Notification and clearance timetableFiling formalities
What are the deadlines for filing? Are there sanctions for not filing and are they applied in practice?
The Anti-Monopoly Law (AML) does not provide any deadlines for filing, but it provides that notifiable transactions cannot be closed without being notified to and cleared by the authority.
Undertakings that fail to notify a qualifying transaction to the State Administration for Market Regulation (SAMR) may be subject to various penalties. SAMR has the power to order the undertakings to cease the implementation of the concentration, dispose of shares or assets, or transfer businesses within a given time limit and adopt other necessary measures to restore the pre-merger market situation. SAMR may also impose a fine of a maximum of 500,000 yuan. The more serious implication for most businesses is the adverse impact on relations with SAMR, potentially on a long-term basis.
Both the Ministry of Commerce (MOFCOM) and SAMR’s published decisions for failure to file to date involve not only domestic transactions and Sino-foreign transactions, but also foreign-to-foreign transactions.
In 2014, MOFCOM adopted its first public failure to notify decision. It imposed a fine of 300,000 yuan on Tsinghua Unigroup for failure to notify its acquisition of RDA Microelectronics (both are Chinese companies). Fines were imposed notwithstanding the fact that MOFCOM found that the transaction had no adverse impact on competition in China, making it clear that ‘lack of impact’ on competition is not a basis for not filing in China if the transaction constitutes a concentration of undertakings and the turnover thresholds are met.
In 2017, MOFCOM adopted its first decision involving a foreign-to-foreign transaction for failure to notify. Canon was fined 300,000 yuan for failure to file its acquisition of Toshiba Medical. The case involved a multistep transaction. There have been several cases involving foreign-to-foreign transactions since then. For example, in 2017, MOFCOM announced a fine of 150,000 yuan on OCI Corporation for failure to file its acquisition of Tokuyama Malaysia, and in 2018 SAMR fined Paper Excellence BV, a company registered in the Netherlands, for failure to file its acquisition of Eldorado Brasil Celulose SA, a Brazilian company. In early 2022, Munich Re, a German insurance company, was fined for failure to file its acquisition of Covanta Europe Assets, a company registered in the United Kingdom.
In 2019, SAMR adopted its first decision involving a transaction that closed prior to clearance. As a result, the party with a duty to file, New Hope Investment, was fined 400,000 yuan for implementing the transaction before SAMR approved it.
SAMR has stepped up enforcement against failure to notify reportable transactions since November 2020, especially against companies active in the internet sector. In December 2020, SAMR fined three companies 500,000 yuan respectively for failing to notify reportable transactions involving variable interest entities (VIE). This was the first time that SAMR had taken action against VIE-related transactions. The decisions also marked the first time that SAMR imposed the current maximum fine under the AML.
The Antitrust Guidelines for the Platform Economy (the Platform Guidelines), which were subsequently adopted in February 2021, have reinforced SAMR’s position on VIE-linked transactions, so transactions with VIE-related structures should similarly be notified if the turnover thresholds are met.
In July 2021, SAMR, for the first time, raised competition concerns and imposed remedies for failure to notify a transaction in the Tencent/China Music Corporation deal. In addition to imposing a fine of 500,000 yuan, SAMR ordered Tencent to take remedial measures to restore competition in the Chinese market for online music platforms where the parties horizontally overlapped. The transaction also raised vertical issues. The measures included terminating exclusivity agreements with major music copyright holders, strengthening internal compliance and a reporting duty.
As at March 2022, MOFCOM and SAMR have together published more than 170 decisions for failure to notify. In 2021, SAMR adopted more than 100 failure to notify decisions, most of which concerned the internet sector. This is a record high compared with prior years.
In addition to the focus on transactions involving major internet platforms, the recent cases also reveal that minority stake acquisitions and some offshore joint ventures are subject to close scrutiny. For example, in April 2021, Shanghai Hantao Information Consultation Co Ltd was fined 500,000 yuan for failure to notify its acquisition of a 6.67 per cent stake in a target company.
In relation to offshore joint ventures, since June 2020, SAMR has investigated the establishment of two offshore joint ventures. One concerned a joint venture between Taiwan Cement and OYAK, a Turkish cement company, set up in the Netherlands with no apparent nexus to China. The other involved a joint venture between Didi and Softbank in Japan, which is active in the car-hailing business in Japan. These enforcement activities highlight the authority’s strict stance on failure to notify reportable transactions.
In some cases, the merging parties voluntarily submitted a notification after completing their underlying transactions, and actively cooperated during the investigation with the authority; however, the merging parties were still fined despite these mitigating factors.
Which parties are responsible for filing and are filing fees required?
