On February 6, 2009, the PRC Ministry of Commerce (MOFCOM), the authority responsible for the pre-concentration review of transactions, published on its website a draft regulation associated with the concentration control regime of the PRC Anti-Monopoly Law (AML) for public comments. The draft regulation is entitled, “Interim Measures for the Investigation and Handling of Suspected Monopolistic Behavior of Business Operators Engaging in Concentration Transactions That Fail to Meet the Notification Criteria” (Draft Investigation Measures for Suspected Transactions). Comments on this regulation must be submitted to the Anti-Monopoly Bureau (AMB) under MOFCOM before March 6, 2009.  

Prior to the issuance of the Draft Investigation Measures for Suspected Transactions, MOFCOM made available for public comment a total of five draft regulations relating to the enforcement of the AML. Two of these drafts are closely related to the Draft Investigation Measures for Suspected Transactions. This edition of the China Update will first distinguish the Draft Investigation Measures for Suspected Transactions from the other two similar draft regulations, then brief you on the highlights of the Draft Investigation Measures for Suspected Transactions, and finally present you with our observations. A translation of the full text of the Draft Investigation Measures for Suspected Transactions is attached for your reference.  

  1. Relationship with the Other Two Draft Regulations

On January 19, 2009, MOFCOM published on its website the draft Interim Measures for the Investigation and Handling of Concentration Transactions Carried Out By Business Operators Failing to Lawfully Submit Notifications (the Draft Investigation Measures for Failure to Submit Notifications) and the draft Interim Measures on the Collection of Evidence on Suspected Monopolistic Behavior of Business Operators Engaging in Concentration Transactions That Fail to Meet the Notification Criteria (Draft Evidence Collection Measures) for public comments. These two draft regulations are closely related to the Draft Investigation Measures for Suspected Transactions.

As indicated by their full names, the Draft Investigation Measures for Suspected Transactions differs from the Draft Investigation Measures for Failure to Submit Notifications in that the former deals with transactions that fail to meet the notification criteria, while the latter focuses on transactions that have met the notification criteria, but for which the involved business operators have failed to lawfully submit their notifications. However, both proposals share a range of similarities. For example, they both are intended to address the “investigation and handling” of transactions. That is, they primarily provide for relevant procedures, methods of investigation, and the possible decisions that MOFCOM may render upon the completion of investigation. Although the Draft Investigation Measures for Suspected Transactions and the Draft Evidence Collection Measures both are aimed at concentration transactions that fail to meet the notification criteria, they represent two different stages of the inquiry that MOFCOM would undertake in dealing with a transaction that fails to meet the notification criteria, but may raise antitrust issues. The Draft Evidence Collection Measures require that MOFCOM first collect evidence regarding the transaction and its affect on competition. If the evidence collected indicates that the transaction will or may have the effect of eliminating or restricting competition, MOFCOM must launch a more indepth investigation into the transaction. The Draft Investigation Measures for Suspected Transactions address the issue of how MOFCOM will conduct this investigation and remedy any anticompetitive effect the transaction might cause.  

  1. Highlights of the Draft Investigation Measures for Suspected Transactions

The Draft Investigation Measures for Suspected Transactions have many aspects in common with the Draft Investigation Measures for Failure to Submit Notifications. Similar provisions cover the measures to be taken during an investigation, the handling of the transaction upon investigation, the business operators’ right to defend themselves, the delivery of legal documents, and the obligation to maintain confidentiality.  

However, the Draft Investigation Measures for Suspected Transactions provide a number of new rules compared with the Draft Investigation Measures for Failure to Submit Notifications.  

For example, the Draft Investigation Measures for Suspected Transactions specify the time frame for MOFCOM’s investigation of a transaction. Article 4 of the Draft Investigation Measures for Suspected Transactions requires that MOFCOM complete an investigation into a possibly anticompetitive transaction within the time frame stipulated in the AML. That is, MOFCOM has an initial period of 30 days and an additional period of 90 days to conduct an investigation. Under special circumstances, the time frame may be extended by an additional 60 days. The Draft Investigation Measures for Failure to Submit Notifications does not include any similar time frame, or indeed any time frame at all.  

In addition, the Draft Investigation Measures for Suspected Transactions introduce the consultation mechanism into the investigation procedures. If a suspected concentration is under investigation, the business operators carrying out the transaction may apply for consultations with MOFCOM regarding the investigation.  

