Chinese Ministry of Commerce ("MOFCOM") recently adopted final versions of several important guidelines concerning the merger control regime to be applied under China's Anti-Monopoly Law ("AML"), and also published a number of additional draft measures for public consultation. These guidelines and draft measures represent another important step towards the establishment of a comprehensive, modern regime of competition law in China.
The AML, which came into force in August 2008, prohibits anti-competitive conduct in three forms: so-called monopoly agreements, abuses of dominant market position and mergers that could have the effect of eliminating or restricting competition. Guidelines issued in January 2009 significantly flesh out the details of the regime in the third of these areas, namely merger control. There are three separate documents:
- Guidelines for Reporting Mergers of Undertakings (the "Reporting Guidelines");
- Guidelines on Reporting Documents and Materials for Mergers of Undertakings (the "Documentation Guidelines"), attaching a standard form for notifying mergers; and
- Guidelines for the Examination of Mergers of Undertakings (the "Examination Guidelines").
MOFCOM has also published on its website, for public consultation, an additional draft guideline and several draft measures, each of which relate to implementation of the merger control provisions of the AML. There are five draft documents:
- Draft guidelines on the definition of the relevant market ("Draft Market Definition Guidelines");
- Draft tentative measures on the investigation of mergers that undertakings have failed to report ("Draft Investigation Measures");
- Draft tentative measures on the collection of evidence relating to mergers that fall below the reporting threshold but which MOFCOM suspects could eliminate or restrict competition ("Draft Evidence Collection Measures");
- Draft tentative measures on reporting mergers ("Draft Reporting Measures"; and
- Draft tentative measures on the examination of mergers ("Draft Examination Measures").
Once finalised and issued, the measures will have the force of law. The guidelines, on the other hand, are stated to be for "reference" purposes and strictly speaking are not legally binding. Nevertheless, the guidelines will remain significant as official explanations of the merger control requirements. Moreover, overlapping content among the various documents will mean that it is important to consider each of the measures and the guidelines before proceeding with a notification.
Each document is considered briefly in turn below.
- The Reporting Guidelines
The Reporting Guidelines deal with various aspects of the notification process. For example, they provide for a pre-notification consultation process which is more formal than the previous system. Parties wishing to consult the Anti-Monopoly Bureau ("AMB") within MOFCOM on any specific issues must now submit a written application as well as documents and materials before engaging in a consultation with AMB officials.
The Reporting Guidelines also clarify which parties must submit the notification and spell out the requirements for accompanying documents and materials. They include a potentially onerous obligation to supply a Chinese translation of any original documents that are not written in Chinese, although the Documentation Guidelines provide some respite in respect of merger agreements and audited financial statements (see below).
- The Documentation Guidelines
The Documentation Guidelines are accompanied by a notification form, which lists 21 sections for completion and submission (in Chinese). Although the precise content and format are different, the form requests similar types of information to that required by Form CO under the EC Merger Regulation. For example, different sections call for an overview of the transaction, an explanation of its effects on competition in the relevant market, an analysis of market entry and details of any efficiencies expected to result from the transaction. Unlike in Europe, there is no "short-form" version of the Chinese notification form.
Under the Documentation Guidelines, if the originals of the merger agreement and audited financial statements are not in Chinese, then either full translations or Chinese-language summaries may be submitted.
The Documentation Guidelines themselves expand upon some of the information requirements listed in the form. For example, they spell out at some length the matters that should be covered by the notifying party's explanations as regards competitive conditions in the relevant market and the potential for market entry. The Documentation Guidelines and notification form also require disclosure of certain other information which is not confined to competition issues, such as the opinions of third parties (including local government, other competent authorities and the public), the expected social effects of the merger and any issues related to national security, industrial policy, state-owned assets or well-known trademarks.
The onerous information requirements of the Documentation Guidelines are likely to result in more time and effort being spent on preparing the notification form and accompanying documents. The real extent of the extra burden will depend in practice on whether the AMB demands that all the information listed in the guidelines be provided in every case, or whether it will be willing to waive some of the requirements in individual cases.
- The Examination Guidelines
The Examination Guidelines briefly set out the process that will be followed by the AMB once a notifying party submits the requisite notification and accompanying materials. The notification must be submitted to the AMB via a new administrative registration centre. If the documents and materials do not meet the AMB's requirements, the AMB may return them to the notifying party or require the submission of supplemental materials.
