The shifting alliances concept is derived from EU competition law. According to Paragraph 80 of the European Commission Consolidated Jurisdictional Notice under Council Regulation 139/2004/EC on the control of concentrations between undertakings (2008/C 95/01), where there is no stable majority in a decision-making procedure and the majority can on each occasion be any combination of minority shareholders, it cannot be assumed that the minority shareholders (or a certain group thereof) will jointly control an undertaking.(1) For example, where three shareholders in an undertaking each own one-third of its share capital and elect one-third of its board of directors, the shareholders will not have joint control, as decisions must be taken on the basis of a simple majority.
According to this concept, a shifting alliance should arguably not be deemed a concentration of business operators, as there is no transfer of rights of control. Further, where a shifting alliance results in the transaction parties having no rights of control over the target company, no antitrust filing should be required. In this context, shareholders can save as much time and money as possible with regard to a transaction and promote it to a substantive stage relatively quickly. However, it is only where clear provisions concerning shifting alliances exist that shareholders and the parties to a transaction can avoid any illegal consequences or adverse effects.
In theory, a concentration of business operators is to some extent an aggregation of their market power, and the effect of this aggregation must be revealed through the controlling power of the transaction parties over the target company. As in the above example, this could be the case where the proportion of shares held by the shifting alliance parties makes it impossible for any shareholder to exercise control over the target company based on its proportion of equity, which must be less than 50% (ie, where it has a non-controlling minority interest). Further, a target company's corporate governance structure and rules generally make it impossible for a shareholder to achieve control over it – for example, where:
- shareholders directly or indirectly hold 50% or less of the voting rights in the target company and cannot form a majority vote in the shareholders' general meeting; or
- the shareholders directly or indirectly hold more than 50% of the voting rights or other similar interests of the target company, but cannot pass or reject decisions concerning:
- the appointment or dismissal of senior executives;
- financial budgets;
- business plans; or
- other strategic operations decisions.
In these circumstances, members of a shifting alliance should not be deemed as having market power aggregation in the context of the Anti-monopoly Law, as they cannot control or implement a decisive influence on the target company.
However, in practice, shifting alliances are not explicitly provided for in the Anti-monopoly Law or its supporting regulations. In order to minimise the related legal risks of a transaction or any adverse effects on their reputation, transacting parties may file the transaction with the Ministry of Commerce (MOFCOM) after pre-consultation or file it directly therewith, even where it is essentially impossible for counterparties to control a target company. However, in certain relatively urgent transactions, such an approach may delay the transaction's progress.
Therefore, in order to reduce the uncertainty of a transaction and its associated costs, as well as advance its progress, the shifting alliances concept should be incorporated into China's antitrust filing rules so as to present filing parties with more explicit guidance in this regard.
On September 8 2017 MOFCOM promulgated the Measures for the Review of Concentrations of Business Operators (revised draft) for consultation. However, the revised draft still lacks provisions on shifting alliances. In this regard, a number of professionals have submitted comments, which will hopefully help to further clarify that under certain circumstances, business operators cannot be controlled by shareholders (ie, where no single shareholder (whether alone or jointly) meets the control or decisive influence criteria). Rather, the strategic decisions of the business operator may be covered by the shifting alliances concept under certain circumstances, which is consistent with the practice of other major antitrust jurisdictions.
Shifting alliances should be subject to rules. For example, it could be presumed that shareholders (or a group of specific shareholders) have no separate or joint control over or decisive influence on a business operator where:
- any shareholder of the business operator does not have controlling rights under the Anti-monopoly Law and the revised draft;
- any shareholder of the business operator cannot exert a decisive influence on the business operator, including in the course of voting; and
- one or several shareholders cannot consistently obtain a majority and each majority decision comprises a random combination of shareholders.
In view of the above, it is clear that an assessment of whether a certain transaction's structure constitutes a shifting alliance in practice is complex. Article 8 of the Measures for the Declaration of a Concentration of Business Operators stipulates that:
"Before the formal declaration, the business operators involved in the concentration may apply to the MOFCOM for Pre-Consultation of the issues relating to the declaration of concentration. The Pre-Consultation application shall be made in writing."
Further, Article 9 of the Guiding Opinions on the Declaration of Concentrations of Business Operators stipulates that:
"Before the Anti-monopoly Bureau decides to put any concentration of business operators on file for review, the business operators concerned may apply to the Anti-monopoly Bureau for Pre-Consultation regarding a transaction of concentration of business operators that has been reported or will be reported, in which case the Anti-monopoly Bureau shall provide guiding opinions on the issues of concern to the consultation applicants based on the information furnished thereby."
These regulations may be the most effective way of solving the problem of whether a transaction has a shifting alliances-type structure or even whether a transaction need be filed. Simultaneously, if a transaction is relatively urgent, the parties can prepare the filing materials at the same time as preparing for the discussion on whether MOFCOM requires the transaction to be filed.
The relevant Anti-monopoly Law enforcement agencies should consider the shifting alliances concept in future in order to further improve the revised draft of the Measures for the Review of Concentrations of Business Operators. Acknowledging this concept at the legislative level will minimise the legal risks which stem from the current uncertainty and will finally place China's antitrust system among those of world's most advanced anti-monopoly jurisdictions.
For further information on this topic please contact Hao Zhan, Ying Song or Stephanie Wu Yuanyuan at AnJie Law Firm by telephone (+86 10 8567 5988) or email (email@example.com, firstname.lastname@example.org or email@example.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.?
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