The merger control authority in the People’s Republic of China (“PRC”), i.e. the Ministry of Commerce (“MOFCOM”), newly revised the Guiding Opinions on Notification of Concentration of Business Operators (“Guiding Opinions”) on 6 June 2014. The revised Guiding Opinions reflect MOFCOM’s latest experience in applying the merger control rules under the PRC Anti-Monopoly Law (“AML”) and provide guidance as to jurisdictional and procedural issues of merger control in the PRC.
We would like to summarize the major highlights of the revised Guiding Opinions as follows:
Acquisition of de facto control
In practice, it is not uncommon that a shareholder holds a minority share in a company, but can also effectively decide the strategic commercial decisions of the company due to the fact that the remaining shares are widely dispensed. Under the AML, a concentration occurs in the case of an acquisition of control. Since a minority shareholder may have control power on a de facto basis, MOFCOM for the first time confirms in the revised Guiding Opinions that acquisition of de facto control can form a concentration. Further, MOFCOM is of the opinion that the following factors need to be considered on a case-by-case basis when assessing whether a transaction leads to an acquisition of control:
- Purpose of the transaction and future plans thereof;
- Changes in the shareholding of other shareholders in the target company before and after the transaction;
- Matters to be decided by the general shareholders’ meeting and its voting mechanism as well as attendance rates of other shareholders and their voting results in historical general shareholders’ meetings;
- Composition of the board of directors or the supervisory board of the target company and their voting mechanism;
- Power to appoint or release the senior management employees of the target company;
- Internal links among the shareholders, internal links among the directors and the facts whether any proxy holder is appointed or whether there is any person acting in concern;
- Whether any material business links or cooperation agreement exists among the parties concerned.
Sole Control and Joint Control
MOFCOM for the first time introduces “sole control” and “joint control” in the revised Guiding Opinions. Further, MOFCOM confirmed that a concentration is formed if a newly established joint venture is jointly controlled by its shareholders. However, if a newly-established joint venture is solely controlled by one shareholder and other shareholders do not have any control power in the newly-established joint venture, the establishment of the joint venture does not form a concentration and, consequently, no merger notification needs to be filed with MOFCOM.
Who are the Parties to the Concentration?
This question is important to determine whose turnover must be considered when calculating the notification thresholds. According to the revised Guiding Opinions, the parties to the concentration are not always the same as the parties to the transaction. In practice, the parties to the transaction in an equity or asset acquisition project usually refer to the buyer and the seller. However, the parties to the concentration in the same transaction only refer to the buyer and the target if the seller will lose the control over the target after closing the transaction. In the latter case, only the turnovers of the buyer and the target will be considered when calculating the notification thresholds. Among them, the turnover of the target will be calculated in case of an equity acquisition. The turnover that is attributed to the transferred assets will be calculated in case of an asset acquisition. In addition, MOFCOM clarified in the revised Guiding Opinions that two or more transactions that take place within a two-year period between the same business operators shall be treated as one and the same concentration arising on the date of the last transaction.
Time for filing
The revised Guiding Opinions specify that a merger notification is allowed to be filed with MOFCOM only after the relevant parties have signed the relevant transactional agreement. However, in case of acquisition of a listed company by takeover bid, the merger notification can be filed with MOFCOM after the takeover bid report has been announced to the public.
According to the revised Guiding Opinions, subject to the approval of MOFCOM, a notifying party is allowed to withdraw its merger filing in case of any of the following circumstances:
- The notified transaction is not a concentration
- The notified transaction does not trigger any statutory threshold for merger filing;
- A party to the concentration owns more than 50% of the voting shares or assets of every other party to the concentration;
- More than 50% of all parties’ voting shares or assets are controlled by the same entity;
- A substantial change occurs in the concentration, and thus a re-filing of the concentration becomes necessary; and/or
- The parties to the concentration abandon the deal.
The revised Guiding Opinions confirmed that the pre-negotiation meeting with MOFCOM is not a mandatory procedure for merger filing in the PRC. The parties to the concentration may voluntarily hold a pre-negotiation meeting with MOFCOM and discuss the issues that are directly relevant to the transaction. In particular, MOFCOM confirms in the revised Guiding Opinions that the parties participating in the pre-negotiation meeting may negotiate with MOFCOM as to whether the transaction can be treated as a simple case and how a simple merger case will be reviewed by MOFCOM from a procedural prospective.