According to the Notification Form and the Guidance for Notification of Concentrations of Undertakings (amended in 2018 (the Notification Guidance)), the notification of a concentration effected by way of a merger is made by all undertakings concerned in the merger. For a concentration effected by other means, the notification is made by the undertaking that will acquire control or will exercise decisive influence, with the assistance of other undertakings to the concentration. Undertakings involved in the concentration that serve merely as an acquisition or investment vehicle are not considered as an appropriate notifying party.
The Notification Guidance further provides that if two or more of the undertakings have the obligation to notify, the undertakings may jointly notify or appoint one of the undertakings to make the notification. Where parties agree that one of them should notify the transaction on behalf of all of them, the others are not exempt from their obligation to notify. Other undertakings participating in the transaction may submit a notification where the parties obliged to file the notification fail to do so. In addition, it is not unusual in practice for the target to be involved as a joint notifying party.
At present, there are no filing fees.
What are the waiting periods and does implementation of the transaction have to be suspended prior to clearance?
SAMR has a statutory review period of 180 calendar days.
The initial review period is 30 days (Phase I), commencing from acceptance of the filing as complete. In practice, the period between notification and acceptance of the case is unpredictable. The pre-acceptance period normally takes up to six to eight weeks or longer depending on, among other things, the complexity of the transaction, the completeness of the notification, supplemental questions raised by SAMR and the merging parties’ response to those questions. The pre-acceptance period can be shorter (approximately up to four weeks) if the transaction is a simple case. The authority has intensified its pre-acceptance review for data completeness in recent years, which may potentially impact the duration of the pre-acceptance period for both standard and simple cases.
At the end of the initial Phase I review period, SAMR must either issue a written decision to clear the transaction or issue a written notice of ‘further review’. If the notifying party does not receive any written notice of further review at the end of the review period, the transaction is deemed to have been cleared, and the parties are free to implement the concentration.
If the notifying party receives a further review notice, which, unlike in the European Union for example, does not necessarily indicate that SAMR has concerns about the concentration, the review period can be extended for another 90 days (Phase II), commencing from the date of the decision for ‘further review’ of the transaction. In certain circumstances, the 90-day Phase II review period may be extended by another 60 days.
Some conditional clearance decisions show that in practice the total review period can take longer than the maximum statutory review period of 180 days. This is the case, for example, where the authority is running out of time to complete its review owing to complex remedy negotiations. In such a case, the notifying party may need to agree to withdraw and refile the notification, which restarts a further 180-day review period. Recent examples of cases where the parties have withdrawn their notification and refiled include AMD/Xilinx (2022), GlobalWafers/Siltronic (2022), SK Hynix/Intel NAND and SSD Business (2021), Illinois Tool Works/MTS Systems (2021), Danfoss/Eaton (2021), Cisco/Acacia (2021), Nvidia/Mellanox (2020), and Danaher/GE BioPharma (2020).
There is no provision under the AML or its implementing rules for expedited review; however, transactions that qualify as simple cases under the Interim Provisions on the Review of Concentrations of Undertakings typically benefit from a quicker review. The simple case procedure is proving effective so far in shortening the review period. In 2021, simple cases accounted for more than 80 per cent of the authority’s caseload, and nearly all of them were cleared within Phase I.Pre-clearance closing
What are the possible sanctions involved in closing or integrating the activities of the merging businesses before clearance and are they applied in practice?
The completion of a reportable concentration prior to clearance can lead to sanctions. SAMR has the power to order the undertakings to cease the implementation of the concentration, dispose of shares or assets, or transfer businesses within a given time limit and adopt other necessary measures to restore the pre-merger market situation. SAMR may also impose a fine of a maximum of 500,000 yuan. The more serious implication for most businesses is the adverse impact on relations with SAMR, potentially on a long-term basis.
Fines to date have usually been imposed for failure to file, not closing before clearance. In 2019, SAMR imposed fines for the first time for closing before clearance. It fined New Hope Investment 400,000 yuan for implementing its transaction prior to SAMR approval.
Are sanctions applied in cases involving closing before clearance in foreign-to-foreign mergers?
Yes. Sanctions also apply in cases involving closing before clearance in foreign-to-foreign mergers; however, SAMR has yet to adopt a decision involving closing before clearance of a notified foreign-to-foreign merger.
Fines related to foreign-to-foreign transactions have to date been imposed for failure to file, rather than closing before clearance. In 2017, MOFCOM published the first decision involving a foreign-to-foreign transaction for failure to file (ie, Canon’s acquisition of Toshiba Medical). Shortly after that, it fined OCI Corporation 150,000 yuan for failure to file its acquisition of Tokuyama Malaysia in 2017.
In 2018, SAMR fined Paper Excellence BV, a company registered in the Netherlands, for failure to file its acquisition of Eldorado Brasil Celulose SA, a Brazilian company. More recently, in early 2022, Munich Re, a German insurance company, was fined for failure to notify its acquisition of Covanta Europe Assets, a UK-registered company.
What solutions might be acceptable to permit closing before clearance in a foreign-to-foreign merger?
