On December 30, 2011, the Ministry of Commerce (“MOFCOM”) of the People’s Republic of China (the “PRC” or “China”),which provides security reviews for inbound mergers and acquisitions, issued the final version of “未依法申报经营者集中调查处理暂行办法,” or“Interim Measures on Failure of Filing for the Investigation of Concentration of Business Operators,” which will come into effect on February 1, 2012 (the “Interim Measures”).1  The Interim Measures signal the PRC government’s determination to fully enforce and punish violators of the PRC’s Anti-Monopoly Law.

Regulatory Background

On August 30, 2007, the Standing Committee of the 10th National People's Congress issued the PRC Anti-Monopoly Law (the “AML”) and it took effect on August 1, 2008.2 Like the Hart-Scott-Rodino Act that established federal premerger notification in the United States, the AML requires that parties to certain proposed transactions involving a business concentration must submit premerger notification to MOFCOM (the “Premerger Notification”) prior to consummating such transactions. The AML Provisions of the State Council on the Application Criteria for Concentrations of Business Operators” (the “Application Criteria”) define a business concentration for purposes of the AML as: (1) a merger of business operators, (2) the gain of control by one business operator over another business operator through the acquisition of equity or assets, or (3) the gain of control or influence by one business operator over another business operator through contractual arrangements.

Not all transactions involving business concentration are subject to filing a Premerger Notification under the AML.  According to Article 3 of the Application Criteria, only proposed concentrations of business operators that meet the following criteria are subject to the Premerger Notification: (1) the total worldwide revenue of all the business operators participating in the proposed concentration generated in the last fiscal year is over RMB10 billion (approximately, US$1.59 billion), and the total revenue generated in China by at least two of the participating business operators in the last fiscal year is over RMB400 million (approximately, US$63.4 million); or (2) the total revenue generated in China by all participating business operators in the last fiscal year is over RMB2 billion (approximately, US$316.7 million), and the total revenue generated in China by at least two of the participating business operators in the last fiscal year is over RMB400 million.

Interim Measures on Failure to File for Investigation of Business Concentrations

On December 30, 2011, MOFCOM issued the Interim Measures to discourage and censure business operators whose business concentration transactions meet the threshold requirements for filing a Premerger Notification, but who consummate such transactions without complying with the notification requirements.  The Interim Measures affirm MOFCOM’s right to investigate and sanction such non-declared transactions and to delegate the investigation of such transactions to provincial commerce authorities.

Process for Investigating Non-Declared Business Concentrations

MOFCOM’s investigation of a non-declared concentration may be initiated through the submission of a confidential report by any enterprise or individual to MOFCOM regarding suspicion of a non-declared concentration. Such report must be in writing and must provide supporting evidence for MOFCOM’s further investigation and verification. If MOFCOM determines that the evidence provided by the whistleblower supports the existence of a non-declared concentration, MOFCOM will open a file and notify the noncompliant participating business operator(s) of such determination in writing. Upon receipt of such notification from MOFCOM, a business operator has 30 days to submit documents and materials to MOFCOM to rebut the presumption that the investigated undertaking involves a business concentration, and if there is a business concentration, that the participants in the undertaking did not reach the filing threshold, and if it did reach the filing threshold, that the concentration has been declared or has not yet been consummated.

Article 6 of the Interim Measures gives MOFCOM 60 days after receiving documents and materials provided by an investigated business operator to investigate whether the transaction involves a non-declared concentration.  If after reviewing such materials MOFCOM determines that the transaction does not involve a non-declared concentration, MOFCOM will terminate its investigation and notify the investigated business operator of its decision. However, if MOFCOM determines that the transaction involves a non-declared concentration, then MOFCOM will notify the investigated business operator in writing of its intent to further investigate the undertaking and the undertaking will be suspended until a final determination can be made.

