In January and February 2009, the Ministry of Commerce of the PRC (MOFCOM) published and sought public comments, which were due in late February, on five draft interim measures to implement the Anti-Monopoly Law of the PRC (AML). We briefed you on the highlights of these draft regulations in previous editions of the China Antitrust Update. In mid March, these drafts were amended and re-published on the official website of the Legislative Office of the State Council for further comments, which were due March 25, 2009. MOFCOM has taken this last round of public comments under advisement and may issue the finalized interim measures at anytime. This issue of Antitrust Update addresses the latest proposed changes to the interim measures based on the material posted to the official website.  

MOFCOM is the authority responsible for antitrust review of proposed transactions and the five draft interim measures cover interconnected but varied aspects of the pre-concentration review. These five draft measures address, respectively: (1) pre-concentration notifications (Draft Notification Measures); (2) MOFCOM’s pre-concentration review (Draft Review Measures); (3) evidence collection on concentrations under the notification thresholds, but which are suspected of competitive harm (Draft Evidence Collection Measures for Suspicious Transactions); (4) investigations and disposition of proposed transactions under the notification thresholds, but which are suspected of competitive harm (Draft Investigation and Disposition Measures for Suspicious Transactions); and (5) investigation and disposition of transactions that meet the notification thresholds, but for which parties are suspected of having failed to fulfill the notification requirements (Draft Investigation and Disposition Measures for Failure to Notify).  

We set out below comments specific to each draft interim measure. Certain substantive rules in the new drafts are stated more clearly, such as the consequences of a failure to properly file a notification. In addition, procedural rules have been added to some measures, including rules regarding who may initiate hearings, how business operators may express and defend their views to MOFCOM, and the procedures enforcement officials must follow in investigating a business entity’s failure to notify. The draft measures also clarify certain definitions that were previously unclear, such as the term “control.” Finally, the latest versions of the interim measures are more consistent in many of the boilerplate provisions, such as the confidentiality provision.  

  1. Draft Notification Measures

The AML requires that parties to a proposed transaction that meet certain thresholds file a notification of the proposed transaction with MOFCOM before proceeding with the transaction. The Draft Notification Measures are intended to lay out the specific requirements and procedures relating to these notifications. The March version of the Draft Notification Measures is not substantially different than the previous draft, although it does clarify what constitutes control of another business operator. The previous version defined control as holding more than 50 percent of the voting shares or assets of another entity, or having control over crucial management or business decisions of an entity despite holding less than 50 percent of its voting shares or assets. The March draft expands on this second criteria, i.e., what it means to have control over management decisions. The draft states that determination of whether an entity controls another entity in the absence of holding 50 percent of its voting shares or assets requires an overall evaluation of various factors, such as the power to determine board member appointments, budgets, substantial investments, operations and sales, and pricing. The most recent draft further states that minority shareholder granted veto powers in the amendments to the articles of a company, changes in the company’s capital, or liquidation will not be seen as obtaining control of the company.  

In connection with the control issue, the previous version of the Draft Notification Measure stated that when two or more businesses jointly form a new enterprise, that new enterprise constitutes a concentration transaction as defined under the AML and may be subject to notification requirements. However, the March draft carves out an exception to this rule, and states that if the new company is set up for a specific purpose and only undertakes R&D, sales, or the manufacturing of specific products for the parent companies, no concentration transaction has occurred, which means that notification will not be required.  

  1. Draft Review Measures

The Draft Review Measures set forth the procedures for MOFCOM’s anti-monopoly review. A change from the previous version of the Draft Review Measures is that this version specifies that notifying parties may state or defend their views regarding the notification matter in writing by mail or facsimile, while the previous draft simply stated that MOFCOM must give the notifying parties opportunities to state or defend their views.

This March draft also specifies that MOFCOM may hold hearings during its reviews, either on its own initiative or on motions by the relevant parties. It further clarifies that every business operator participating in a transaction review may, during MOFCOM’s review process, offer their opinions on how to revise any restrictive conditions to be imposed on the transaction.  

