Legislation and jurisdictionRelevant legislation and regulators
What is the relevant legislation and who enforces it?
The Chinese Antimonopoly Law (AML) (which entered into force on 1 August 2008) contains a chapter entitled ‘Concentration of undertakings’. This chapter deals with the merger control regime in China. The AML is supplemented by implementing regulations, including the Rules on Notification Thresholds for Concentrations of Undertakings published by the State Council (the Notification Thresholds Rules) in August 2008.
In March 2018, as part of wider institutional reform in China, the Antimonopoly Bureau of the Ministry of Commerce (MOFCOM), which was formerly responsible for the enforcement of the merger control rules under the AML, and the two other competition authorities in China, the Price Supervision and Antimonopoly Bureau of the National Development and Reform Commission (NDRC) and the Antimonopoly and Anti-unfair Competition Bureau of the State Administration for Industry and Commerce were merged into one new super authority called the State Administration for Market Regulation (SAMR). Following the merger, SAMR is now responsible for the enforcement of merger control in China.
In addition to the AML itself, MOFCOM published a range of secondary legislation, some of which has been slightly amended by SAMR to reflect the institutional change. The legislation includes, among others, implementation rules, interim rules and guidance notices that complement the AML and the Notification Thresholds Rules and address procedural and substantive issues as well as information requirements related to the merger control procedure in China.
In 2009, MOFCOM published several implementing measures (such as the 2009 Notification Measures and 2009 Review Measures) covering a range of issues, such as the information the notifying party is required to include in merger filings submitted to MOFCOM, a number of key substantive and procedural issues regarding merger control reviews, rules on the calculation of turnover for financial institutions and voluntary filing of non-reportable mergers. In addition to the implementing rules published by MOFCOM, the Antimonopoly Commission of the State Council (which is the authority under the AML that is generally responsible for coordinating and guiding antitrust policy within China) published guidelines on the definition of the relevant market in 2009.
In 2011, MOFCOM published implementation rules for national security review of mergers and acquisitions of domestic enterprises by foreign investors. In the same year, it published interim provisions to assess the effects of concentrations on competition (the 2011 Interim Provisions for the Assessment of the Effect of a Concentration of Undertakings on Competition).
In 2012, MOFCOM published interim rules to empower it to investigate concentrations that meet the jurisdictional thresholds but where the relevant party or parties have failed to notify. In 2012, MOFCOM also published a new notification form (the Notification Form), which contains more burdensome information and document requirements.
In February 2014, MOFCOM published interim provisions on standards for transactions reviewed under a simplified procedure (the Interim Provisions on Standards for Simple Cases). These provisions provide criteria for defining ‘simple cases’, namely transactions that do not give rise to significant competition concerns and therefore merit streamlined review by the authority. In April 2014, MOFCOM published the Tentative Guidelines on the Notification of Simple Cases. These guidelines provide procedural guidance on the notification of simple cases but do not set any deadlines for the authority to complete its review in these cases. That said, in practice, the authority seeks to complete its review of ‘simple cases’ in Phase I. MOFCOM also adopted a new notification form for notifying simple cases as well as a public notice form for notifying transactions under the simple case procedure.
In June 2014, MOFCOM published Guidance for Notification of Concentrations of Undertakings (the Notification Guidance). The Notification Guidance specifies the factors to consider when determining whether there is an acquisition of control and provides procedures for pre-notification consultation meetings with the authority.
In December 2014, MOFCOM adopted the Interim Provisions on the Imposition of Restrictive Conditions on Concentrations of Undertakings (the 2014 Interim Remedy Provisions), which provide guidance in relation to the types of remedies that can be imposed, the conduct of remedy negotiations, the implementation and monitoring of remedies, the varying and lifting of remedies, and the legal liabilities to which undertakings and trustees are subject. They took effect from 5 January 2015.
In February 2015, MOFCOM published the Guidance on the Notification Name of Concentrations of Undertakings (the Naming Guidance), amended in February 2017, which provides rules on how to name a transaction for notification purposes.
In September 2018, the State Council and SAMR amended parts of the regulations and measures set out above to reflect the change from MOFCOM to SAMR. The substantive rules remain unchanged for now. The amended regulations and measures include the Notification Thresholds Rules, the Notification Guidance, the Notification Form, the Naming Guidance and the Tentative Guidelines on the Notification of Simple Cases (the name of the latter was amended and is now known as the Guidelines on the Notification of Simple Cases). References to these regulations and measures in this document refer to the amended secondary legislation.Scope of legislation
What kinds of mergers are caught?
