On March 8, 2007, the Anti-Monopoly Investigation Office (AIO) of China’s Ministry of Commerce (MOFCOM) issued the Guidelines for Antitrust Filing for Merger and Acquisition of Domestic Enterprises by Foreign Investors (“the Filing Guidelines”). The Filing Guidelines superseded the earlier ones of April 20, 2006 (“the Original Guidelines”) and were issued in connection with the implementation of the competition-law aspects of the Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors (“the M&A Provisions”), which came into force on September 8, 2006.
As the adoption of the draft Antitrust Law of China (ATL) is still pending, the antitrust review of M&A transactions in China is currently governed by the M&A Provisions.1 Until the ATL is adopted, the M&A Provisions will remain the leading example of merger review rules of general applicability currently enforced by China. It has been reported that hundreds of transactions have been filed with, and reviewed by, MOFCOM and the State Administration for Industry and Commerce (SAIC) in accordance with the M&A Provisions since their coming into force.
However, the M&A Provisions only define the thresholds above which the parties of a M&A transaction must file with MOFCOM and the SAIC. They are silent on the specific procedures and filing materials needed for such filings. The Original Guidelines also lacked any detailed description of the materials to be filed and sometimes caused uncertainty in the review process due to ambiguities. Clarification of the procedures and filing materials required by MOFCOM when implementing the antitrust review of the M&A Provisions was urgently necessary to allow the affected parties to take well-informed decisions regarding the filing of potential transactions to be filed. The publication of the Filing Guidelines is therefore a step in the right direction.
II. Main Contents of the Filing Guidelines
The Filing Guidelines have introduced new procedural mechanisms and substantive requirements as regards the filing materials, procedure and timing considerations that will apply from now on to the antitrust review of M&A transactions. These changes have been inspired by foreign merger review regimes and will therefore sound familiar to antitrust practitioners with international experience. At the same time, however, the interpretation of these rules may raise some practical difficulties in China during the initial implementation period, given the local lack of experience in more comprehensive and sophisticated merger review procedures.
1. Pre-filing Consultation
To improve efficiency and ensure the transparency and predictability of the review, the AIO encourages the filing party or its authorized agent to initiate informal contacts with the AIO prior to the formal filing. Such informal consultations can be used to determine whether a filing is necessary and to discuss the appropriate definition of relevant markets.
2. Procedure and Timing Considerations for the Filing
Under the Filing Guidelines, the formal filing to the AIO must be made before the public announcement of the intended M&A transaction. For extraterritorial M&A transactions, the filing must be submitted prior to the transaction’s public announcement or at the same time as the pre-merger filing, if any, submitted to the competent authorities of the country where the intended M&A transaction will take place.
The review by the AIO must be carried out within thirty working days, starting from receipt of the complete filing materials. The filing party will be deemed to have obtained clearance, if it does not receive any notice of further review after the 30 working day deadline has expired. In the event that the filing party receives such notice, the time limit will be extended to 90 working days. The filing party must then provide further materials and additional explanations to the AIO, as may be required.
3. Filing Materials
The Filing Guidelines contain a detailed description of the materials that need to be filed. What follows is a comprehensive but not exhaustive list:
a. Basic information on each party to the M&A transaction
b. Basic information about the M&A transaction
c. Information about any enterprises affiliated with the parties involved in the M&A transaction and information about any enterprises, representative offices or subsidiaries that are established in China, and any other entities registered in China by all parties to the M&A transaction
d. Information about the relevant markets, such as the definition of the relevant product and geographic markets, volume of sales and market shares within the relevant markets for all parties to the M&A transaction in the last two fiscal years, information about the top five competitors in the relevant markets, information about the supply and demand structure in the relevant markets, and the state of competition in the relevant markets
e. The M&A Agreement and the previous year’s audited financial statements for all parties to the M&A transaction, including a Chinese translation of the M&A Agreement or at least a Chinese language summary of the agreement’s substantive terms
f. Materials supporting the request (if any) for a waiver of the antitrust review
g. Information about trade associations in the relevant markets
h. Information on the status of filings in other jurisdictions
i. Other information that may requested by the AIO on a case-by-case basis (e.g. based on the parties’ informal exchanges with the AIO before their formal submission)
If the filing party does not wish to have information in the filing materials disclosed or publicized, it must mark the documents or particular parts of the documents that should be kept confidential and briefly state the reasons behind the requested non-disclosure or non-publication. When requesting confidentiality, an additional non-confidential set of the filing materials must also be submitted.
As explained by AIO officials, the Filing Guidelines are not intended to render the supervision and administration of the filing process more restrictive and cumbersome. Instead, they are issued to provide guidance and assistance to transacting parties. Understanding the AIO’s approach at each step of the review process and the detailed requirements for the filing materials is intended to help transacting parties anticipate accurately and in time the review process and its expected outcome. The newly introduced pre-filing consultation mechanism will hopefully also improve the efficiency and predictability of the review process.
