On 8 September 2017, China’s Ministry of Commerce (“MOFCOM”) released for public consultation its draft Measures for the Review of Concentrations of Undertakings (the “Draft Measures”). The Draft Measures, if adopted, would replace MOFCOM’s Rules for the Notification of Concentrations of Undertakings (January, 2010) and the Rules for the Review of Concentrations of Undertakings (January, 2010).
The Draft Measures address a range of important issues in China merger control, including the notion of a “concentration”, turnover calculation, filing requirements, review procedures, and the investigation of concentrations which do not reach the applicable notification thresholds under the Anti-Monopoly Law. MOFCOM has helpfully sought to consolidate in the Draft Measures various rules and provisions concerning the review of concentrations which have been, to date, scattered throughout a variety of legal instruments. The regulator has also offered some welcome clarity around key concepts central to its review of mergers including as regards the meaning of “control” for the purposes of assessing whether a concentration has occurred. In some respects MOFCOM’s clarifications merely codify established practice but that in itself is useful in terms of affording further legal certainty.
There are instances, however, where the Draft Measures, if adopted in their current form, would represent something of a missed opportunity. This is the case, for example, for provisions relating to MOFCOM investigations of concentrations falling below the prescribed merger filing thresholds. In such circumstances, MOFCOM proposes, inappositely in our view, to follow the same procedures which apply where parties fail to notify a notifiable transaction. Additionally, with respect to certain of the clarifications in the Draft Measures, MOFCOM could well have gone further as explained in more detail below.
This alert offers an overview of those aspects of the Draft Measures which add to existing published rules. Given the importance of the Draft Measures, O’Melveny intends to make a submission to MOFCOM in response to its public consultation. In this context, we would be happy to convey on an anonymous basis any views which our clients might have on the Draft Measures.
MOFCOM’s consultation closes on 9 October, 2017. Should you wish your views to inform O’Melveny’s submission to MOFCOM, you are invited to contact the authors of this alert. To be included in the firm’s submission, comments should reach O’Melveny by close of business on 4 October, 2017.
A concentration occurs where one undertaking acquires “control” of another. Given the centrality of the concept, it is perhaps surprising that MOFCOM had not adopted any formal guidance on the meaning of “control”, or the factors relevant to an analysis of control, until the release in 2014 of its Guidance on the Notification of Concentrations of Undertakings (the “Guidance”). The Guidance lists the factors to be considered in determining whether one entity acquires control of another, including:
- the purpose of the transaction and the plans of the parties
- changes to shareholding structure brought about by the transaction
- matters subject to or reserved for resolution of the shareholders in general meeting and the voting mechanisms for such meetings
- the composition and voting arrangements of the board of directors and/or the board of supervisors of the target undertaking
- mechanisms for the appointment and removal of senior officers
- the terms of any shareholders’ agreement
- attendance at shareholder meetings
- common interests among shareholders or collective action
- significant commercial relationships or agreements.
These various factors to which MOFCOM will have regard when determining whether control exists or has been acquired have now been reiterated in Article 7 of the Draft Measures. In addition, the Draft Measures include a new provision which sheds light on what control means and not simply the factors MOFCOM will take into account in deciding whether there is control. Article 6 provides that control concerns an ability to control, whether by voting rights or other means, the strategic commercial plan of an undertaking, its budget, and the appointment or removal of senior managers of the undertaking.
Article 6 provides useful additional guidance to businesses on what specific issues to look for when reviewing the factors listed under Article 7 in the context of an analysis of control and whether particular transactions entail an acquisition of control or change of control. Nonetheless, the Draft Measures still contain some considerable open texture which can accommodate a variety of views as to whether there is or is not a concentration in the circumstances of a particular deal.