Mergers and acquisitions that are characterised as a ‘concentration of undertakings’ are caught by the AML and require notification to SAMR if they meet the relevant turnover thresholds.
A concentration of undertakings is defined in the AML as:
- a merger of undertakings;
- an undertaking acquiring control over one or more undertakings by acquiring shares or assets; or
- an undertaking acquiring control or being able to exercise decisive influence over one or more undertakings by contract or any other means.
What types of joint ventures are caught?
The AML is silent on whether joint ventures are subject to notification. However, this issue was clarified in the Notification Guidance. This provides that a newly established joint venture (ie, a greenfield joint venture) constitutes a concentration of undertakings if at least two undertakings jointly control the joint venture. If, however, only one undertaking solely controls a joint venture and other shareholders have no control, then that joint venture does not constitute a concentration of undertakings. The Notification Form also provides that both greenfield joint ventures and joint ventures formed by way of acquisition or change of control are reportable transactions and that the ‘undertakings concerned’ in joint venture transactions will vary depending on the nature and type of the transaction structure. MOFCOM/SAMR have imposed remedies in several cases involving the establishment of a joint venture, such as Corun/Toyota China/PEVE/Sinogy/Toyota Tsusho in 2014 and Zhejiang Garden/DSM in October 2019. Several companies have also been fined for failure to file reportable joint ventures.
Is there a definition of ‘control’ and are minority and other interests less than control caught?
The AML does not provide a definition of ‘control’.
However, the Notification Guidance explains that control in the context of China merger control includes both sole control and joint control and that control or decisive influence is determined by reference to legal and factual circumstances. Factors that are taken into consideration include the corporate governance procedures of the undertakings concerned as reflected in transaction documents and articles of association (eg, the voting mechanism at the general meeting of shareholders, the board of directors or other supervisory board, the appointment and removal of senior management), the objective and the future plan of the transaction, the shareholding structure of the undertakings concerned before and after the transaction (eg, if an acquisition of control cannot be determined on the basis of concentration agreements and articles of association, but factors such as the shareholding being dispersed give an undertaking de facto control, such a transaction also constitutes an acquisition of control), the relationship between the shareholders and directors of other undertakings; whether there exist significant commercial relationships, cooperation agreements, etc, between the undertakings concerned. Accordingly, the issue of whether a transaction leads to an acquisition of control or decisive influence must be determined on a case-by-case basis.Thresholds, triggers and approvals
What are the jurisdictional thresholds for notification and are there circumstances in which transactions falling below these thresholds may be investigated?
For any merger or acquisition of control that is considered a ‘concentration of undertakings’, a pre-merger notification must be filed with SAMR if the relevant parties’ turnover exceeds any of the following thresholds, as set out in the Notification Thresholds Rules and the Notification Guidance:
- the total worldwide turnover of all parties to the transaction in the previous financial year exceeded 10 billion yuan and the PRC turnover of each of at least two parties to the transaction in the previous financial year exceeded 400 million yuan; or
- the combined PRC turnover of all parties to the transaction in the previous financial year exceeded 2 billion yuan and the PRC turnover of each of at least two of the parties to the transaction in the previous financial year exceeded 400 million yuan.
The Notification Guidance and the 2009 Notification Measures also provide that, in cases where a concentration does not meet the notification thresholds, the undertakings participating in the concentration may nevertheless notify the transaction voluntarily to SAMR. Parties may choose to file on a voluntary basis in circumstances where the transaction may give rise to competition concerns.
Further, SAMR has the discretion under the Notification Thresholds Rules to review non-reportable transactions that are not voluntarily notified by the parties, if SAMR considers that the transaction is likely to result in the ‘elimination or restriction of competition’. Such a discretionary review may, for example, be initiated in the event of complaints from third parties including customers, suppliers or competitors.
A national security review regime took effect in March 2011, which may apply to transactions that do not trigger a merger control filing requirement or transactions that do trigger such a requirement but involve the acquisition of control of a Chinese enterprise in certain sensitive sectors.
Is the filing mandatory or voluntary? If mandatory, do any exceptions exist?
