China's merger control regime
China's merger control regime has long been a topic of discussion. Some commentators interpret Chinese merger control as being influenced by political factors – namely, authorities trying stop foreign competitors from flooding China's market, rather than just encouraging competition.(1) But is that really the case?
This article is the first in a three-part series on merger reviews in China. Subsequent articles will provide an overview of:
- maintaining domestic market competition; and
- developing a nuanced understanding of Chinese merger control in order to better predict merger approvals.
In China, as in the European Union and the United States, merger control regulates mergers, acquisitions and other transactions that involve concentrations of undertakings. As a concentration of undertakings may lead to concentration of market power, merger control is an important ex ante regulatory tool employed by antitrust authorities to keep markets healthy in many jurisdictions – China is no exception.
If Chinese antitrust authorities decide that a concentration has the effect of eliminating or restricting competition in the relevant market, they may decide to prohibit the concentration or, more often, they approve it but with remedies imposed. According to the 2008 Anti-Monopoly Law (AML), if a transaction involving a merger, acquisition (including equity or asset deals) or establishment of a joint venture meets the notification threshold prescribed by the State Council, the parties concerned must notify the State Administration for Market Regulation (SAMR). Otherwise, the transaction is in violation of the AML and the SAMR may initiate an investigation and impose a penalty against the transacting entities. So far, the notification thresholds for merger control in China generally require that:(2)
- at least two of the concentration parties each has an annual turnover (within China and during the last fiscal year) that exceeds 400 million yuan (approximately $63 million); and
- the aggregate turnover in the last fiscal year of all concentration parties exceeds:
- globally – 10 billion yuan (approximately $1.58 billion); or
- domestically – 2 billion yuan (approximately $315 million).
Due to the fact that turnover is the determining factor, the above notification standards apply regardless of the nationality of the undertaking. Thus, a company's status as a Chinese or foreign company is not a consideration that triggers merger control review in China.
Merger review is also required for mergers between foreign entities that operate in China. For example, where an American company acquires 100% of a German company – where both foreign entities are in China – and either their global or Chinese turnover meets one of the above standards, the transaction must be notified to the SAMR. Failure to file a notification of concentration of undertaking renders it illegal, which exposes the entities involved to regulatory penalties.
Pursuant to the current AML, the SAMR may decide to impose a fine of up to 500,000 yuan (approximately $72,000). This limit, however, may increase under the expected amendments to the AML (which are currently being reviewed by the legislative branch). The penalties that the SAMR may impose against an illegal concentration of undertakings also include:
- ordering the undertakings to cease the concentration;
- disposing of shares or assets;
- divesting from the business; or
- adopting other necessary measures to restore the market situation before the concentration within a prescribed period.
In practical terms, fines are the enforcement tool of choice and the SAMR rarely imposes structural or behavioural remedies on illegal concentrations of undertakings. Since the introduction of the AML in 2008, such remedies were imposed in only one case – namely, the acquisition of China Music Corporation by Tencent Holdings Limited (which was ordered to give up its exclusive music rights to restore competition to the market).
These penalties apply without regard to the nationality of the undertaking. A foreign company that operates in China and fails to notify a necessary transaction may be subject to such penalties even when the transaction involves only foreign-owned entities. For concentrations that fall below the notification thresholds, the antitrust authorities have the power to initiate an investigation if there is evidence indicating that the concentration has or is likely to have the effect of eliminating or restricting competition. In addition, undertakings may also voluntarily file notice of the concentration. Currently, under Chinese merger regulations, proactive investigation and voluntary filing are mainly used for "killer acquisitions" of start-ups by larger companies, especially in the Internet industry.
For further information on this topic please contact Hao Zhan or Ying Song at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected] or [email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.
(1) Angela Huyue Zhang, "Problems in Following EU Competition Law: A Case Study of Coca-Cola/Huiyuan", 3 PekingUJ LegStudies (2011) 96 at 97. Foreign multinationals were also concerned that they would be the primary targets under the AML, see ibid.
(2) Turnover thresholds may change in the near future. In addition, there is a special threshold for financial sectors.