The Ministry of Commerce of China (MOFCOM) recently promulgated a new amended merger notification form along with instructions for completing the form. In doing so, MOFCOM aims to further regulate the procedures regarding antitrust review of large mergers, acquisitions and joint ventures; to promote transparency in the notification procedure; and to improve the efficiency of antitrust review.
On 6 June 2012, the Ministry of Commerce of China (MOFCOM) promulgated a new amended merger notification form along with instructions for filling out the form. The aim of this promulgation is to further regulate the procedures regarding antitrust review of large mergers, acquisitions and joint ventures (concentrations); to promote transparency in the notification process; and to improve the efficiency of antitrust review.
The new notification form will formally take effect on 7 July 2012. Cases of concentration of an undertaking that arose before the promulgation of the new notification form are not required to adopt the new notification form.
It seems that MOFCOM has taken into account lessons learned in the four years since the Anti-Monopoly Law (AML) was implemented. Many ambiguous issues in the implementation of the AML have been clarified in the new notification form and the related endnotes. Hereinafter are some examples.
Previously, the identification of notifying parties under various scenarios was unclear. Endnote 2 of the new notification form clearly indicates which parties are the notifying parties in the case of a combination of undertakings (either combination by absorption or combination by new establishment) or formation of a joint venture (either setting up a new joint venture or forming a transaction involving a pre-existing enterprise).
In a merger of undertakings, whether by absorption or by establishment of a new company, the parties to the merger are all undertakings participating in the concentration. If after the concentration two or more undertakings have control over or can exercise decisive influence on the target undertaking, these two or more undertakings are undertakings participating in the concentration.
In the establishment of a new joint venture, the joint controlling parties of the joint venture are undertakings participating in the concentration, while the joint venture itself is not regarded as an undertaking participating in the concentration. Where a joint venture is formed by a transaction on the basis of an existing company, if the existing company itself is a joint venture, the existing company and all undertakings that have control over or can exercise decisive influence on the existing company after the transaction are considered undertakings participating in the concentration. If the existing company is solely controlled by a single undertaking before the transaction, all undertakings that have control or can exercise decisive influence after the transaction are undertakings participating in the concentration. If a single controlling party before the transaction ceases to have control or be capable of exercising decisive influence over an existing company, the existing company is considered to be an undertaking participating in the concentration.
Use of Internal Studies as Data
Many notifying parties have been concerned about whether or not MOFCOM would treat their internal studies as acceptable data. The new notification form includes an item for “studies, analyses and reports that are internally prepared by transaction parties” (internal data) and an item for “studies, analyses and reports that are prepared by third parties” (external data). The arrangement confirms the “best practice” that many firms have been following: internal data are admissible and should be provided.
At the same time, it should be noted that studies “evaluating or analysing the concentration” must be provided if they are “. . . prepared by or for the directors, supervisors and officers (or organisations or individuals exercising similar functions) of the transacting parties . . .” China’s Company Law gives a comparatively wide scope to the class of persons in a company to whom this would apply, including senior management and members of the board of directors or supervisory board (in a European context). Particular care therefore must be taken with this requirement. Investment advisers, business consultants and bankers might provide such reports to senior management of a company without such reports necessarily being prepared by employees of a transacting party for a company’s board. Failure to provide such reports to MOFCOM could lead to fines not only for the company concerned, but also for individuals who conceal relevant reports, in addition to criminal penalties under Article 52 of the AML. The latter states: “[a]s regards the inspection and investigation by the anti-monopoly authority, if business operators refuse to provide related materials and information; provide fraudulent materials or information; conceal, destroy or remove evidence; or refuse or obstruct investigation in other ways, the anti-monopoly authority shall order them to make rectification and impose a fine of less than ¥20,000 on individuals and a fine of less than ¥200,000 on entities. In serious circumstances, the anti-monopoly authority may impose a fine from ¥20,000 to ¥100,000 on individuals, and a fine from ¥200,000 to ¥1 million on entities; where a crime is constituted, the relevant business operators shall assume criminal liabilities.”
Equally, external data for evaluating or analysing the concentration must be disclosed to MOFCOM if they are relevant to the concentration. Such data include studies and reports on the industry or industries involved in the concentration.
What to Supply Absent a Duly Signed Concentration Agreement
The duly signed concentration agreement must be provided at the time of notification. However, if the undertakings submit sufficient evidence to prove that a duly signed concentration agreement cannot be provided at the time of notification, the notification may be filed before the concentration agreement is signed, but only so long as relevant materials, such as a memorandum or framework agreement, a draft concentration agreement or a general offer, are provided. The key terms and conditions of the transaction must be provided to ensure the certainty of the transaction.
These materials must include information necessary for review of the concentration. Whether or not the review is complete, as soon as the concentration agreement is signed the notifying party must provide the concentration agreement to MOFCOM without delay and state the differences and similarities between the concentration agreement and the original notification materials. If after submitting the notification the content of the concentration experiences a material change sufficient to influence MOFCOM’s review and decision, the notifying party must promptly notify MOFCOM and either update the notification or file a new notification (endnote 23 of the new notification form).
Objective Review Factors/Measures Introduced to Quantify Notification/Review Process
It is critical to review the level of market at which the concentration has been reached. Previously there was no direct and objective standard to determine what overlapping relations the notifying parties reached: horizontal or vertical. The National Bureau of Statistics of China (NBSC) issues a code to each product or service that is provided in the market (item 7.1 of the new notification form). If the codes of the products (or services) of the concentrating parties are identical, the concentrating parties concentrate on a horizontal market. The NBSC code thus will help both notifying parties and MOFCOM to objectively assess and determine the level of market at which the concerned parties are concentrating.
In addition, MOFCOM requires that the HHI/CRn index be applied to analyse the impact of the concentration on market competition before or after the concentration. MOFCOM requires that reasons be provided if the notifying party cannot provide the HHI index (endnote 39 of the new notification form).
MOFCOM’s new notification form for concentrations clarifies a number of issues and therefore is of assistance to large corporations seeking clearance of mergers, acquisitions and joint ventures in China. At the same time, the new form imposes a high level of responsibility on notifying parties to ensure they provide full disclosure of significant amounts of information in much the same way (and probably to a greater extent) as required, for example, in Europe. The new form therefore means higher costs and greater scope for mistakes when making such filings in China. Having counsel experienced in dealing face-to-face with the Chinese antitrust authorities and corresponding authorities in other jurisdictions will become even more important in the clearance of multinational mergers and acquisitions.
The English translation of the new notification form is available upon request.