Legislation and jurisdictionRelevant legislation and regulators
What is the relevant legislation and who enforces it?
The Anti-Monopoly Law (AML), which entered into force on 1 August 2008, contains a chapter entitled ‘Concentrations of Undertakings’. This chapter deals with the merger control regime in China. The AML is supplemented by implementing regulations, including the Rules on Notification Thresholds for Concentrations of Undertakings published by the State Council (amended in 2018 (the Notification Thresholds Rules)) and the Guidelines on the Definition of the Relevant Market published by the Anti-Monopoly Commission of the State Council, which is generally responsible for coordinating and guiding antitrust policy within China.
The State Anti-Monopoly Administration, a vice ministerial-level body under the State Administration for Market Regulation (SAMR), established in November 2021, is now responsible for the enforcement of merger control in China. Its predecessor was the Anti-Monopoly Bureau (AMB) under SAMR.
The AMB was established in March 2018 as a result of the merger of the Anti-Monopoly Bureau of the Ministry of Commerce (MOFCOM), which was formerly responsible for the enforcement of the merger control rules under the AML, and the two other former competition authorities in China, the Price Supervision and Anti-Monopoly Bureau of the National Development and Reform Commission (NDRC) and the Anti-Monopoly and Anti-Unfair Competition Bureau of the State Administration for Industry and Commerce.
In addition to the AML, several implementing rules, guidance and measures have been adopted, such as:
- the Guidance for Notification of Concentrations of Undertakings (amended in 2018 (the Notification Guidance)), which specifies factors to consider for determination of control and provides guidance on the filing procedures, such as the pre-notification consultation;
- the Guidelines on the Notification of Simple Cases (amended in 2018), which provide procedural guidance on the notification of ‘simple cases’ that do not give rise to significant competition concerns and therefore merit a streamlined review. While there is no express deadline provided in the guidelines for the review of simple cases, in practice the authority seeks to complete its review of simple cases in Phase I;
- the Guidance on the Notification Name of Concentrations of Undertakings (amended in 2018), which provides rules on how to name a transaction for notification purposes; and
- the Interim Provisions on the Review of Concentrations of Undertakings (adopted in 2020), which consolidate various rules and regulations related to key areas of China’s merger control regime, including notification thresholds, filing procedures, review procedures, assessment of the competitive effects of a transaction, remedies and investigations into failure to file. In addition, these Interim Provisions empower SAMR to delegate its merger review function to its provincial branches. This is expected to ease SAMR’s resource constraints as it faces an ever-growing caseload.
What kinds of mergers are caught?
Mergers and acquisitions that are characterised as a ‘concentration of undertakings’ are caught by the AML and require notification to SAMR if they meet the relevant turnover thresholds.
A concentration of undertakings is defined in the AML as:
- a merger of undertakings;
- an undertaking acquiring control over one or more undertakings by acquiring shares or assets; or
- an undertaking acquiring control or being able to exercise decisive influence over one or more undertakings by contract or any other means.
What types of joint ventures are caught?
The AML is silent on whether joint ventures are subject to notification; however, this issue was clarified in the Notification Guidance. This provides that a newly established joint venture (ie, a greenfield joint venture) constitutes a concentration of undertakings if at least two undertakings jointly control the joint venture. If, however, only one undertaking solely controls a joint venture and other shareholders have no control, the joint venture does not constitute a concentration of undertakings.
The Notification Form also provides that both greenfield joint ventures and joint ventures formed by way of acquisition or change of control are reportable transactions and that the ‘undertakings concerned’ in joint venture transactions will vary depending on the nature and type of the transaction structure.
MOFCOM and SAMR have imposed remedies in several cases involving the establishment of a joint venture, such as Corun/Toyota China/PEVE/Sinogy/Toyota Tsusho (2014) and Zhejiang Garden/DSM (2019). Many companies have also been fined for failure to file reportable joint ventures.
Is there a definition of ‘control’ and are minority and other interests less than control caught?
The AML does not provide a definition of ‘control’; however, the Notification Guidance explains that control in the context of China merger control includes both sole control and joint control and that control or decisive influence is determined by reference to legal and factual circumstances.
Factors that are taken into consideration include:
- the corporate governance procedures of the undertakings concerned as reflected in transaction documents and articles of association (eg, the voting mechanism at the general meeting of shareholders, the composition and voting mechanism of the board of directors or other supervisory board, and the appointment and removal of senior management);
- the objective and the future plan of the transaction;
- the shareholding structure of the undertakings concerned before and after the transaction (eg, if an acquisition of control cannot be determined on the basis of concentration agreements and articles of association, but factors such as the shareholding being dispersed give an undertaking de facto control, such a transaction also constitutes an acquisition of control);
- the relationship between the shareholders and directors of other undertakings; and
- whether there exist significant commercial relationships, cooperation agreements, etc, between the undertakings concerned.
Accordingly, the issue of whether a transaction leads to an acquisition of control or decisive influence must be determined on a case-by-case basis.Thresholds, triggers and approvals
What are the jurisdictional thresholds for notification and are there circumstances in which transactions falling below these thresholds may be investigated?