MOFCOM’s current implementing rules or guidance are silent on interdependent transactions i.e. transactions linked by a condition such that one transaction would not be carried out without the other. Article 8 of the Draft Measures now bridges this gap by providing that if the same undertaking acquires control over one or more other undertakings through interrelated transactions which are linked de jure (the typical scenario) or de facto,the transactions will be considered one concentration for China merger control purposes. Article 8 would therefore not apply to the demerger of a JV where the parents acquire parts of the JV - these transactions would constitute separate concentrations both of which may need a MOFCOM approval. It is not clear whether an initial acquisition of sole control followed by a further acquisition of part of the acquired undertaking resulting ultimately in joint control is within scope of Article 8.
In the area of turnover calculation for the purposes of analyzing whether a transaction is notifiable, the Draft Measures for the most part simply reiterate existing published rules and guidance. There are however two points where new guidance is offered:
- First, Article 12 clarifies that the turnover of an undertaking comprises the turnover of those undertakings or entities it controls at the time of notification, but not the turnover of those undertakings or entities it no longer controls at that time. Under this rule, the turnover of an undertaking as shown in its audited accounts may need to be adjusted for the purposes of analyzing whether the notification thresholds have been exceeded.
- Second, Article 13 provides that the turnover of an entity jointly controlled by a number of undertakings involved in the concentration is to be apportioned equally among the controlling business operators.
The Draft Measures are therefore silent on whether apportionment is appropriate where an entity is jointly controlled by an undertaking involved in the concentration and a third party undertaking not involved in the concentration.
The Draft Measures also fail to address the question of whether the concept of “control” in the context of turnover calculation (for the purpose of aggregating the turnover of different legal entities to arrive at the turnover the undertaking as a whole) is identical to or different from “control” for the purposes of assessing whether a concentration has occurred. Ambiguity on this point can cause difficulty for businesses when assessing whether a given transaction triggers a filing requirement.
Concentrations falling below the merger filing thresholds
Article 50 of the Draft Measures provides that MOFCOM may investigate concentrations which fall below the prescribed merger filing thresholds on its own initiative or following a complaint. Where MOFCOM initiates such a review, Article 51 of the Draft Measures provides, surprisingly, that the investigation may follow the procedures set out in MOFCOM’s Interim Rules on the Investigation and Handling of Concentrations of Undertakings not Notified in Accordance with the Law (“Interim Rules”).
The application of the Interim Rules - presumably by analogy - is inapposite in so far as those rules oblige parties to suspend a transaction, allow for “dawn raid” type investigative tools and provide for a review timeline that is less rigorous from MOFCOM’s perspective relative to the timeline that applies for notified transactions. While the Draft Measures serve legal certainty by making provision for the investigation of mergers which are not subject to a mandatory filing obligation, this benefit is lost in so far as the procedures in the Interim Rules seem unlikely to be followed in a strict sense - this would appear unjust bearing in mind that the investigated parties have not in fact failed to comply with any applicable legal requirement to file the transaction with the authorities.
Interestingly, MOFCOM issued in 2009 two instruments for consultation which were not adopted at the time but which catered specifically to the scenario where MOFCOM opened an investigation into a transaction which was not notifiable. These instruments were the draft Interim Rules on the Gathering of Evidence for Suspected Monopolistic Concentrations of Undertakings not Reaching the Notification Thresholds and the draft Interim Rules on the Investigation and Handling of Suspected Monopolistic Concentrations of Undertakings not Reaching the Notification Thresholds. This earlier framework, while not flawless, was more fit for purpose than the mechanism apparently envisaged by the Draft Measures.
The Draft Measures will certainly improve the transparency and predictability of the merger review regime in China in a number of important respects. There are areas, however, where the Draft Measures do go far enough in terms of clarifying the more unpredictable parts of the China merger control regime. Notably the meaning of “control” and the analysis that should be followed in assessing whether control has been acquired could be further elaborated. The provisions concerning the investigation of transactions which parties are not required to notify but which MOFCOM decides to investigate could also be more tailored to the particularities of that type of case. It is however positive that MOFCOM is consulting on the Draft Measures and it is to be hoped that the measures in their final form will address these issues.