By way of background, on 11 February 2014, China’s Ministry of Commerce (“MOFCOM”) issued its Interim Regulations on Applicable Standards for Simple Cases regarding Concentration of Undertakings (the “Regulations”). The Regulations set out the circumstances in which a concentration may qualify for simple case treatment. On 18 April 2014, MOFCOM published Tentative Guidelines on the Notification of Simple Cases regarding Concentrations of Undertakings (the “Guidelines”). The Guidelines provide procedural details for the notifying parties, such as the provision of an opportunity for a pre-notification meeting, the required use of a simple case notification form which reduces the burden of information to be submitted, and the consequences for the revocation of simple case status.
There are six categories of transactions that qualify as simple cases for the purposes of the MOFCOM Regulations:
Horizontal mergers in which the combined market share of the parties is less than 15%;
Vertical mergers in which each party has a market share of less than 25%;
Other (conglomerate) mergers where each party has a market share of less than 25%;
The acquisition of shares or assets of a non-Chinese company, where said company does not conduct economic activities in China;
The establishment of a non-Chinese joint venture, where said JV does not conduct economic activities in China;
A change in control of a joint venture, whereby the JV becomes controlled by one or more of the previously jointly controlling parents.
MOFCOM data currently reveals that, as of September 17, 2014, 19 of the 23 simple cases reported by MOFCOM were based on the transactions falling below the above market share ceilings. One may infer from this that many applications for simple case status will depend upon submitting market definitions that are realistic economically and defensible. The parties already face this responsibility when filing a normal merger notification with MOFCOM, so there is no reason for special concern here. And rightly, third parties are permitted to file challenges to the notifying parties’ market definitions to ensure that only deals qualifying for simple case treatment are given this status.
As a point of comparison, the European Commission also has a simplified procedure for certain mergers, which is found in a 2013 Commission Notice. This Notice contains market share tests very similar to those above for ascertaining whether transactions qualify for the simplified procedure. In fact, the EU has had 14 years of experience with this procedure (the 2013 Notice is the latest of several such Notices going back to 2000). The Commission and notifying parties have not had particular difficulties with the fact that third parties may challenge market definitions. If anything, this eventuality forces the parties to be more disciplined and thorough about how they approach this issue.
Nevertheless, it may be the case that there is no precedent for certain product market definitions and original analyses are daunting because the products are complex and the industry concerned is rapidly evolving. Likewise, it may be difficult to obtain reliable market share data for certain industries where there is no public source for obtaining the data or where certain key market participants do not publish their sales figures. In these situations, simple case treatment seems inappropriate due to the amount of time that may be necessary to obtain solid, reliable data. Both the Regulations and the Commission Notice addressed this issue by explicitly excluding the application of the simple case/simplified procedure where it is “difficult” to define the relevant markets or to determine the parties’ market shares. In these situations, the parties must file the usual full-length notification form and the entire process must begin anew.
The Regulations’ fourth qualifying case category involving non-Chinese targets may seem at first glance to potentially conflict with those preceding based upon the combined market share of the parties, particularly if “economic activities” are interpreted strictly as Chinese presence. However, it appears that the fourth qualifying scenario is intended to apply to acquisitions of a third firm by two or more parties when the target is a non-Chinese firm with no Chinese sales (i.e. "economic activities" related to sales rather then legal or physical presentce in China). In these circumstances, the acquiring firms would satisfy the AML sales thresholds, thus triggering a mandatory notification, but the joint acquisition would not be subject to the Regulations' market share tests. This interpretation would eliminate any inconsistencies in the application of the Regulations' scenarios. It is also consistent with the EU approach: The Notice also provides that joint acquisitions are a separate means of obtaining expedited review.
Does “simple case” imply a fast-track process?
The principal purpose of the new MOFCOM legislation is to reduce the burden on the notifying parties in non-controversial cases by requiring less in the way of submitted information, thereby permitting MOFCOM toconcentrate its resources on more complex and/or troublesome mergers. To this end, there is now a prescribed simple case notification form. In simple cases, the parties are not required, for example, to submit information on the supply and demand structure of the relevant market, to appraise barriers to entry, or to identify efficiencies, if any, arising from the transaction.
