- New Filing Guidelines amend version promulgated on January 5, 2009
- Guidelines define control to mean ‘the right to control or exert a decisive influence on an undertaking’, with multiple factors to be considered in the determination of control
- Guidelines clarify the rules of calculation of turnover
- Contractual arrangement with regard to designation of notifying party will not be recognized as a valid defense in the case of failure to notify
Background to the Guidelines
The Anti-Monopoly Bureau of the Ministry of Commerce (“MOFCOM”) of the People’s Republic of China (“PRC”) released a new version of the Guiding Opinions on the Notification of Concentration of Undertakings (“New Filing Guidelines”) on June 6, 2014, which amended the previous version promulgated on January 5, 2009. Whereas certain existing rules set forth in the previous version of such guiding opinions or other regulations related to the notification of concentration of undertaking are incorporated, the New Filing Guidelines present certain new rules adding clarity to the requirements of MOFCOM with regard to the notification of concentration of undertakings. The following new rules deserve attention.
Highlights of the Guidelines
Determination of Control
Under PRC law, a transaction is subject to the notification of concentration of undertakings with MOFCOM only if the participating undertakings reach the statutory thresholds with regard to their turnover in the last fiscal year, and one or more undertakings acquire control over another through such transaction. Previously, there was no guidance on the determination of such control until the issuance of the New Filing Guidelines.
The New Filing Guidelines define control to mean ‘the right to control or exert a decisive influence on an undertaking.’ According to the Guidelines, in order to determine the existence of such control, one would need to consider multiple legal and factual factors, including without limitation:
- the purposes of the transaction and future development plan
- the shareholding structure and the change resulting from the transaction
- the matters subject to voting by shareholders, including historical meeting attendance and voting mechanism
- the composition of board of directors or supervisors and voting mechanism
- the appointment of senior officers
- the relationship among shareholders and among directors, e.g. voting trust, person acting in concert, etc.
- whether there is any material commercial arrangement among participating undertakings
Such factors, though being considered by the MOFCOM in the determination of control as a matter of practice, are specified in a regulation for the very first time. Nonetheless, it remains unclear how each of these factors function in the determination of control – for example, whether an investor’s acquisition of 30% of equity interest of a target company with the right to appoint two out of the five directors constitutes control over the target.
It is noteworthy that a draft version of the Guiding Opinions on the Notification of Concentration of Undertakings for public comments in early 2009 used to provide that the acquisition of (i) more than 50% voting shares or assets of an undertaking, or (ii) the right to decide on the appointment of one or more directors and senior officers, budget, operations and sales, pricing, material investment, or other material management and operational matters of such undertaking through the acquisition of shares or assets or contractual arrangements constitutes acquiring control over such undertaking provided, however, that the veto rights to the amendment of articles of association, increase or decrease of capital, and liquidation that are granted to protect the interests of minority shareholders should not be considered as control. Such specific guidance was removed from the official guiding opinions issued in 2009 and was not included in the New Filing Guidelines either. However, from a practical point of view, MOFCOM may have been following such guidance, especially with regard to the acquisition of more than 50% voting shares and the right to appoint one or more directors and senior officers. Given the absence of any specific guidance under the New Filing Guidelines, such practice may likely continue.
In relation to the determination of control, the New Filing Guidelines recognize the concept of joint control. In particular, the establishment of a joint venture is subject to the notification of concentration of undertakings with the MOFCOM only where such joint venture is jointly controlled by multiple parties. The concept of joint control, however, has existed as a matter of practice for a number of years. As a joint venture partner typically acquires the right to appoint at least one director or senior management, it would be considered as having control, jointly with other shareholders, over the joint venture based on the specific guidance noted above.
Calculation of Turnover
Under the anti-monopoly regulations in the PRC, the turnover of an undertaking in a given transaction generally includes not only the turnover of the undertaking itself but the turnover of its affiliates with which there is control relationship in the last fiscal year. In this regard, the New Filing Guidelines clarify that the turnover generated by any affiliate which was sold or with which the control relationship was terminated in or before the last fiscal year should be excluded.
According to the existing rules, where a transaction involves only a portion of an undertaking, the turnover of the seller in this transaction should be limited to the turnover of such relevant portion provided that the seller, after the transaction, no longer has any control over such relevant portion. The New Filing Guidelines specify that such provision is mainly applicable to the following two scenarios:
- in the case of asset sales, only the turnover generated by the assets to be sold will be considered in the determination of the seller’s turnover as long as the seller no longer has any control over such assets after completion of the asset sales, and
- in the case of sales of all or portion of equity interest of a target company, only the turnover of such target company will be considered in the determination of the seller’s turnover as long as the seller no longer has any control over the target company after the completion of the transaction.
Whereas the New Filing Guidelines clarify that the turnover of a participating undertaking jointly controlled by multiple parties must include the turnover of all such controlling parties, no clarity is offered for the calculation of the turnover of a participating undertaking’s affiliates that are jointly controlled by the participating undertaking and other parties.
According to the existing rules, the turnover of such affiliates jointly controlled by the participating undertaking and others should be calculated “only once”. However, it is unclear whether such calculation should be interpreted as split equally among the controlling parties, allocation in accordance with the shareholding percentages of the controlling parties, or otherwise. Though an undertaking usually includes the turnover of the affiliates under its control only where the financial statements of such affiliates are consolidated into those of the participating undertaking, it remains to be clarified whether such practice complies with the requirement of calculation “only once”.
Liabilities of Failure to File
With respect to the participating undertakings with the statutory obligation to notify MOFCOM of the concentration of undertakings, the existing rules provide that all parties to a merger have the obligation of notification whereas the party or parties acquiring control in other types of concentration of undertakings have such obligation. According to the New Filing Guidelines, the undertakings may enter into a contractual arrangement whereby one party is designated to make the notification on behalf of all the parties with the obligation of notification; however, such contractual arrangement will not be recognized as a valid defense of other parties if the designated party fails to notify.
Timing of Filing
According to the New Filing Guidelines, the notification needs to be made after the execution of a transaction agreement and before the implementation of the transaction. Nonetheless, where the sales of equity interest of a China-based company are at issue, it remains unclear whether the implementation of the transaction means the approval of the equity transfer by the competent commerce authority, the issuance of a new business license of the target company reflecting such equity transfer, or otherwise.
It is also noteworthy that, according to the standard notification form developed by MOFCOM, they may accept a framework agreement, a memorandum of understanding or similar, as opposed to a definitive transaction agreement, for the commencement of its review in certain special circumstances, e.g., for the purposes of complying with mandatory requirements under other PRC laws or policies or regulations of other jurisdictions. It would be reasonable to expect that such practice may likely continue to be allowed.
The New Filing Guidelines add clarity to the requirements of MOFCOM with regard to the notification of concentration of undertakings, especially those related to the determination of control and calculation of turnover, though certain rules that might cause uncertainty in their implementation remain to be further clarified.