Further, the Draft Investigation Measures for Suspected Transactions expressly state that MOFCOM may hold hearings as it deems necessary or as applied for by the involved business operators or interested parties, which is not provided in the Draft Investigation Measures for Failure to Submit Notifications.  

Most importantly, the Draft Investigation Measures for Suspected Transactions stipulate the legal consequences for concentration transactions under investigation. Obviously, transactions without anticompetitive effects would be granted the approval to proceed with the transaction. If the transaction under investigation is found to be anticompetitive, but it has not yet been consummated, it may be prohibited or approved with certain restrictions imposed by MOFCOM. If the transaction under investigation is found to have or potentially may have anticompetitive effects, and it has already been consummated, the involved business operators may faced with the severe sanctions stated in Article 48 of the AML. Specifically, MOFCOM may order the business operators to cease the transaction, dispose of the involved equity, assets or business within a certain time frame, or take other necessary measures to restore competition. Additionally, the business operators may be faced with a fine of up to RMB 500,000.  

  1. Observations on the Draft Investigation Measures for Suspected Transactions

The Regulation on the Notification Criteria for Concentration Transactions Carried Out by Business Operators (Notification Criteria Regulation) establish the notification threshold for business operators, one that provides relatively objective guidance for business operators to assess their proposed transactions. Nevertheless, this does not lead to the conclusion that transactions that do not meet the criteria set forth in the Notification Criteria Regulation are outside of the scope of the concentration control regime. On the contrary, the Notification Criteria Regulation empowers MOFCOM to examine the competitive effects of any concentration transaction even that it fails to meet the criteria.  

As stated above, the Draft Investigation Measures for Suspected Transactions, together with the Draft Evidence Collection Measures, establish the framework used to evaluate the competitive effects of transactions that fail to meet the official notification criteria. The two draft regulations lay out an entire set of specific procedures relating to evidence collection, investigation, and final decisions. They reflect MOFCOM’s intention to capture any transaction with anticompetitive effects, regardless of whether it has met the notification criteria.  

Such a regime increases the risk of transactions conducted by business operators being caught by the antimonopoly review rules in China. As such, we believe that to ensure a smooth transaction, business operators considering a deal will need to be more cautious in complying with the Chinese concentration control rules. Before entering into a proposed transaction, if the involved business operators are not certain on whether they have met the notification criteria, even when they are equipped with the calculation rules stated in other draft regulations, they may use the preconcentration consultation to obtain an opinion from MOFCOM regarding whether they need to submit a notification. For transactions that may attract MOFCOM’s attention, the involved business operators may also actively submit their notifications to MOFCOM, in order to obtain the antimonopoly clearance as soon as possible. Even if a business operator has already carried out the transaction, and MOFCOM has subsequently collected evidence or conducted an investigation, the business operator may cooperate with MOFCOM during the process, and prove to MOFCOM that its transaction does not have anticompetitive effects.

(Unofficial Translation by Hogan &Hartson LLP)  

Attachment  

Interim Measures for the Investigation and Handling of Suspected Monopolistic Behavior of Business Operators Engaging in Concentration Transactions That Fail to Meet the Notification Criteria  

(Draft for Comments)  

Article 1 Purpose of These Interim Measures  

The Interim Measures for the Investigation and Handling of Suspected Monopolistic Behavior of Business Operators Engaging in Concentration Transactions That Fail to Meet the Notification Criteria (the Interim Measures) are drafted in accordance with the Anti-Monopoly Law of the People’s Republic of China (hereinafter referred to as the AML) and the Regulation of the State Council on the Notification Criteria for Concentration Transactions Carried Out by Business Operators (hereinafter referred to as the Regulation), for the purpose of regulating the investigation and handling of concentration transactions that fail to meet the notification criteria, but which are suspected of having or potentially having the effect of eliminating or restricting competition.  

Article 2 Notice on Initiating Investigation  

If the Ministry of Commerce of the People’s Republic of China (hereinafter referred to as MOFCOM) decides to investigate a concentration transaction that fails to meet the notification criteria, but which is suspected of having or potentially having the effect of eliminating or restricting competition, according to the Regulation and the Interim Measures for the Collection of Evidence on Suspected Monopolistic Behavior of Business Operators Engaging in Concentration Transactions That Do Not Meet the Notification Criteria, MOFCOM must notify the business operators under investigation in writing about its decision, and inform them of the documents and materials that they are required to submit.  

Article 3 Measures for Investigation  

When lawfully carrying out an investigation, MOFCOM may take relevant measures, including those specified in Article 39 of the AML, and may, depending on its needs, solicit opinions from other entities or individuals, such as other government departments, industry associations, business operators, or consumers.  

