Recently, China’s Ministry of Commerce (MOFCOM) has significantly stepped up its pace in proposing rules to implement the Anti-Monopoly Law (AML) and the Regulations of the State Council on the Criteria for Notification of Concentrations of Business Operators (Notification Criteria). After releasing the merger notification and draft relevant market definition guidelines during the first week of 2009 (for more information, see MWE China Law Offices’ article “China Releases Merger Notification Guidelines and Draft Relevant Market Definition Guidelines”, available at http://www.mwechinalaw.com/news/2009/guidelines.html), MOFCOM released four new draft rules for comments on its website on January 19 and 20, 2009:
- Interim Measures on Notification of Concentrations of Business Operators (draft) (Notification Measures)
- Interim Measures on Examination of Concentrations of Business Operators (draft) (Examination Measures)
- Interim Measures on the Investigation and Handling of Concentrations of Business Operators without Notifications (draft) (Investigation Measures)
- Interim Measures on the Evidence Collection for Suspected-of-Monopoly Concentrations of Business Operators Without Reaching the Notification Thresholds (draft) (Evidence-Collection Measures)
Acquisition of Control
The Notification Measures define and specify several key concepts on concentrations of business operators as stated in the AML. For example, the Notification Measures clarify what constitutes an acquisition of control over other business operators:
A business operator acquires 50 percent or more shares or assets with voting rights attached (Voting Shares or Assets) of other business operators
Even if a business operator does not acquire 50 percent or more Voting Shares or Assets of other business operators, it can nonetheless decide certain factors of another business operator, such as the appointment of one or more members of the board of directors and key managerial personnel, financial budget, business operation and sales, pricing making, major investments, or other important management and business decisions.
As regards the criteria to determine whether any concentration of business operators requires an anti-monopoly notification, Article 3 of the Notification Criteria provides for only one criterion—turnover—and the Notification Measures provide important guidance as to how the relevant turnover figures are to be calculated. Pursuant to the Notification Measures, the turnover equals the revenue that a business operator obtains from the sale of products and the provision of services in the previous fiscal year, minus various taxes and surcharges. However, the taxes and surcharges that are taken away from the turnover shall not include enterprise income tax and the deductible value-added tax.
With respect to the calculation of the turnover of a single business operator participating in a concentration, the Notification Measures provide that the turnover of this single business operator shall be the sum of the turnover of all controlling or controlled business operators of this single business operator (e.g., parent and subsidiary companies, sister companies or the companies under their common control). However, the turnover shall exclude the turnover arising from the transactions among the single business operator, its controlling and controlled business operators.
The Notification Measures also specify how to take account of the total turnover of all concentrating parties. If any business operators participating in a concentration jointly control a business operator, then the following apply:
The turnover arising between the controlled business operator and any controlling business operator shall be excluded. So shall the turnover between the controlled business operator and any other business operator(s) that has a controlling relationship with the aforementioned controlling business operator(s).
The turnover between the controlled business operator and a third-party business operator shall be included, and such a turnover shall be equally allocated among the controlling business operators.
Turnover on Partial Acquisitions
When a concentration involves the acquisition of part of one or several business operators, only the turnover attributable to the business involved in the concentration shall be included when calculating the turnover of the seller. Several consecutive concentrations between the same buyer and seller conducted within one year shall be deemed as one concentration, and the relevant turnover is represented by the aggregate turnover of the businesses acquired during that one-year period.
Establishment of a New Enterprise
According to the Notification Measures, any establishment of a new enterprise by two or more business operators will also constitute the concentration of business operators.
The Examination Measures address MOFCOM’s examination procedures, examination methods and various rights of the applicant(s) that file a notification.
MOFCOM may hold a hearing during the anti-monopoly examination at its own discretion.
A hearing shall not be open to the public. If the hearing involves any business secret, the concerned party attending the hearing may apply for an individual hearing.
When MOFCOM believes that a concentration results in or may result in eliminating or restricting competition, it may notify the parties of the decision in writing. In the notification, MOFCOM shall set a reasonable period within which the parties may defend themselves in a written response.
Either MOFCOM or an applicant may propose restrictive conditions upon clearance. The restrictive conditions may include structural conditions such as divesture of assets or business units, behavioral conditions such as providing access to the merged companies’ network, and/or comprehensive conditions consisting of both structural and behavioral conditions.
The Examination Measures provide that the restrictive conditions should be effective and practical.
The Investigation Measures are directed at imposing sanctions on business operators of a concentration for failure to file merger notifications required under the AML (Un-notified Concentration).
MOFCOM may launch an investigation on such an Un-notified Concentration on the basis of the information that was collected through a lawful channel—the information could be from a whistle blower, public media or governmental authorities.
During the investigation, if MOFCOM finds that the concentration has not yet been implemented, it may request the business operators under investigation to file a notification in time, as required under the AML. If MOFCOM finds that the concentration has been implemented, MOFCOM may impose punishment pursuant to Article 48 of the AML, which includes ceasing the concentration, disposing of its shares or assets by a deadline, transferring the business, taking other necessary measures to restore the status quo prior to the implementation of the concentration, and a fine of up to RMB 500,000.
According to Article 4 of the Notification Criteria, although a concentration of business operators does not reach the notification threshold as judged from the turnover of the business operators, if such a concentration results in or may result in eliminating or restricting competition based on facts and evidence collected, MOFCOM shall investigate the concentration. The Evidence- Collection Measures were issued to implement Article 4 of the Notification Criteria.
The process consists of three stages: primary analysis, evidence collection and case establishment for investigation.
MOFCOM may launch a preliminary analysis on the basis of the information that is obtained through any legitimate channel. In conducting the preliminary analysis, MOFCOM will take into account factors such as market share, territorial scope, competitors, upstream and downstream enterprises, consumers and public opinion, among others.
On the basis of its primary analysis, MOFCOM shall start the procedure for evidence collection when it suspects, “based on sufficient justification,” a concentration results in or may result in eliminating or restricting competition. However, the Evidence- Collection Measures do not clarify what is “based on sufficient justification”—it is apparently as undefined as the phrase “at the discretion” of MOFCOM.
Evidence can be collected from public channels, business operators involved in the concentration, industrial associations, administrative departments, local governments, suppliers, customers, competitors and other related organiztions or individuals.
If there is sufficient evidence to show that the concentration has or may have the effect of eliminating or restricting competition, MOFCOM will initiate an investigation of the concentration. The Evidence-Collection Measures do not provide for any time limit for the investigation. It appears that MOFCOM may initiate the investigation no matter whether or not the concentration has been completed.
The draft rules provide important interpretive guidance on the merger notification and review provisions of the new AML. They also signal that merger enforcement will be one of MOFCOM’s top enforcement priorities, including the possible investigation of transactions that do not qualify for mandatory pre-merger notification under the AML.
This article was originally published as an MWE China Law Offices China Law Alert.