On 23 October 2020, the State Administration for Market Regulation ("SAMR") released the Interim Provisions on the Review of Concentrations of Undertakings ("Provisions"). The Provisions took effect on 1 December 2020. On 28 October 2020, the SAMR also released a document titled Answers by the People in charge of the Anti-Monopoly Bureau under the State Administration for Market Regulation to Reporters’ Questions.
Below is an overview on the key aspects of the Provisions.
1. The existence of the controlling powers exercised by a business operator ("Undertaking") over other business operators ("Other Undertakings") is one of the most import standards in determining whether a transaction constitutes a "concentration" under the merger control review system of the PRC Anti-Monopoly Law ("AML").
Under the AML, the term "controlling powers" refers to the right or status of an Undertaking that has or may have a decisive influence over Other Undertakings in respect of: (i) the production and operation activities of such Other Undertakings; or (ii) the major business decisions of such Other Undertakings.
a) According to the AML, controlling powers may exist in the form of, among others:
- direct and indirect controlling powers;
- sole and joint controlling powers;
- positive and passive controlling powers; and
- the right to control and the status being under control.
However, since in practice there are various situations and forms of controlling powers, in order to determine the existence of controlling powers, a comprehensive analysis and evaluation shall be conducted from both legal and practical perspectives depending on the circumstances of the specific case.
b) According to the Provisions, in order to determine whether controlling powers exercised by one Undertaking over Other Undertakings exist, the following factors, inter alia, shall be considered:
(1) transaction purpose and future plan;
(2) shareholder structure of such Other Undertakings prior to and after the transaction and the changes thereof;
(3) voting matters, voting mechanism, attendance rates and voting situations as far as the shareholders' meeting of the Other Undertakings is concerned;
(4) composition of board of directors or board of supervisors of the Other Undertakings and voting mechanism;
(5) appointment and removal, etc., of the senior management of the Other Undertakings;
(6) relationship between shareholders and directors of the Other Undertakings, and whether there is proxy voting or persons acting in concert, etc.;
(7) whether there are any major commercial relations or cooperation agreements, etc. between the Undertaking and the Other Undertakings; and
(8) other factors that shall be considered.
In short, it can be concluded that an Undertaking has the controlling powers over Other Undertakings, provided that the Undertaking can, generally, decide or veto (i) the production and operation activities of such Other Undertakings; or (ii) the major business decisions of such Other Undertakings.
2. According to the AML, the notification threshold for merger control filing is triggered if either (i) the total worldwide turnover of all the undertakings to the concentration in the previous financial year exceeded RMB 10 billion and the turnover in China of each of at least two undertakings to the concentration in the previous financial year exceeded RMB 400 million; or (ii) the combined turnover in China of all the undertakings to the concentration in the previous financial year exceeded RMB 2 billion and the turnover in China of each of at least two of the undertakings to the concentration in the previous financial year exceeded RMB 400 million.
a) Under the AML, the aggregate turnover of the following companies shall be calculated for purposes of calculation of the turnover of each undertaking to a concentration:
(1) the undertaking to the concentration (“Subject Undertaking”);
(2) the undertakings that are directly or indirectly controlled by the Subject Undertaking (“Subsidiary Undertakings”);
(3) the undertakings that directly or indirectly control the Subject Undertaking (“Parent Undertakings”);
(4) the undertakings that are directly or indirectly controlled by the Parent Undertakings; and
(5) any other undertakings that are under common control of two or more than two undertakings listed above.
The turnover of each undertaking to the concentration shall not include the turnover between the undertakings listed in the aforesaid Items 2 a) (1) to (5).
b) According to the Provisions, in order to calculate the combined turnover of each undertaking to a concentration, it shall also be considered whether a "controlling relationship" exists among the undertakings listed in Item 2 a) above at the time of submitting the notification documents ("Date of Submission") to the SAMR. In other words:
(1) In case an Undertaking has lost the controlling powers over the Other Undertakings at the Date of Submission, the turnover of such Other Undertakings shall not be included;
(2) In case an Undertaking has newly obtained the controlling powers over the Other Undertakings at the Date of Submission, the turnover of such Other Undertakings shall be included.
c) According to the Provisions, in case an Undertaking only acquires a part ("Target Undertaking") of a third undertaking (e.g. the Seller) and the Seller will lose controlling powers over the Target Undertaking, thus, the turnover of the Seller will not be included.
