active shares that influence decision making and passive shares, which are purely financial interests without any influence over decision making. Thus, a minority interest could allow for control over the entity that is being acquired or the ability to exercise decisive influence over that entity, in which case the transaction must be filed for approval.
Inter-company transactions (eg, transactions between affiliates) do not have to be reported. The following types of structure are exempt:
- where one of the parties to the transaction holds 50% or more of the voting shares or assets of every other party to the transaction; or
- a company that is not one of the parties to the transaction holds 50% or more of the voting shares or assets of every other party to the transaction.
Under Article 4 of the Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators 2008 and Article 29 of the June 2014 Revised Merger Notification Guidelines, the Ministry of Commerce has discretional authority to investigate transactions that are below the threshold requirements, but that in its opinion already restrict or eliminate competition or have the potential to restrict or eliminate competition. There are no implementation regulations in this context, except for draft interim measures circulated in 2009. There have been no instances of this type of investigation, at least none that have been made public.
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