The Ministry of Commerce of China (“MOFCOM”) recently released the amendments to the existing Regulations on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors ( “M&A Rules”) adopted in September of 2006 (“Amendments”). The Amendments aim to bring the M&A Rules in line with the Anti-Monopoly Law of China ( ‘AML”) and the Provisions on the Reporting Threshold for Concentrations of Business Operators (“Reporting Provisions”), both promulgated by the State Council after the adoption of the M&A Rules.
The most significant change in the Amendments is that the entire Chapter 5 of the M&A Rules is replaced with a new provision “Article 51”, which states that “ [a]ccording to the relevant provisions of AML, if the acquisition of domestic enterprise by the foreign investor reaches the thresholds set forth in the Reporting Provisions, such transaction shall be reported to MOFCOM in advance, no transaction shall be proceeded without prior reporting.” The Reporting Provisions requires that the business operators report the concentration in advance to MOFCOM if:
- the total of the global business turnover of all of the business operators who are to be part of the concentration exceeded Rmb10 billion during the previous financial year and the business turnover in China of each of at least two of those business operators exceeded Rmb400 million during the previous financial year; or
- the total of the business turnover in China of all of the business operators who are to be part of the concentration exceeded Rmb2 billion during the previous financial year and the business turnover in China of each of at least two of those business operators exceeded Rmb400 million during the previous financial year.
Before the Amendments was made, the reporting thresholds in the original Chapter 5 of the M&A Rules include, under different circumstances, determination of business turnover, market share, the number of enterprises acquired in related industry in China, and assets in China. now it seems that “business turnover” becomes one of the major elements in determining whether to report a transaction to MOFCOM for approval. Note that MOFCOM and financial watchdogs such as the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission have jointly released measures on calculation of business turnover for financial industry for purpose of reporting concentration of business operators, which outlines the elements to be considered in calculation of “business turnover” for banks, securities companies, futures companies, fund management companies and other financial institutions. However, clarifications on calculation of business turnover for companies in certain other sectors may also be needed.
It’s worth noting that, according to the AML and the Reporting Provisions, so long as the reporting thresholds are met, not only concentration under the context of the M&A Rules requires MOFCOM’s approval, pure domestic concentration of business operators involving either private enterprise or state-owned enterprise also require MOFCOM’s approval, unless:
- one business operator participating in the concentration possesses 50% or above of the voting shares or assets of each of other business operators; or
- 50% or above of the voting shares or assets of every business operator that is involved in the concentration is possessed by one business operator who does not participate in the concentration.
The invalidated Chapter 5 of M&A Rules also contains a provision which exempts a concentration from reporting to MOFCOM if the concentration may ameliorate the conditions for fair market competition, or restructure a loss-making enterprise and ensure employment, or introduce advanced technology and, bring in management talent and enhance the international competitiveness of the enterprise, or ameliorate the environment. The elimination of such provision by the Amendments means that there will be no exemption from reporting, but the AML provides that, after a proposed concentration is reported, MOFCOM may approve a concentration otherwise eliminating or restricting competition, if the business operators concerned can prove either that the favorable impact of the concentration on competition obviously exceeds the adverse impact, or that the concentration is in harmony with the public interests.
The Amendments also replace the term “ultimate controlling party” with “actual controlling party” in Article 42 and 44 of the M&A Rules, a term used and defined by the Company Law as a person who, although not a shareholder of the company, is nonetheless able to direct the acts of the company by virtue of an investment relationship, agreement or other arrangement.
The Amendments, which should have been made earlier, have filled the gab between the relevant provisions in the M&A Rules and those in the AML. It is a good sign of Chinese legislators’ efforts to develop a unified and stable legal framework, however, how the amended M&A Rules will be implemented in practice remains to be seen.