  1. Draft Evidence Collection Measures for Suspicious Transactions and Draft Investigation and Disposition Measures for Suspicious Transactions  

Both draft measures regarding suspicious transactions apply to transactions that do not meet the notification thresholds, but which are suspected of having an anticompetitive impact. Like the updated Draft Review Measures, these drafts specify that parties may state or defend their views in writing to MOFCOM by mail or electronic means. These drafts were further edited to allow MOFCOM to authorize its provincial-level branches to collect relevant information, and assist MOFCOM in collecting evidence or investigating the cases, a change which is not present in the updated Draft Review Measures.  

These two updated drafts also largely adopt the language in the previous Draft Investigation and Disposition Measures for Suspicious Transactions to eliminate the inconsistencies in their respective predecessors regarding confidentiality. Under the previous Draft Evidence Collection Measures for Suspicious Transactions, only MOFCOM would be required to keep in confidence the launching, proceedings, and substance of its evidence collections. Under the March drafts, however, MOFCOM, the business operators being investigated, and other entities and individuals must keep in confidence trade secrets and other confidential information they learn during the investigation, unless the disclosure of the information is required by law, or prior consent of the right-holders of the trade secrets has been obtained.  

  1. Draft Investigation Measures for Failure to Notify

The Draft Investigation Measures for Failure to Notify cover the disposition of concentration transactions that met the notification thresholds, but for which no notification was filed with MOFCOM. The March draft makes extensive language changes to its predecessor. In particular, this draft adds several provisions specifying the procedural rules by which enforcement officials must abide by during the investigation, and it parses out how MOFCOM will dispose of the affected transactions, a point on which the previous draft was unclear.  

In regard to the first point, the procedural rules, the March draft sets forth rules that enforcement officials must follow in examining or copying relevant documents, inquiring regarding the relevant people, and seizing or detaining relevant evidence. The draft provides that MOFCOM may initiate hearings on its own or on other parties’ motion, and refers to the Draft Review Measures for the procedural rules for hearings. The draft also provides that if a business operator being investigated undertakes to timely eliminate the negative effects that a concentration transaction has or may have on competition, MOFCOM may suspend or eventually terminate its investigation in accordance with the AML. After MOFCOM reaches a decision upon the completion of an investigation, it must notify in writing the business operators that were investigated, and may also publish the decision.

Regarding the disposition of the transaction upon completion of the investigations, the March draft distinguish among three situations: (1) for a concentration transaction that has or may have the effect of eliminating or restricting competition and for which no notification has been filed with MOFCOM, MOFCOM will order the parties to terminate the concentration, take steps to restore the condition to what was before the concentration, and may impose a penalty of up to RMB500,000; (2) for a concentration transaction for which no notification has been filed with MOFCOM, but which does not have an effect of eliminating or restricting competition, or if the business operators under investigation fulfills its commitment to eliminating the negative effects of the transaction, MFOCOM may impose a penalty of up to RMB500,000; or (3) for a concentration transaction that meets the notification thresholds, but has not been filed with MOFCOM, MOFCOM will require that the business operators under investigation timely notify MOFCOM in time.  

Similar to the other draft measures, the March draft of the Draft Investigation Measures for Failure to Notify provides that the relevant business operators may state or defend their views in writing to MOFCOM by mail or electronic means. In addition, they may petition to MOFCOM to hold hearings. MOFCOM may authorize its provincial-level branches to collect relevant information, and assist MOFCOM in investigating the cases.  

In sum, both substantive and cosmetic changes have been made in the March drafts of the interim measures, a fact demonstrating that the Chinese government was receptive to public comments, and that it is paying particular attention to due process issues. It is not likely the government will seek further public comments on these draft measures, and MOFCOM may issue the final interim measures at anytime. We will report on that development when it occurs.