China has been working on an Anti-Monopoly Law (“AML”) for almost a decade, and the latest draft is expected to be finalized and to come into effect during the later part of 2007.
During the interim period, companies should not assume that China lacks an antitrust framework. In April 2003, a law entitled the Provisions on Takeover of Domestic Enterprise by Foreign Parties (the “Takeover Provisions”) was promulgated. That law provides, for the first time, a legal basis for the Chinese government to review the antitrust impact of both international and domestic mergers or acquisitions, even for transactions taking place entirely outside of China. Thus, the Takeover Provisions have been viewed by some scholars as restricting foreign investments by the Chinese government.
Details of implementation of the antitrust provisions of the Takeover Provisions were not set forth or explained, however. Thus, foreign companies faced numerous uncertainties due to a lack of guidance from the Ministry of Commerce (“MOFCOM”).
In order to solve this uncertainty problem, on March 8, 2007, MOFCOM issued the Guideline on Filing of Anti-Monopoly Notification (“Guideline”) detailing the necessary filing procedures for premerger notification, which solved many of the uncertainties previously encountered. However, even with the Guideline, many of the key terms of the Takeover Provisions remain obviously vague and uncertain, and how they are to be defined and applied will be determined in the future.
Requirements for Premerger Notification
Pursuant to the Takeover Provisions and the Guideline, China now has a domestic legal basis for intervening in mergers or acquisitions outside of China. For any mergers or acquisitions that meet at least one of the following circumstances, the overseas acquiring party is required to submit its acquisition plan to the relevant Chinese government authorities for approval:
1. The value of the assets in China owned by either the acquiring party or the acquired party is more than RMB3,000,000,000 (approximately USD388,601,046);
2. The business volume in China of the acquiring party or the acquired party is more than RMB1,500,000,000 (approximately USD194,300,518) in the same year;
3. The market share in China of the acquiring party or the acquired party and its affiliated enterprises has reached 20%;
4. The market share in China of the acquiring party or the acquired party and its affiliated enterprises will reach 25% after the merger or acquisition; or
5. There will be more than 15 foreign-invested enterprises in China in the relevant industries owned by the acquiring party or acquired party directly or indirectly after the merger or acquisition.
It is important to emphasize that as long as one of the circumstances mentioned above is triggered, regardless of whether the mergers or acquisitions take place in China or entirely outside of China, the acquiring party shall be subject to the required premerger notification. For example, in a merger or acquisition involving a U.S. company and a European company, if either company triggers any of the above-mentioned circumstances, the premerger notification is mandatory.
Documents required for Premerger Notification
The Takeover Provisions set forth an extensive list of documents to be submitted in the premerger notification, including an application for the establishment of the foreign-funded enterprise, the articles of association of the foreign-funded enterprise to be established after the takeover, and the prior year financial audit report of the company to be taken over.
However, the Guideline goes further and requires much more documentation, such as copies of the certificate of approval and business licenses for all Chinese subsidiaries and representative offices of the parties to the transaction; an accounting of annual revenues in the relevant China product market(s) during the past two years; copies of certificates of incorporation or the equivalent of the parties to the transaction; and extensive information on the relevant markets(s) including but not limited to market entry costs, legal and practical barriers of market entry, restrictions caused by intellectual property, and information on the status of the parties in the relevant product market. Based upon our experience in premerger notification in China, the documentation requirement is the biggest challenge faced by an applicant due to the lengthy amount of time required for preparation.
Submission and Approval of Premerger Notification Application
The completed application for premerger notification must be submitted to the Antitrust Review Office of the Ministry of Commerce in Beijing, located at #2 Dong Changan Road, Room 3516. The application can be submitted by the applicant on its own or through an attorney licensed in China.
The Antitrust Review Office must make a decision within 30 business days from the date of the submission of a complete and acceptable application. The silence of the MOFCOM after the expiration of the 30-day window shall be deemed to be successful clearance of the premerger notification. However, in case of inquiries by the Antitrust Review Office during the 30-day window, the application period will be extended to 90 days, and the applicant must timely provide the requested information.
To ensure a smooth approval of the premerger notification application, it is recommended that the applicant communicate with the Antitrust Review Office prior to the submission of the application so that what is filed is “accepted” and triggers no inquiries.
Exemption for Premerger Notification
China does allow for exemptions to premerger notification, and the acquiring party or the acquired party may apply to MOFCOM and the State Administration of Industry and Commerce for exemption under any of the following circumstances:
1. The merger or acquisition may improve the conditions for fair market competition;
2. An under-performing enterprise is taken over, and the employment position of the workers of such enterprise are preserved;
3. The merger or acquisition may introduce into China advanced technologies or skilled management personnel and improve a domestic enterprise’s international competitiveness; or
4. The merger or acquisition may improve the natural environment.
The relevant government authorities have full discretion making decisions regarding the aforementioned exemptions. In applying for an exemption, a party must provide supporting evidence simultaneously with the application for premerger notification.
Failure to Apply for Premerger Notification
Premerger notification is currently deemed to be an administrative provision in China. Generally, under the current legal system of China, any non-compliance with administrative provisions will subject the breaching party to administrative penalty.
At the present time, the relevant laws and regulations are silent on the consequences of non-compliance with the legal requirements for premerger notification by either the acquiring party or the acquired party. Under existing general legal principles and precedents, the Chinese government authorities are likely to assess administrative penalties on the breaching party in various forms, including warnings and fines.
The recent creation of the Antitrust Review Office of MOFCOM and the issuance of the Guideline indicate the greater attention from the Chinese government on premerger notification. It further confirms the likely importance of the AML once it becomes effective. Based upon our experience, the Takeover Provisions and the Guideline will likely serve as the foundation for the implementation of the AML.