Filing is mandatory for any ‘concentration of undertakings’ that meets any of the notification triggers specified in the Notification Thresholds Rules.
The AML provides for an exemption from pre-merger filing for intragroup transactions in specific circumstances, namely where:
- among all undertakings involved in the concentration, one undertaking possesses 50 per cent or more of the voting shares or assets of every other undertaking; or
- one undertaking not involved in the concentration possesses 50 per cent or more of the voting shares or assets of every undertaking involved in the concentration.
Do foreign-to-foreign mergers have to be notified and is there a local effects or nexus test?
Yes. Foreign-to-foreign mergers must be notified if the turnover thresholds are met. The Notification Thresholds Rules require two parties to generate turnover in China (albeit low amounts). Otherwise, there is no additional ‘effects test’. However, under the Interim Provisions on Standards for Simple Cases, certain foreign-to-foreign transactions may qualify as ‘simple cases’ on the basis that the transaction does not give rise to significant competition concerns. Transactions that qualify for simple treatment are subject to less burdensome information requirements under the Guidelines on the Notification of Simple Cases and a streamlined review process.
Are there also rules on foreign investment, special sectors or other relevant approvals?
Yes. All foreign investment in China must be filed with or approved by MOFCOM or one of its local branches. Foreign investment is regulated under the Foreign Investment Law (effective from 1 January 2020), the Implementing Regulations of the Foreign Investment Law (effective from 1 January 2020), the Catalogue of Sectors Where Foreign Investment is Encouraged (Encouraged Sector Catalogue) (2019) and the Negative List (amended in 2019). Certain sectors are closed to foreign investment or subject to foreign ownership restrictions, while foreign investment is encouraged in other sectors through preferential policies. Foreign investment falls under four categories in China: encouraged, permitted, restricted and prohibited. The first category is provided in the Encouraged Sector Catalogue and the last two categories are prescribed in the Negative List. The 2019 Encouraged Sector Catalogue contains 415 nationwide sectors and 693 regional sectors, representing an increase over the encouraged sectors in the former 2017 Foreign Investment Catalogue. The 2019 Negative List has reduced the number of restricted and prohibited sectors from 48 to 40 compared to the 2018 version, including for sectors such as financial services, transportation, energy, agriculture and infrastructure. This highlights an increasing trend towards fewer restrictions for inbound investment. While foreign investment in restricted sectors must be approved by MOFCOM or its local branches, only a filing is required for foreign investment in sectors outside the Negative List.
Another relevant approval regime is the national security review regime. This applies to an acquisition of Chinese domestic businesses by foreign investors if (1) the transaction involves the military sector (including enterprises located near key and sensitive military facilities and other enterprises active in connection with national defence); or (2) it involves key agricultural products, as well as sectors involving key energy infrastructure, transport, technology and equipment manufacturing, and the transaction will result in the acquisition of ‘actual control’ by the foreign investor over the Chinese domestic business. If a transaction needs to be reviewed on national security grounds, it will be conducted by an inter-Ministerial Committee, led by NDRC as well as MOFCOM (the Committee).
MOFCOM used to have a key role in the national security review regime, as it was responsible for determining whether a transaction fell within the regime. However, according to an announcement published on NDRC’s website on 30 April 2019, resulting from a reassignment of responsibilities among government ministries, NDRC is responsible for receiving national security review filings. While no further details are currently available on the precise scope of NDRC’s responsibilities, the announcement suggests that NDRC will play a more important role under the national security review regime.
In August 2011, MOFCOM published a set of implementing rules, which include an ‘anti-circumvention’ clause, prohibiting foreign investors from circumventing national security review by relying on mechanisms such as trusts, multilevel reinvestments, leasing and loan arrangements, contractual control structures or offshore transactions. This makes clear that national security review is concerned with the substance and actual effect of a transaction rather than its form.
National security review is conducted in two phases: a ‘general review’ (Phase I), which lasts up to 30 working days, and a ‘special review’ (Phase II), which lasts up to 60 working days. Where the Committee cannot reach consensus, the transaction may be referred to the State Council for final determination, for which there is no time limit for a decision. According to the Foreign Investment Law (2019), the national security review decision is the final decision once made. This means it is non-appealable.
Where the Committee determines that a transaction gives rise to national security concerns, parties may be required to abandon or (in cases where completion has already occurred) unwind the transaction, or to put in place remedial measures to address the concern.
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23 June 2020