For any merger or acquisition of control that is considered a concentration of undertakings, a pre-merger notification must be filed with SAMR if the relevant parties’ turnover exceeds any of the following thresholds, as set out in the Notification Thresholds Rules and the Notification Guidance:
- the total worldwide turnover of all undertakings concerned in the transaction in the previous financial year exceeded 10 billion yuan and the PRC turnover of each of at least two undertakings concerned in the transaction in the previous financial year exceeded 400 million yuan; or
- the combined PRC turnover of all undertakings concerned in the transaction in the previous financial year exceeded 2 billion yuan and the PRC turnover of each of at least two of the undertakings concerned to the transaction in the previous financial year exceeded 400 million yuan.
In cases where a concentration does not meet the notification thresholds, the undertakings concerned may nevertheless notify the transaction voluntarily to SAMR. Parties may choose to file on a voluntary basis in circumstances where the transaction may give rise to competition concerns.
Further, SAMR has the discretion under the Notification Thresholds Rules to review non-reportable transactions that are not voluntarily notified by the parties, if SAMR considers that the transaction is likely to result in the ‘elimination or restriction of competition’. Such a discretionary review may, for example, be initiated in the event of complaints from third parties including customers, suppliers or competitors.
Is the filing mandatory or voluntary? If mandatory, do any exceptions exist?
Filing is mandatory for any ‘concentration of undertakings’ that meets any of the notification triggers specified in the Notification Thresholds Rules.
The AML provides for an exemption from pre-merger filing for intragroup transactions in specific circumstances, namely where:
- among all undertakings involved in the concentration, one undertaking possesses 50 per cent or more of the voting shares or assets of every other undertaking; or
- one undertaking not involved in the concentration possesses 50 per cent or more of the voting shares or assets of every undertaking involved in the concentration.
Do foreign-to-foreign mergers have to be notified and is there a local effects or nexus test?
Yes. Foreign-to-foreign mergers must be notified if the turnover thresholds are met. The Notification Thresholds Rules require two parties to generate turnover in China (albeit low amounts); otherwise, there is no additional ‘effects test’.
However, under the Interim Provisions on the Review of Concentrations of Undertakings, certain foreign-to-foreign transactions may qualify as ‘simple cases’ on the basis that the transaction does not give rise to significant competition concerns. Transactions that qualify for simple treatment are subject to less burdensome information requirements under the Guidelines on the Notification of Simple Cases and a streamlined review process.
Are there also rules on foreign investment, special sectors or other relevant approvals?
Yes. All foreign investment in China must be filed with or approved by MOFCOM or one of its local branches. Foreign investment is regulated under the Foreign Investment Law (effective from 1 January 2020), the Implementing Regulations of the Foreign Investment Law (effective from 1 January 2020), the Catalogue of Sectors Where Foreign Investment is Encouraged (2020 (Encouraged Sector Catalogue)) and the Negative List (amended in 2021).
Certain sectors are closed to foreign investment or subject to foreign ownership restrictions, while foreign investment is encouraged in other sectors through preferential policies. Foreign investment falls under four categories in China: encouraged, permitted, restricted and prohibited. The first category is provided in the Encouraged Sector Catalogue, and the last two categories are prescribed in the Negative List.
The 2020 Encouraged Sector Catalogue contains 480 nationwide sectors and 755 regional sectors, representing an increase over the encouraged sectors in the former 2019 Encouraged Sector Catalogue. The 2021 Negative List has further reduced the number of restricted and prohibited sectors from 33 to 31 compared to the 2020 version. This highlights an increasing trend towards fewer restrictions on inbound investment. While foreign investment in restricted sectors must be approved by MOFCOM or its local branches, only a procedural filing is required for foreign investment in sectors outside the Negative List.
Another relevant approval regime is the national security review regime, which took effect in March 2011. This regime applies to:
- an investment made by a foreign investor in China’s military or military-related industries, or an investment in a Chinese domestic business located near military or military-related facilities; or
- a foreign investor’s acquisition of control over a Chinese domestic business active in critical agriculture, critical energy and resources, critical equipment manufacturing, critical infrastructure, critical transportation services, critical cultural products and services, critical IT-related or Internet products and services, critical financial services, key technologies and other critical sectors.
A set of implementing rules, published by MOFCOM in August 2011, include an ‘anti-circumvention’ clause, prohibiting foreign investors from circumventing national security review by relying on mechanisms such as trusts, multilevel reinvestments, leasing and loan arrangements, contractual control structures or offshore transactions. This makes clear that the national security review is concerned with the substance and actual effect of a transaction rather than its form.
According to the Measures on Security Review of Foreign Investment (effective from 18 January 2021), a reportable foreign investment must be notified to a working mechanism office (the Office) led by the NDRC and MOFCOM. Institutionally, the Office sits under the NDRC.
A national security review is conducted in three phases:
- a preliminary review phase, which lasts up to 15 working days, during which the Office determines whether a foreign investment triggers a national security review;
- a general review phase, which lasts up to 30 working days; and
- a special review phase, which lasts up to 60 working days, and will be initiated if a foreign investment has or may have an impact on national security, and can be extended in special scenarios.
During its review, the Office can ‘stop the clock’ while awaiting a notifying party’s response to information requests.
If the Office determines that a transaction gives rise to national security concerns, the parties may be required to abandon or (in cases where completion has already occurred) unwind the transaction, or to put in place remedial measures to address the concern.