On 4 January 2017, China’s Ministry of Commerce (MOFCOM) published its decision to fine Canon Inc. (Canon) for failure to notify its acquisition of Toshiba Medical Systems Corporation (TMSC) under the Anti-Monopoly Law (the AML).
The decision is an important development for two key reasons:
- first, it is the first foreign-to-foreign transaction that has attracted a MOFCOM penalty for failure to notify; and
- second, it demonstrates MOFCOM’s determination to clamp down on transaction structures deliberately designed to avoid or defer merger filings.
Canon, a Japanese-based imaging and optical products manufacturer, acquired TMSC, a Japanese company active in the medical equipment sector, from Toshiba Corporation (Toshiba) by way of a 100% share acquisition.
According to publicly available information, the transaction was structured in two steps.
- Step one involved Canon paying the entire consideration for TMSC to Toshiba without acquiring any voting rights. This step was completed on 17 March 2016, before a notification was made to MOFCOM. At completion of step one, a SPV (set up for the transaction) acquired the shares with voting rights in TMSC (Voting Shares), while Canon acquired the non-voting share (Non-voting Share) and some stock options in TMSC.
- Step two involved Canon acquiring 100% of TMSC. This step was conditional upon the parties receiving all necessary regulatory approvals, including from MOFCOM, and had not been implemented at the time of MOFCOM’s decision. Completion of step two envisaged TMSC re-purchasing and cancelling the shares from the SPV and Canon, and Canon exercising the stock options by converting them into Voting Shares, thereby acquiring TMSC.
Canon notified the transaction to MOFCOM following completion of step one but prior to step two.
MOFCOM considered that while the transaction was structured in two steps, both steps were closely related and essential for Canon to complete its acquisition of TMSC. MOFCOM therefore concluded that Canon should have notified the transaction to it before completion of step one. Failure to do so meant that Canon had implemented at least parts of the transaction (step one) before obtaining MOFCOM clearance – commonly referred to as gun jumping. This infringed the AML, which prohibits parties from taking steps to implement a transaction pending MOFCOM approval.
MOFCOM fined Canon RMB 300,000 (approximately USD 43,000) for its failure to notify even though the transaction raised no competition concerns. The maximum fine that could have been imposed under the AML is currently RMB 500,000. In determining the level of the fine, MOFCOM took the following factors into account:
- although MOFCOM started investigating the transaction due to a complaint, Canon did file a notification before step two;
- the goal of the two-step structure was to enable Toshiba to obtain payment quickly and help alleviate its financial difficulties (however, this also indicated that the parties deliberately structured the transaction to delay filing); and
- although Canon had started to implement the deal, it had not been fully implemented.
The decision provides the following key takeaways concerning a failure to notify a reviewable transaction to MOFCOM:
- Foreign-to-foreign transactions can be subject to fines for failure to notify. MOFCOM has, in the past, only imposed fines for failure to notify where at least one of the parties was Chinese. The Canon decision shows that MOFCOM will not hesitate to intervene in cases where, as here, the parties are foreign (although they have assets in China). It remains to be seen whether MOFCOM would fine in a situation where none of the parties involved in a transaction has any physical presence in China. Companies should not assume that failure to notify a ‘no-issues’ transaction in China will escape MOFCOM’s scrutiny.
- Careful consideration must be given to ‘multiple-step’ transaction structures designed to avoid / defer filings. Transaction structures deliberately designed to avoid or defer merger filings must be contemplated with great care and assessed under the rules of each jurisdiction where the transaction would otherwise be notifiable. In this case, for example, the Japan Fair Trade Commission (JFTC) and the European Commission (EC) both reviewed the transaction. In the case of the JFTC, it reprimanded Canon for late notification but did not impose a fine. By contrast, the EC cleared the transaction.
- The consequences of failing to notify go beyond the imposition of fines. While the maximum fine for failure to notify in China is currently relatively low when compared to other jurisdictions such as the EU, parties must take into account other consequences such as reputational damage, relationship damage with the regulator and – where the transaction gives rise to competition concerns – the potential for the regulator to impose a remedy or seek to unwind the transaction.