Although the list of required filing materials and information is long, the Filing Guidelines reflect a certain degree of flexibility and provide some discretion for the parties to limit the materials submitted on a case-by-case basis. For example, Section III.(8) allows parties to provide explanations as to why a relevant market definition is unnecessary. Similarly, certain information requirements are only listed as recommendations rather than mandatory obligations, which is aimed at promoting the efficiency of the review process2. According to AIO officials, these provisions may be liberally construed to permit parties to self-select the items necessary to make the filing. Furthermore, the Filing Guidelines make clear that, even in respect of the required information, if the filing party is unable to submit certain materials or believes that their submission is unnecessary, it may raise the issue during the pre-filing consultation phase or specify the reasons for omissions in the filing materials. The AIO may then fully or partly approve the exemption of the relevant filing materials or information.
The Filing Guidelines indicate that there may be further adjustments to their provisions in the light of future experience. In this context, there are already some issues worth flagging for possible future adjustment. Indeed, although the Filing Guidelines provide more detailed guidance and a certain flexibility, filing parties need to pay particular attention to some of their provisions.
1. No Differentiation Between Extraterritorial M&A and Domestic M&A
Despite the title “Guidelines for Antitrust Filing for Merger and Acquisition of Domestic Enterprises by Foreign Investors,” the Filing Guidelines also apply to certain M&A transactions occurring outside of China (“extraterritorial” M&A transactions) as long as such transactions reach the threshold stipulated in the M&A Provisions.
However, the Filing Guidelines do not differentiate between the filing materials, procedure and timing considerations that apply to extraterritorial as opposed to domestic M&A transactions. Most of the extraterritorial M&A transactions are unlikely to raise significant competition issues in China but the filing parties will still have to go through the full set of filing formalities. This imposes a significant burden and an unnecessary cost on such extraterritorial M&A transactions as many requirements call for detailed information and/or extensive analysis of issues that are not easily susceptible to quantification or objective characterization. Therefore, it is recommended that some “fast track” procedure be applied to extraterritorial M&A transactions, under which certain filing materials may be exempted and procedures expedited. Furthermore, the nature of the more detailed conditions and filing materials necessary for requesting exemption from antitrust review should be explicitly stated.
2. Ambiguity of Certain Key Definitions in the Filing Guidelines
Certain key terms in the filing requirements, such as “company scale,” “control,” “substantive terms of the M&A agreement,” “substantive terms of the financial statement,” and “estimated completion date of the transaction” are not clearly defined. This may cause ambiguity and inefficiency in the filing process. For example, there might be different understandings between the filing party and the authorities as to the circumstances in which a company could be regarded as “controlled” by another entity or individual. Periodically adopted future guidelines or other general announcements by MOFCOM could help clarify such technical issues.
3. Burden of the Required Filing Materials
Although a certain flexibility has been provided to the filing parties, the Filing Guidelines still potentially require the parties to submit a significant amount of materials on a number of complex issues. While most of the required information is potentially important for an antitrust analysis, the same does not apply to certain other requirements, which could be difficult or costly to obtain. For example, the notarization and authentication needed for the “Identity Certificate or Registration Certificate” 5 could be very time-consuming. It may also be difficult for a multinational group to submit detailed information about affiliated enterprises that have no connection with the M&A transaction.
4. Issues Concerning the Review Process
The initial time limit of the review is specified as 30 working days under the Filing Guidelines. This is potentially excessive for a broad range of transactions, especially those that only have slight impact on related Chinese markets. For transactions that require no additional review beyond the materials contained in the filing, this seems excessive and may impede or substantially enhance the risks of impeding a broad variety of transactions.
Another serious practical difficulty results from the mandatory deadline for the formal filing, especially if there are no foreign (i.e., non-Chinese) merger filings triggered by the transaction (which would apparently help postpone the Chinese merger filing). Under the Filing Guidelines, the filing must be made before the public announcement of the planned M&A transaction. Typically, the contracting parties in major M&A transactions will rush to announce their agreement to the public immediately after its signature, and in many cases they may even be legally required to do so. It would be extremely impractical for them to have to prepare a substantial formal filing to the AIO during the final phase of their commercial negotiations, especially as a lot of the information required for the filing will not be available and the details of the transaction could still change. In line with international practice, it would make more sense to require parties to obtain merger clearance by the AIO prior to closing their transaction, instead of imposing any particular deadline for the date of the filing.
In addition, the AIO still intends to continue the “negative approval” mechanism, under which the review process is deemed cleared if the filing party has not received any notice for further review after 30 working days. The filing parties will not receive any kind of approval certificate certifying that the filing is cleared. This can create uncertainties and potential concerns for the filing parties It is also unclear whether the review process could be regarded as finally completed if it is only “deemed cleared” from MOFCOM. In practice, if it is deemed cleared from MOFCOM, the SAIC will usually not raise any objection. However, there is still risk and uncertainty in this regard as there is still no provision regarding the respective duties and functions of MOFCOM and SAIC in the antitrust review.
In the meantime, the draft ATL is still awaiting its second reading before the National People’s Congress. According to Mr. Wu Zhenguo, vice director-general of the Treaty and Law Department of MOFCOM, speaking during a conference at the United States Council for International Business in New York on March 12, 2007, the M&A Provisions will be superseded by the ATL when it becomes effective. However, officials stated that the practical experience gleaned from using the Filing Guidelines may well influence the relevant part of the ATL and its subsequent implementing regulations.