d) If an undertaking is under joint control ("Undertaking under Joint Control")
(1) by all the undertakings to the concentration; or
(2) by undertaking(s) to the concentration and undertaking(s) which is not a party to the concentration;
the following applies: the turnover of the Undertaking to the concentration shall also include the turnover between such Undertaking under Joint Control and any third party undertaking. Further, such inclusion shall be conducted only once.
e) According to the Provisions, for those multiple transactions ("Separate Transactions") which have been conducted by and between the same undertakings within the previous two years, and each of such Separate Transactions did not reach the notification thresholds under the AML:
(1) All such Separate Transactions which have been conducted within the previous two years shall be regarded as one transaction. Accordingly, the turnover of the undertakings to the transactions shall be the combined turnover of the undertakings to all such Separate Transactions.
(2) The Provisions further state expressly that the term "within two years" refers to the period (i) starting from the date on which the first Separate Transaction was completed (ii) to the date on which the transaction agreement in the last Separate Transaction was executed.
3. Transactions subject to the simple case procedures
a) According to the Provisions, any transaction which meets one of the following requirements may follow the simple case procedures, subject to the exceptions stated in Item 3 b) below:
(1) Low-Market-Share Test
(a) On the same relevant markets, the combined market share of the undertakings to the concentration is less than 15% on any such market;
(b) On the upstream and downstream markets, the respective market share of each of the undertakings to the concentration on such upstream and downstream markets is less than 25%; and
(c) If the undertakings are neither on the same relevant market nor have any upstream and downstream relationship, the respective transaction-related market share of each of the undertakings to the concentration is less than 25%.
The Low-Market-Share Test is only met, if all of the above conditions are met.
(2) No-Impact-on-China Test
The simple case procedures shall also be adopted for the "No-Impact-on-China" transactions, which consist of the following two situations, i.e.:
(a) If a joint venture company is established overseas, and such joint venture company will not carry out any economic activity within the territory of China; or
(b) If the acquisition of equity or assets of an overseas target is conducted, and such overseas target does not carry out any economic activity within the territory of China.
(3) The simple case procedures shall also be adopted for transformations of a joint venture company, i.e. a joint venture company was under joint control by more than two undertakings before the concentration, but it will become being controlled by one or more of such undertakings after the concentration.
b) According to the Provisions, even if a transaction meets one of the legal requirements stated in Item 3 a) above, it shall not follow the simple case procedures under the AML should one or more of the following circumstances occur:
(1) A joint venture company was under joint control by more than two undertakings before the concentration, and it will become being solely controlled by one undertaking after the contraction, and the following two conditions are met: (i) The sole controlling shareholder and the joint venture company are competitors on the same relevant markets; and (ii) The combined market share of such sole controlling undertaking and the joint venture company is more than 15%;
(2) It is difficult to define the concerned relevant markets for the concentration;
(3) The concentration may have an adverse impact on market access and technological progress;
(4) The concentration may have an adverse impact on consumers and other relevant undertakings;
(5) The concentration may have an adverse impact on national economic development; or
(6) Other circumstances which according to the SAMR's discretion may have an adverse impact on the competition on the market.
4. Legal consequences
According to the AML, undertakings shall notify the SAMR of concentrations reaching the notification thresholds ("Pre-merger Notification Obligation"). Further, before the clearance is granted by the SAMR after the submission of the notification documents, undertakings shall refrain from implementing the concentrations ("Standstill Obligation").
a) According to the Provisions, if an Undertaking fails to observe (i) the Pre-merger Notification Obligations; (ii) the Standstill Obligations; or (iii) the examination decisions previously issued by the SAMR, this constitutes a violation of the AML.
b) Should any of the violations stated in Item 4 a) above occur, the SAMR may, inter alia, impose on the concerned Undertaking one or more of the following sanctions:
- order the termination of the concentration;
- order the disposal of the relevant shares/assets within the prescribed time limit;
- order the assignment of relevant business within the prescribed time limit;
- order the adoption of necessary measures to restore the status quo prior to the concentration;
- impose a fine of up to RMB 500,000; or
- take other necessary measures.
The Provisions have provided further guidance on the merger control review system under the AML by express and specific stipulations on the determination of the existence of controlling powers, the calculation of turnovers as well as setting legal standards for cases following simple case procedures, etc.
Thus, the Provisions will improve the transparency, predictability and operability of the merger control review system under the AML and contribute to the uniform law enforcement of the merger control review system in China.