Zhan Hao November 12 2015 Warning from MOFCOM: second wave of concentration notification penalties AnJie Law Firm | Competition & Antitrust - China Zhan Hao Competition & Antitrust DecisionsConcentrations subject to notificationFailure to notifyActions prior to official approvalPenaltiesCommentOn September 29 2015 the Ministry of Commerce (MOFCOM) published four administrative decisions imposing penalties for illegal activities relating to concentrations. For the second time, MOFCOM published penalty decisions made against undertakings which failed to observe the Anti-monopoly Law notification obligation.DecisionsThe four published decisions were as follows:MOFCOM fined Fujian Electronics & Information (Group) Co Ltd (FJEI) Rmb150,000 for failure to notify the acquisition of 35% of the shares in Shenzhen Chino Communication Co Ltd (SCC). Details of the decision suggest that the investigation was triggered by a third-party complaint after MOFCOM had notified the public of the concentration between SCC and FJEI's holding company, Fujian Furi Electronics Co Ltd.Shanghai Fosun Pharmaceutical (Group) Co Ltd applied to MOFCOM for consultation regarding the proposed purchase of 65% of the shares in a target through two subsidiaries, Shanghai Fosun Pharmaceutical Industry Development Co Ltd (FPID) and an offshore subsidiary. During the negotiation period, FPID completed the share transfer without MOFCOM's approval. MOFCOM therefore fined FPID Rmb200,000 for violating the relevant laws and regulations.On November 3 2014 CSR Nanjing Puzhen Co Ltd and Bombardier Transportation Group Sweden Co Ltd concluded an agreement to establish a joint venture in which each party owned 50% of the shares. In December they notified MOFCOM of the potential transaction. However, before notification, both parties had already appointed directors and management to the joint venture, which had already obtained a business licence. As the parties had actively filed the concentration notification and cooperated fully in MOFCOM's investigation, Nanjing Puzhen and Bombardier Sweden were ultimately fined Rmb150,000 each.MOFCOM fined BesTV New Media Co Ltd and Microsoft Corporation Rmb200,000 each for establishing of a joint venture without notification. This case was also triggered by third-party complaints.Concentrations subject to notificationThe Anti-monopoly Law stipulates that where a concentration between undertakings meets certain turnover thresholds, it should be notified to MOFCOM for anti-monopoly review before it is implemented.A 'concentration' is defined as:a merger;the acquisition of a controlling right in an undertaking through the acquisition of equity or assets (including the establishment of a joint venture); orthe acquisition of a controlling right in an undertaking or the ability to exercise decisive influence over an undertaking by contract or other means.The turnover thresholds are met if:the undertakings' collective global turnover exceeded Rmb10 billion in the previous fiscal year, with at least two undertakings achieving a turnover of more than Rmb400 million each in China; orthe undertakings' collective turnover in China exceeded Rmb2 billion in the previous fiscal year, with at least two undertakings achieving a turnover of more than Rmb400 million each in China.For the purpose of the Anti-monopoly Law, 'control' means controlling or exercising decisive influence over a company. Chinese regulators (including MOFCOM) identify control based on multiple legal and factual elements, such as:the purpose of the concentration, factoring in future plans;the equity structure of the target both before and after the concentration;the matters put to vote by general meeting in the target, as well as the voting mechanisms;the composition and voting mechanisms of the target's board of directors or board of supervisors;the appointment and removal of the target's senior management personnel;the shareholder-director relationship in the target; andwhether a significant business relationship exists between the acquirer and the target.Notably, in the FJEI decision, MOFCOM identified that the transfer of 35% of the shares (ie, below 50%) constituted 'control' under the Anti-monopoly Law and therefore obliged the parties to notify the transaction.Failure to notify Based on the above cases, failure to notify MOFCOM of a concentration is predicated on the following acts and omissions:reaching the turnover thresholds, but failing to notify MOFCOM;filing notification to MOFCOM after implementing a concentration; orconducting implementation actions before obtaining official approval.Any of these acts or omissions may result in failure to meet the notification obligation under the Anti-monopoly Law.Action prior to official approvalEven if MOFCOM has been notified of the transaction, the parties may still violate the Anti-monopoly Law if they engage in implementation actions before obtaining official approval. The second and third decisions discussed above suggest that actions such as transferring equity, obtaining a business licence and appointing directors or managers before gaining MOFCOM's approval could be viewed as failure to notify. Experience suggests that actions such as transferring ownership of property and assets, relocating important staff and exchanging competitively sensitive information (eg, prices and planned output of commodities) might also breach the Anti-monopoly Law.Penalties Pursuant to the Anti-monopoly Law and the Interim Measures on the Investigation of Failure to File for Concentration of Undertakings, MOFCOM may impose a fine of up to Rmb500,000 if it finds that undertakings implemented a concentration without legal notification and approval. MOFCOM may also carry out other measures, including reversing the concentration or ordering a disposal of shares or assets or a transfer of business within a specified timeframe.CommentMOFCOM has spent a great deal of effort on concentration enforcement in recent years. As demonstrated by its publication of information on penalties for failure to notify or comply with restrictive conditions, MOFCOM's procedural transparency has been significantly improved. Stricter, more standardised enforcement can be expected in future.Third-party complaints are still the main trigger for investigations, which should remind companies of the importance of visible antitrust compliance during M&A activities.After assessing the competitive effects of the transactions discussed in this update, MOFCOM concluded that none of the concentrations would eliminate or restrict competition in the relevant market. Therefore, whether a transaction will eliminate or restrict competition in the relevant market does not affect the notification obligation.In these cases the undertakings were fined up to Rmb200,000, which is less than the penalties of Rmb300,000 imposed in the last year and the maximum applicable penalty of Rmb500,000 for violations of concentration control rules. How the amount is determined is unclear.Considering the negative consequences of failure to notify MOFCOM of a concentration, it is advisable to seek professional advice from antitrust counsel when planning mergers and acquisitions.For further information on this topic please contact Hao Zhan at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.