Nevertheless, some commentators seem to hope—if not expect—that simple case treatment will result in fast-track treatment for simple cases.
As an initial observation, the Regulations and Guidelines do not even refer to an expedited or fast-track clearance. It would therefore be inaccurate to state that simple case treatment will result in clearance in less than 30 days, the Phase I deadline, as a legal entitlement.
A related question is whether the simple case procedure will, as a matter of practice, result in clearance in less than 30 days. But it is still too early to draw this conclusion. According to the MOFCOM website, as of September 17,2014, 23 transactions have been designated as simple cases. The first concentration to receive simple case treatment was published on MOFCOM’s website on May 22, 2014, and this deal was cleared in 18 days. A more meaningful assessment will be possible later next month when MOFCOM’s third quarter statistics are published.
Nevertheless, some commentators seem to suggest that MOFCOM will find it difficult to provide a fast-track clearance of less than 30 days. This conclusion is based on several features of the process:
1. MOFCOM must publish a public notice form describing the transaction (and justifying simple case treatment) that is posted on its website. This public notice invites challenges to the simple case status from third parties within 10 days. MOFCOM must then evaluate the submissions received and determine whether they justify a reassessment of MOFCOM’s conclusion, thus triggering requests for information and potential meetings with the parties and/or third parties.
2. Despite the simplified notification requirement, the notifying parties must still provide a detailed analysis of the relevant markets, as well as their market shares and those of their competitors.
The argument is that third parties will be able to provide evidence on the relevant markets and on market shares which challenges the conclusions reached by the parties and by MOFCOM itself on the applicability of simple case treatment, thereby jeopardizing a review period of less than 30 days.
More critically, some commentators fear that such attacks may result in loss of simple case treatment altogether. This would compel the filing of a normal, full-length notification, triggering the review period anew, resulting in a substantial loss of time for the notifying parties.
Standing alone, the public notice requirement shouldn’t prevent MOFCOM from deciding simple cases in less than 30 days. Under the EU’s simplified procedure, the Commission must publish in the Official Journal a notice of the notified concentration and a statement that it may qualify for the simplified procedure in the Official Journal, as well as provide third parties with 10 business days to file their comments on the concentration. Despite this publication requirement, as a matter of practice, the simplified procedure usually results in clearance in 21 days, rather than thePhase I deadline of 25 business days.
Moreover, as in China, third parties may challenge the conclusions reached the European Commission as to the applicability of the simplified procedure. The result of such attacks may be that the simplified procedure lasts for the entire Phase I period or, worse, that the simplified procedure is deemed inapplicable and the parties must “start the clock” anew with a standard Form CO.
The difference, perhaps, is one of perception—these “unhappy” outcomes are not deemed unusual in Europe. Under the 2013 Notice, qualifying transactions are not legally entitled to clearance in less than 25 business days, but the efficiencies usually result in a shortened procedure. When the Commission finds issues that result in a normal Phase I clearance period or even revocation of the simplified procedure, these incidences are considered a small price to pay when considering the benefits of the procedure. The fact is, the EU’s simplified procedure has been widely accepted by the legal and business communities; indeed, this procedure now accounts for over 60% of all cases cleared unconditionally in Phase I. This percentage will increase under the Commission’s 2013 Notice, which raised the market share thresholds for horizontal and vertical deals to 20% and 30%, respectively.
To answer the main question above, however, the EU’s experience with a simplified procedure suggests that MOFCOM should, in a majority of cases, reach a decision in simple cases in less than 30 days. Although it is unfair for companies operating in China to think of this as an entitlement, such outcomes may well be the result of the efficiencies resulting from the simple case procedure.
The MOFCOM simple case procedure is a huge step forward for China merger control and it is consistent with best practices. If third parties are, indeed, able to offer credible evidence challenging the relevant market and market share arguments of the notifying parties, thus causing a delay in obtaining the clearance, it should be accepted as a small price to pay.