Once the notification is deemed complete and satisfactory, the AMB will conduct its preliminary substantive examination within 30 days. The AMB may decide to conduct a further in-depth examination, although the Guidelines do not specify the precise grounds for taking such a decision. Any such enquiry must be completed within 90 days from the decision to initiate the in-depth examination. The 90-day period may be extended by no more than 60 days if the parties to the merger agree, the submitted documents are not accurate and need further verification, or relevant circumstances have materially changed since the merger was notified. The notifying party will receive written notice of the final decision. As required under the AML, the AMB will publish its decisions prohibiting or imposing conditions on a merger.
The Chinese regime therefore provides for a two-phase review system similar to that applied by the European Commission under the EC Merger Regulation. Presumably, most cases will be cleared rapidly, within the 30-day first phase. However, MOFCOM may open an in-depth enquiry (lasting several months) into those transactions which it views as problematic.
AMB officials have orally confirmed that any reference to "days" in respect of the statutory time limit for the AMB to complete its examination and investigation of a merger will be construed as "working days" and not calendar days.
The guidelines leave some areas of uncertainty unresolved. For example, they do not prescribe any deadline for filing merger notifications; although, according to the officials of the AMB, the notifying parties are encouraged to file their proposed mergers as early as possible. Nor is it clear when the 30-day period for the AMB's preliminary examination of the merger will begin to run, since (according to the Reporting Guidelines) the issue of a registration receipt for the documents submitted does not mean that those documents are considered satisfactory. The AMB could still require the notifying parties to provide supplementary information at any time until it deems that the substantive requirements are met, and no time limit has been set on the AMB's ability to request supplementary information.
This uncertainty surrounding the start of the first phase timetable will make it more difficult for notifying parties in China to predict when they will be able to implement their merger. The standard practice in Europe is for the European Commission to review a draft notification during the pre-notification contacts and then give its informal confirmation once the draft is considered complete and ready for formal notification. It remains to be seen whether a similar practice will emerge in China.
- The Draft Market Definition Guidelines
These draft guidelines take an approach to market definition which is broadly similar to that applied under European Union competition law. They set out the various factors to be applied when considering the relevant product and geographic markets, focusing in particular on the need to carry out an analysis based on demand- and supply-side substitutability. The draft Guidelines also explain that in complicated cases it may be appropriate to apply the "hypothetical monopolist" test, whereby a market may be defined according to the smallest group of goods and geographic area over which a hypothetical monopolist may maintain a price level that is higher than the competitive price.
- The Draft Investigation Measures
These draft measures contain provisions on how MOFCOM should investigate non-notified mergers that it discovers through sources such as media reports. Under the Draft Investigation Measures, MOFCOM would be able to collect evidence from the parties, stop or unwind mergers, and impose penalties if the merger has been implemented.
- The Draft Evidence Collection Measures
Consistent with the Regulations of the State Council on the Thresholds for Reporting of Mergers of Undertakings (effective from 3 August 2008), this draft measure would allow MOFCOM to conduct an initial analysis of mergers falling below the notification thresholds. If sufficient evidence indicated that a merger could have anti-competitive effects, then MOFCOM could collect further evidence from a variety of sources and may initiate a formal case investigation based on that evidence. Hence, undertakings need to be aware that their merger might be investigated by MOFCOM on competition grounds, even if it falls below the threshold for notification. This tentative measure does not, however, specify the time limit for MOFCOM to conduct its initial analysis of a merger (which might happen after the merger concerned has been consummated).
- The Draft Reporting Measures
This draft measure overlaps to a degree with the Reporting Guidelines already adopted and discussed above. However, it also covers other important issues. For example, the draft sets out a non-exhaustive definition of the concept of "obtaining control" of another undertaking. According to the draft, such control may be obtained through the acquisition of 50% or more of the target's shares or, below that threshold, where the acquirer obtains the ability to make decisions on key operational matters such as management appointments, financial budget, business sales and pricing. Moreover, the establishment by two or more undertakings of a new joint venture is specifically included as a merger of undertakings. This test appears to catch all forms of joint venture meeting the thresholds, without taking into account the nature of the joint venture's business or the extent to which it carries out a business. The draft also lays down basic rules for calculating turnover for the purposes of the AML's notification thresholds, and includes details of the various documents that must be submitted when reporting a merger.
- Draft Examination Measures
This draft measure deals with various important aspects of the merger review process which are not already covered by the Examination Guidelines considered above. For example, it provides for:
- the withdrawal of a notification by the notifying party;
- the powers of MOFCOM to convene hearings and collect evidence;
- MOFCOM's duty to address a written statement of objections to the parties during an in-depth review and to allow those parties to submit a written defence; and
- the possibility of proposing restrictive conditions or modifications to the planned merger, in order to remedy competition concerns.
The Draft Market Definition Guidelines were open for public comment until 31 January, while the deadline for comments on the other four draft measures is 16 February 2009.