There is no formal hold-separate or carve-out arrangement that might be acceptable to remedy local issues in a foreign-to-foreign merger.Public takeovers
Are there any special merger control rules applicable to public takeover bids?
No. Although there is no official position on this, in practice, the review process can be expedited when a transaction is subject to public takeover bid rules.Documentation
What is the level of detail required in the preparation of a filing, and are there sanctions for supplying wrong or missing information?
Under the AML and the merger control implementing rules, the notification materials to be submitted include :
- a notification form, containing the names of the parties, registered business addresses, scope of business, the identity certificates or registration certificates of the notifying parties, as well as the date on which the concentration will take place – in the case of offshore notifying parties, certificates notarised and authenticated by the relevant local authorities must be submitted;
- an explanation of the transaction’s impact on competition in the relevant market;
- the transaction agreement and other relevant documents;
- the financial and accounting reports for the previous accounting year of the participating undertakings, audited by public accountants; and
- other documents and materials as may be required by the authority.
The Notification Form requires a significant amount of information and documents to be provided, such as details of the parties’ Chinese activities and foreign entities active in the relevant sectors, details of the joint venture (if applicable), general information on other undertakings involved in the transaction (eg, the seller), internal documents and materials prepared by third parties in relation to the transaction, and detailed information on customers and suppliers. This may result in more time and resources being required to prepare a filing. While some of the information required is optional, SAMR may ask for explanations if the optional information is not provided.
‘Simple cases’ are subject to less burdensome information requirements. According to the Guidelines on the Notification of Simple Cases, SAMR will not review a notification as a simple case on its own initiative. Notifying parties that would like their transaction to be treated as a simple case must submit an application to SAMR using a simple case notification form. Some of the information and documents required to be submitted in the standard notification form are not required in the simple case notification form. This, to some extent, eases the administrative burden for notifying parties. Information and documents that do not need to be provided in a simple case notification form include:
- information on the parties’ affiliates, if not active in the business relevant to the notified transaction;
- the business licences and certificates of approval of the parties’ affiliates within China;
- the demand and supply structure of the relevant market and information on the parties’ major suppliers and customers;
- information on market entry;
- information on horizontal or vertical cooperation agreements; and
- potential efficiencies of the transaction.
A simple case notification still requires substantial corporate and competition-related information; in particular, market definition analyses and a full set of data, including total market sizes and the market shares of the parties and their major competitors.
In addition, a public notice form must be submitted alongside the simple case notification form. The notice identifies the notifying parties and includes a summary of their activities, the transaction and the reasons for notifying the transaction as a simple case (with reference to one or more of the criteria for qualifying as a simple case). After the transaction is accepted by SAMR as a simple case, SAMR will publish the public notice form on its website for a period of 10 days for public comments.Investigation phases and timetable
What are the typical steps and different phases of the investigation?
The AML contemplates a two-phase review process, including Phase I (30 calendar days) and Phase II (90 calendar days, which can be extended by another 60 calendar days). The Interim Provisions on the Review of Concentrations of Undertakings provide guidance on the procedures to follow when the authority conducts its review. They also recognise a notifying party’s right to be heard and to make known its views on concerns raised by the authority.
Prior to a formal notification of a concentration, a notifying party may consult SAMR on matters related to the notification. The application for pre-notification consultation is made in writing. This is not a mandatory procedure. In complex cases, for example, where the notifying parties are uncertain as to whether a transaction is reportable or the precise scope of the relevant markets involved is difficult to delineate, it may be helpful to consult SAMR prior to filing. This may facilitate the preparation of the filing and streamline the review process. The decision to consult SAMR is made on a case-by-case basis.
What is the statutory timetable for clearance? Can it be speeded up?
In practice, a large majority of reviews (including ‘no-issue’ cases) extend well beyond the initial 30-day Phase I review period, unless the transaction is a simple case. For a case without significant competition concerns and that does not qualify for simple treatment, the usual time taken from notification to clearance is approximately four to six months, depending on the facts of the case.
It is commonly understood that the delay is largely the result of a combination of factors, such as capacity constraints at SAMR, the complexity of the cases and the broad scope of involvement of other government agencies and third parties that the authority consults during its review process.
Although the Guidelines on the Notification of Simple Cases do not provide any formal guidance regarding the timetable for review of simple cases, this route is proving effective in shortening the review period. The usual time taken from notification to clearance is approximately two to three months, and the vast majority of simple cases are cleared within Phase I. Some cases are cleared shortly after the start of Phase II if SAMR is unable to complete its review within Phase I. SAMR does not usually conduct extensive consultation with stakeholders, such as other government agencies for simple cases as it does for standard cases. This is one of the key factors that facilitate the shortened review.
Administrative time limits have been set for case teams to request information and for notifying parties to respond to information requests. This serves to streamline and speed up the review process.