In 2014, there has been a flurry of new rules and guidelines as China continues to upgrade its merger control system:
- In March, MOFCOM announced that, as of 1 May, it would start to publicize the names of parties and any fines imposed when it discovers that companies have failed to report notifiable transactions under Chinese merger control.
- In February, MOFCOM adopted interim provisions setting out when merger transactions would amount to "simple cases". In April, MOFCOM published a fast-track merger review procedure for those cases and a new notification form. 12 transactions have already been notified to MOFCOM under this process and three cases have been cleared (one of which was cleared within 19 calendar days). Click here for details on when a transaction is eligible and the procedure to be followed.
- In June, MOFCOM adopted Revised Guidance on when transactions need to be notified. Click here for more details.
What this means for you
- Higher stakes for failing to file a merger: MOFCOM is alert to the fact that not all companies file their mergers (e.g. due to a potentially long review period). MOFCOM's determination to take a stricter approach to this conduct is reflected in its decision to publish fines and the names of companies that have not followed the rules. It has also established a dedicated hotline so that whistleblowers can inform MOFCOM of unreported transactions.
A large number of companies rushed to confess their failure to file notifiable transactions to MOFCOM prior to 1 May 2014. MOFCOM has previously revealed the identity of one company that failed to file (but not the amount of any fine). Companies are advised to check China merger control requirements carefully given that the risk of enforcement is higher.
- Faster review for 'simple cases': the new procedure should substantially accelerate the currently lengthy merger review process in China for transactions that do not have a significant impact on competition. MOFCOM officials have stated that the simplified procedure could see 60 per cent of notified transactions cleared within 30 days. Plus, the content requirements of the simplified form are substantially less, thereby reducing preparation time.
As at 28 July, 12 transactions (notified by a mix of multinational and domestic companies) have been lodged under this process and the first of these cases was cleared within 19 calendar days. The second and third cases were cleared in 30 days. Click here for the table showing the notified cases and why they were eligible for consideration as simple cases.
Given that clearances used to take 4-6 months, the first three cases paint a very positive picture. However, there are actually no guarantees as to timing. In addition, there is a risk that the simple procedure will increase the volume of notified transactions and, if resource constraints within MOFCOM's intake division remain unaddressed, this could exacerbate work loads leading to a bigger backlog of cases, despite MOFCOM's very best intentions.
There is also the fact that the simple case procedure involves the transaction being made public at an early stage - potentially attracting opposition from a customer or competitor.
Ultimately, parties must make a judgment call as to whether to use the 'simple' procedure. Intuitively, transactions involving offshore joint ventures/targets with no activities in China will be strong candidates for the simple procedure. But in fact, this table shows that MOFCOM has accepted simple-case notifications in a variety of circumstances. Indeed the second and third clearance decisions involves transactions where the parties are competitors (albeit minor) and therefore it would have been necessary to define the relevant market with some degree of precision (so that MOFCOM was satisfied that the 15 per cent combined market share threshold was not exceeded).
The eligibility of a transaction for 'simple case' review also depends on the sensitivity of the sector affected by the merger. Chinese merger control law allows consideration of non-competition factors. Delay may arise where MOFCOM receives comments from another Government department if a strategic sector is affected. In our experience, productive pre-notification discussions with MOFCOM and other departments can be critical - to minimize the risk of unforeseen objections arising and therefore facilitate the adoption of a clearance decision within 30 days.
- More clarity on when and how to notify mergers: the Revised Guidance is intended to clarify a number of key issues including:
- what amounts to "control", including in relation to joint ventures. The previous lack of guidance on this was a major concern for businesses assessing whether or not their transactions required to be notified in China
- how to calculate turnover when assessing whether the turnover thresholds are met
- how to engage with MOFCOM at the pre-notification stage and what to provide
However, many key questions remain unanswered and ambiguity remains. For example, MOFCOM declined to comment on the concept of full-functionality in the joint venture context.
Overall, MOFCOM has introduced a number of important policy changes in recent months. The ability to use the simple case procedure brings advantages but it is unlikely to be a coincidence that MOFCOM is simultaneously tightening up enforcement where companies fail to bring to its attention notifiable mergers. One possible interpretation is that while MOFCOM is providing a faster route to clearance, it will expect, in return, greater respect for filing requirements.