China’s Ministry of Commerce (MOFCOM), which is responsible for merger control reviews under China’s Anti-Monopoly Law, has issued a set of standards for identifying which concentrations of undertakings will qualify as “simple cases”. The new rules are still silent on the procedural benefits of a concentration being classified as “simple”; however, it is likely that a fast-track procedure for simple concentrations (or at least a reduction in information burdens) will be introduced in due course.

The new standards are set out in the “Interim Rules Regarding the Applicable Standards of Simple Merger Review Cases” (“Simple Merger Standard”), promulgated by MOFCOM on 12 February 2014 and effective the same date. The Simple Merger Standard follows the circulation of draft rules for public comment in April 2013.

The Simple Merger Standard is similar in some respects to procedural rules applied by the European Commission and amended in December 2013; see our e-bulletin here. However, there are also noticeable differences (some examples of which are outlined below).

Background

Under China’s competition law regime, concentrations of undertakings must be filed with MOFCOM for review if: 

  • the aggregate global turnover of all undertakings participating in the concentration exceeded RMB10 billion during the previous financial year, with at least two undertakings each having a turnover of RMB400 million or more within China during the previous financial year; or
  • the aggregate turnover within China of all undertakings participating in the concentration exceeded RMB2 billion during the previous financial year, with at least two undertakings each having a turnover of RMB400 million or more within China during the previous financial year.

Undertakings meeting these thresholds are required to apply to MOFCOM for merger control approval. The regime is mandatory and suspensory, meaning that the parties cannot complete the transaction before the grant of the approval. Preparation of the required application materials can be costly and time-consuming for the parties involved.

For some time, MOFCOM has indicated an intention to implement a simplified merger control review process for concentrations that clearly do not harm competition.

Simple cases defined

The Simple Merger Standard sets out a test for identifying simple cases. According to Article 2 of the Simple Merger Standard, MOFCOM will treat the following concentrations as simple cases:

  • For concentrations involving parties active in the same relevant market (i.e. in a horizontal relationship): the total market share of all parties to the concentration is less than 15% in the same relevant market (the equivalent threshold qualifying a concentration for the simplified procedure in the EU was raised to 20% in December 2013 effective from 1 January 2014).
  • For concentrations involving parties in a vertical relationship: the market share of the parties to the concentration in each of the upstream and downstream markets is less than 25% (the equivalent threshold qualifying a concentration for the simplified procedure in the EU was raised to 30% in December 2013 effective from 1 January 2014).
  • For concentrations involving parties that are neither active in the same market nor in a vertical relationship: the market share of each of the parties to the concentration is less than 25%.
  • For offshore joint ventures: the parties establishing a joint venture are outside China and the joint venture has no economic activities in China (the EU equivalent criterion applies to joint ventures which are not active in the EEA, or which have EU turnover and assets of less than EUR100m as at notification).
  • For acquisitions of the equity or the assets of an offshore target: the offshore target has no economic activities in China.
  • For reduction of the number of controlling shareholders: in joint ventures that are jointly controlled by two or more parties, one or more shareholders exit with the result being that the joint venture is controlled by either one remaining shareholder or is still jointly controlled by the remaining shareholders.

In December 2013, the European Commission also introduced a new criterion where the Commission “may” adopt the simplified procedure where market shares exceed the thresholds but the market share increment is low (measured by reference to Herfindahl-Hirschman Index). However, there is no similar provision in the Simple Merger Standard.

Exclusions

In any of the following circumstances, however, a concentration will not be treated as a simple case (even if it comes within the above definition of a simple case):

  • A joint venture controlled by two or more parties becomes controlled by one of the parties through the concentration and the joint venture competes with the controlling party in the same relevant market.
  • The relevant market for the concentration is difficult to define.
  • The concentration may have a negative impact on market entry or innovation.
  • The concentration may have a negative impact on consumers or other relevant operators.
  • The concentration may have a negative impact on the development of national economy.
  • Other circumstances that MOFCOM considers which may have a negative impact on competition in the market.

Revocation

MOFCOM may also revoke simple case status in any of the following circumstances:

  • When the applicant conceals important information or provides false and misleading information.
  • When a third party alleges that the concentration has the effect of excluding or restricting competition and provides relevant evidence.
  • When MOFCOM finds material changes in the circumstances of the concentration or competition in the relevant market.

Comments

Under China’s current competition law, all concentrations of undertakings meeting the filing thresholds are subject to the same review process. While some approvals are obtained within the initial 30-days’ review period, in practice, the China merger control process can be very lengthy with many reviews going into phase II and beyond. In addition to the formal review timetable, although not mandatory, in practice pre-notification contacts with MOFCOM are highly recommended and MOFCOM will often require a large amount of information during the pre-notification period. As the clock does not start to tick until MOFCOM formally accepts a filing as complete, the process from preparation of the filing to clearance may take months even in absence of substantive issues. Subjecting all reportable concentrations to the same process has led to a heavy workload for both MOFCOM and the reporting undertakings.

Whilst the implications for those cases that fall within the test of a “simple” case are not specified in the Simple Merger Standard, it is anticipated that the Simple Merger Standard is the first step towards MOFCOM’s long stated goal of accelerating the review procedure for simple cases that do not merit an in-depth investigation. The Simple Merger Standard should also lead to a lessening of the information gathering burden which parties to a concentration currently face.

The introduction of the Simple Merger Standard is timely: it ties in with the adoption of the “simplification measures” by the European Commission on 5 December 2013.

The availability of a fast-track procedure in China and the expansion of the simplified procedure in the EU will be welcome news for businesses active in these two jurisdictions, which previously faced potentially lengthy merger control processes even for transactions that raised no substantive competition law issues.