Upon receipt of the MOFCOM preliminary determination, an investigated business operator has another 30 days to submit additional documents and materials to MOFCOM.  MOFCOM is required to complete its further investigation within180 days after receiving such documents and materials.  In its conduct of such investigation, MOFCOM has the right, subject to Article 39 of the AML, to: (1) inspect the business premises or any other relevant place of business operators under investigation; (2) make inquiries of such business operators, interested parties, or other relevant entities or individuals; (3) review and duplicate relevant documents, agreements, account books, business correspondences and electronic data, etc. of such business operators, interested parties and other relevant entities or individuals; (4) seize and retain relevant evidence; and (5) make inquiries about such business operators' bank accounts.  During its investigation, MOFCOM will assess the nature, extent, duration of the investigated transaction and whether the investigated transaction will or may exclude or restrict competition under the AML and related regulations.

Upon conclusion of its further investigation, and before delivering a formal determination, MOFCOM will notify the investigated business operator of its conclusion and the evidence supporting such conclusion.  The investigated business operator thereafter has the right to submit to MOFCOM its written opinion regarding the applicability of the AML to the transaction, along with supporting evidence. MOFCOM will then deliver a formal decision in writing to the investigated business operator which MOFCOM also has the right to publish.  A business operator who does not accept MOFCOM’s final decision may apply for administrative reconsideration and subsequently for administrative litigation.  However, it is not clear whether any of the sanctions discussed below would be suspended during such reconsideration and administrative litigation.

Sanctions for Failure to Declare Business Concentrations

Article 13 of the Interim Measures gives MOFCOM the right to fine an investigated business operator up to RMB500,000 (approximately, US$80,000) if it concludes that it has consummated a covered business concentration without making the required MOFCOM filing.  In addition, MOFCOM has the right to order the noncompliant business operator to take necessary measures to restore the status of the marketplace prior to consummation of the business concentration, including but not limited to: (1) stopping the concentration; (2) disposal of the equity or asset(s) acquired in the concentration within a certain period; and (3) transfer of the acquired business within certain period.

MOFCOM may also penalize any refusal to provide related materials and information, the provision of false information or concealing evidence, the destruction or transmission of evidence, or any other actions designed to obstruct the course of MOFCOM’s investigation of the investigated business operator during the conduct of the investigation.  However, it is not clear whether such a penalty would be assessed on the investigated business operator alone or whether uncooperative interested parties and other relevant entities or individuals involved by MOFCOM in the investigation would also be subject to the penalty.

What the Interim Measures Mean to You

The Interim Measures is the latest in a series of antitrust legislation since the passage of the AML in 2008 that affirm the determination of PRC government authorities to regulate certain business undertakings, but it is unique in its establishment of enforcement procedures for noncompliance.  As early as January 2011, MOFCOM had signaled its intent to enact AML enforcement measures.  In a January 2011 interview with the Antitrust Source,3 Shang Ming, Director General of MOFCOM’s Anti-Monopoly Bureau reported that although there had been a significant increase in 2010 (1) in the number of premerger notifications filed with and cleared by MOFCOM (120 filings of which more than 110 were cleared), as compared to only 77 cleared transactions in 2009, and (2) in the percentage of filings involving manufacturing industries and listed companies (70% of filings came from manufacturing industries and 60% of filings involved listed companies),4 MOFCOM believed that there were still some critical AML enforcement issues that needed to be resolved through the introduction of implementing regulations. Ming remarked that a small number of undertakings involving business concentrations that exceeded the AML notification threshold were not being reported to MOFCOM as required, and that MOFCOM would continue to improve the AML enforcement mechanism and would discipline and punish such violation of the law.

Although MOFCOM has some discretion regarding what weight to give to each of its investigative criteria, including whether the investigated transaction will or may exclude or restrict competition under the AML and related regulations, the Interim Measures signal MOFCOM’s determination to consistently enforce the AML and improve compliance.  When considering participation in any undertaking involving PRC companies that may result in a business concentration, transaction participants and their counsel should understand the relevant PRC antimonopoly rules and regulations and when in doubt consult with MOFCOM regarding their applicability to an undertaking.  If an undertaking is deemed to be subject to review, participants should comply with the AML notification procedures and cooperate with MOFCOM during its review and investigation process.