China's Ministry of Commerce (MOFCOM) has published the long-awaited Interim Provisions on the Standards for Simple Cases of Concentrations of Operators (the Provisions).
The Provisions contain the substantive criteria for determining which merger control cases may be treated as simple cases by MOFCOM with effect from 12 February 2014.
The Provisions do not set out the procedural rules that will apply to simple cases.
Which cases will qualify as simple cases?
According to the Provisions, merger control cases meeting the following criteria will be treated as simple cases:
- for horizontal mergers: in a same market, the collective market share of all operators concerned in the concentration is less than 15%;
- for vertical mergers: the market share of each of the operators concerned in the concentration in each of the upstream and downstream markets is less than 25%;
- for mergers that are neither horizontal nor vertical: the market share of each of the operators concerned in the concentration in each of the markets is less than 25%;
- for off-shore joint ventures: the off-shore joint venture does not engage in business operations in China;
- for acquisitions of off-shore targets: the off-shore target does not engage in business operations in China; and
- for reductions in the number of existing controlling shareholders: the joint venture that is jointly controlled by two or more operators will be controlled by one or more existing operators through the concentration.
Which cases will not qualify as simple cases?
Cases meeting any of the criteria set out above may not qualify as simple cases under the following circumstances:
- in case of a change from joint to sole control, there is horizontal overlap between the previously jointly controlled entity and the operator who will acquire sole control over the entity;
- the affected market is difficult to define;
- the concentration may cause adverse impacts on market entry or technology development;
- the concentration may cause adverse impacts on consumers or other relevant operators;
- the concentration may cause adverse impacts on national economic development; or
- other circumstances where competition may be adversely affected as determined by MOFCOM.
When can MOFCOM withdraw findings for simple cases?
MOFCOM may revoke a decision to treat a concentration as simple cases if:
- the notifying party conceals important information, or provides false or misleading material to MOFCOM;
- a third party claims that the concentration has or may have the effect of eliminating or restricting competition, and can provide supporting evidence; or
- MOFCOM discovers material changes to the transaction or competition in the affected market.
What are the differences to the Draft Provisions?
In April 2013, MOFCOM published the Draft Provisions for comment by the public. The Provisions are not significantly different to the Draft Provisions.
The reference in the Draft Provisions to MOFCOM pursuing the notifying parties' legal liabilities for concealing important information or providing false or misleading information has been removed from the Provisions.
However, Article 52 of the PRC Anti-Monopoly Law (AML) empowers MOFCOM to impose fines of less than RMB20,000 on individuals, and fines of less than RMB200,000 on entities, or in serious cases, fines of up to RMB100,000 on individuals and fines of up to RMB1,000,000 on entities, for concealing important information or providing false or misleading information. MOFCOM’s powers under Article 52 are not affected by the Provisions.
What is the difference with the EU standards?
The Provisions adopted by MOFCOM are similar to the standards previously adopted in the EU for simplified procedures before 2014, especially the market share thresholds for horizontal and vertical mergers.
In January 2014, the EU reformed its simplified procedures and expanded the scope for their application. Under the amended rules, the combined market share threshold for horizontal mergers was increased from 15% to 20%, the market share threshold for vertical mergers was increased from 25% to 30%.
In addition, a concentration may qualify for simplified procedures where the combined market shares of all operators are between 20% and 50%, but the increase in market share due to the merger is small ( for example, the HHI delta is less than 150)1.
How will the Provisions change the current merger control review process?
It is noteworthy that there are no procedural rules attached to the Provisions. In other words, the Provisions only contain the rules for identifying simple cases, but do not describe what the simplified procedure will entail.
Because MOFCOM is not bound by any timeline to review a simple case, it remains unclear to what extent the review period might be shortened with the promulgation of this new regulation.
We understand that there may be some practical reasons why procedural rules have not yet been articulated. For example, to determine whether a case may be treated as a simple case requires a substantive review, including determining the affected market/s and verifying market share data.
Under MOFCOM’s current review process, a case must first go through a pre-acceptance process which is handled by MOFCOM’s Consultation Division, which is responsible for determining the completeness of the filing materials.
In order to decide on whether a case is simple or not at the pre-acceptance stage, the case review divisions (i.e., the Legal Division and the Economic Division) will have to participate in the process. Otherwise, having regard to the limited administrative resources at the Consultation Division, conducting a substantive review at the pre-acceptance stage may further prolong the pre-acceptance period. Moreover, if the case review divisions do not participate in the preview process, it will be difficult for them to review and clear the case within a month after a case is officially accepted.
Therefore, to implement an efficient review process, the case review divisions may have to step in early in the process and further collaboration between the Consultation Division and the case review divisions may be necessary. This may fundamentally change the way the different divisions are currently functioning. Another way to solve this problem may require accumulation of enough "precedents" and the creation of a database so that MOFCOM can easily refer to previous cases or industry data in the same market to make a decision.
What will be the next step?
It is speculated that at the next step, MOFCOM will promulgate the procedural rules or guidelines for handling simple cases. It is also possible that for simple cases, MOFCOM may even narrow the scope of information required from the notifying parties.
In general, enactment of the Provisions sends a very positive signal demonstrating that MOFCOM has been striving to improve efficiency. In practice, even before the Provisions were promulgated, an increasing number of cases handled by our firm were cleared by the end of Phase 1. We believe that the simplified procedure, once officially established, will substantially change the current review process, and will benefit companies doing transactions that require merger control clearance in China.