According to a leading Chinese financial newspaper, officials at the Ministry of Commerce of the PRC (MOFCOM) recently confirmed that China Unicom Limited (Unicom), and China Netcom Group Corporation (Hong Kong) Limited (Netcom) failed to file a pre-concentration notification with MOFCOM as required under the Anti-Monopoly Law (AML) before they merged on October 15, 2008. The consequence of this lapse remains uncertain.
On May 1, 2009, the Economic Observer (Observer), a weekly financial newspaper in China made the above report without citing the MOFCOM officials’ names. The report does not specify the circumstances under which MOFCOM made this confirmation, but alludes to MOFCOM’s written response to the Observer dated April 21, 2009 (Written Response). In the Written Response, the Anti-Monopoly Bureau (AMB),which reports to MOFCOM, stated that MOFCOM treats domestic and foreign companies equally in procedures, criteria, and methods when conducting anti-monopoly pre-concentration reviews, and notifying companies assume equal responsibilities regardless of their nationalities. Consequently, the government will not make special rules for concentrations involving state-owned enterprises (SOEs). According to the Observer, since the AML took effect on August 1, 2008, multiple mergers and acquisitions have taken place between or among SOEs, particularly enterprises directly owned by the central government, but MOFCOM has received few pre-concentration notifications from these enterprises.
According to the Observer article, legal experts in China have opined that Unicom and Netcom should have secured an anti-monopoly clearance from MOFCOM by filing a pre-concentration notification before proceeding with their merger. This opinion is based on the fact that all the material elements of the Unicom-Netcom merger occurred after the AML came into force, including the shareholder approval, approval by the China Securities Regulatory Commission, and the completion of the merger. In addition, Unicom and Netcom met the notification requirements under the Provisions by the State Council on the Criteria for Pre-Concentration Notification by Business Operators (Pre-Concentration Notification Provisions) enacted under the AML in August 2008. Under the Pre-Concentration Notification Provisions, merging business operators with an aggregate global turnover in excess of RMB10 billion in the preceding fiscal year, or an aggregate turnover within China in excess of RMB2 billion, and in each case, with at least two of the merging business operators each having a turnover within China in excess of RMB400 million, must complete a pre-concentration notification with MOFCOM. According to the reorganization report released by Unicom and Netcom, in 2007 the parties met this standard: Unicom had a turnover of more than RMB100 billion and Netcom posted an approximately RMB87 billion turnover. Pre-merger Unicom was one of China’s leading mobile carriers, and Netcom led the industry in the fixed-line and broadband market. After the merger, Netcom became Unicom’s wholly-owned subsidiary, and Unicom’s name was changed to China Unicom (Hong Kong) Limited.
The Observer reports that Unicom and Netcom’s independent financial advisor and Unicom’s Chinese legal counsel specified in their reports that the government’s anti-monopoly clearance was a prerequisite for the merger’s consummation. However, these two companies’ public announcement on their merger did not indicate if they had filed and cleared all requirements with MOFCOM.
The Observer interviewed several senior anti-monopoly lawyers and experts in China in preparing the article, all of whom expressed the view that SOEs are not exempt from the jurisdiction of the AML and consequently must fulfill their pre-concentration notification obligations in compliance with the law. According to the Observer, some drafters of the AML believe that the failure of certain central-government-owned enterprises’ to file preconcentration notifications resulted from their misinterpretation of a provision in the AML. This provision singles out predominantly state-owned industries affecting national economic livelihood and national security, requiring that the state will protect business operators’ lawful operations in these industries. According to these legal experts, this provision does not grant SOEs a blanket exemption from anti-monopoly regulations.
In the Written Response, AMB states that if MOFCOM ascertains that business operators carried out concentrations without fulfilling the pre-concentration notifications, MOFCOM may penalize the violators in accordance with Article 48 of the AML. Under Article 48, MOFCOM may impose monetary penalties, and may take necessary steps to reverse the merger by forcing disposition of equity interests or assets, transfers of business operations, or other means. Consistent with Article 48, MOFCOM has drafted a set of measures on the investigation and disposition of transactions that meet the notification thresholds, but for which parties are suspected of having failed to fulfill the notification requirements (Draft Measures).
AMB’s Written Response to the Observer refers to the Draft Measures, on which the government finished collecting public comments in late March 2009. Under the latest version of the Draft Measures released for public comments, if a concentration took place without having obtained necessary pre-concentration clearance, MOFCOM may;
(1) take steps to restore the condition to what was before the concentration, and may impose a penalty of up to RMB500,000 if a concentration eliminates or restricts, or will likely eliminate or restrict competition, or (2) may impose a penalty of up to RMB500,000 if a concentration does not or will not likely eliminate or restrict competition, or if the business operators have committed to eliminating the negative effects of the transaction.
Based on the quotes in the Written Response to the Observer, MOFCOM did not state whether it will initiate an investigation into Unicom-Netcom’s failure to file a pre-concentration notification. If it is the media that brings the possible violation to MOFCOM's attention, and if the rules under the Draft Measures apply, MOFCOM may, but is not required to, initiate an investigation into Unicom and Netcom. This is because, under the Draft Measures, both whistleblowers’ reports and information released by the media may trigger a MOFCOM investigation. However, MOFCOM is further revising the Draft Measures before its expected official issuance in the near future, therefore uncertainties remain on what the official rule will be on this issue, and how media reports will impact the government's anti-monopoly enforcement actions in practice.
Although AMB generally stated in its Written Response that it intends to penalize violators of the pre-concentration notification rules in accordance with the law, this statement was not targeted at any specific actors. As the Observer article reports, according to some Chinese anti-monopoly lawyers, in practice, the anti-monopoly authorities may face insurmountable obstacles in enforcing the AML against some SOEs. This is partly an issue of coordination, government departments other than the anti-monopoly authorities are involved in assessing a number of factors concerning the impact on pricing, market, consumptions, and competition by SOEs’ mergers and reorganizations. It also is an issue of authority, many heads of the SOEs directly under the central government are ministerial-level officials appointed by the central government; because MOFCOM is also a ministry under the central government it may lack enforcement clout where some major SOEs are concerned.
At this stage, it remains unclear what MOFCOM’s Written Response means to the completed Unicom-Netcom merger, or to other mergers between or among SOEs that may meet the preconcentration notification requirements. MOFCOM’s Written Response seems to have been largely phrased in general terms rather than aimed to addressing the specific case. Until further media reports reveal more details or MOFCOM makes an official statement to clarify its position, the public will continue to speculate on what has prompted MOFCOM’s Written Response and how it will affect the anti-monopoly enforcement landscape in China.