Article 4 The Obligation of Relevant Parties to Collaborate  

The business operators under investigation, interested parties, and other relevant entities or individuals must collaborate with the investigation in accordance with Article 42 of the AML.

Article 5 Time Frame for the Investigation  

When carrying out an investigation, MOFCOM must refer to the AML’s provisions on the time frame specified for investigating concentration transactions carried out by business operators.  

Article 6 Consultations  

If the involved business operators have not completed their transaction at the time of the investigation, such business operators may request to consult with MOFCOM.  

The business operators under investigation may promise in writing to suspend their concentration transaction within the time frame specified by MOFCOM. If the business operators have done so, MOFCOM must use its best efforts to complete its investigation within the time frame mentioned above.  

Article 7 Risks on Continuing to Carry Out Concentration Transactions  

If the business operators under investigation have not completed their transaction and continue to carry out the transaction before MOFCOM decides, in accordance with these Interim Measures, on how it will handle the case, the business operators involved will assume all the risks arising from MOFCOM’s decision, in accordance with Article 48 of the AML.  

Article 8 Factors to Consider  

MOFCOM must determine whether the concentration transactions carried out by business operators, that fail to meet the notification criteria, have or might have the effect of eliminating or restricting competition in accordance with the factors specified in Article 27 of the AML.  

Article 9 Procedures of the Hearings  

During its investigation, MOFCOM may initiate or organize hearings upon requests from the business operators under investigation or interested parties. The procedures of the hearings must be carried out according to the provisions of the Interim Measures for the Review of Concentration Transactions Carried Out by Business Operators.  

Article 10 Suspension of Investigation  

If the business operators under investigation agrees to take measures to remove the effect that their transaction has or may have on eliminating or restricting competition within the time frame set forth by MOFCOM, MOFCOM may deal with such cases in accordance with Article 45 of the AML.

The specific procedures of and requirements relating to the agreement [mentioned above] of business operators must be established in accordance with the Interim Measures for the Review of Concentration Transactions Carried Out by Business Operators.  

Article 11 Handling of the Case Upon Investigation  

During the investigation, MOFCOM must make a decision on handling the case according to the following:  

  1. If the transaction has not been consummated, and it has or may have the effect of eliminating or restricting competition, MOFCOM may make its decision on handling the case in accordance with Articles 28 and 29 of the AML.
  2. If the transaction has been consummated, and it has or may have the effect of eliminating or restricting competition, MOFCOM may make its decision on handling the case in accordance with Article 48 of the AML.
  3. If the transaction does not have the effect of eliminating or restricting competition, or if the business operators under investigation have fulfilled the agreements they made, in accordance with Article 10 of these Interim Measures, to remove the possible effect that their transaction has or may have on eliminating or restricting competition, MOFCOM must cease its investigation.  

Article 12 Business Operators’ Right to Defend Themselves  

MOFCOM must provide the business operators under investigation with an opportunity to state their opinions or defend themselves.  

Article 13 Announcement to the Public Upon Investigation  

MOFCOM must notify the business operators under investigation about the decision it makes, in accordance with these Interim Measures, on handling the case.  

MOFCOM must timely announce to the public its decisions on prohibiting business operators from carrying out concentration transactions or on imposing additional restrictive conditions on such transactions.  

Article 14 Delivery  

Necessary deliveries of written documents to the business operators under investigation must be made in accordance with the relevant provisions of the Civil Litigation Law of the People’s Republic of China.  

If MOFCOM delivers the documents through a public announcement, it must announce the documents to be delivered on its official website. The announcement will be deemed as delivered two weeks after the announcement date. With respect to announcements made to other countries, they will be deemed as delivered six weeks after the announcement date.  

For deliveries made via announcements to Taiwan, Hong Kong, and Macau, the provision on overseas delivery mentioned above applies.  

Article 15 Obligation to Maintain Confidentiality  

MOFCOM, the business operators under investigation, and other entities and individuals shall maintain confidentiality over trade secrets obtained during the investigation, except for disclosures required by laws and regulations, or those permitted through consent provided in advance from the right owner of the trade secrets.  

Article 16 Enforcement Authority  

The Anti-Monopoly Bureau of MOFCOM is responsible for the implementation of these Interim Measures.  

Article 17 Right of Interpretation  

These Interim Measures are interpreted by MOFCOM.  

Article 18 Effective Date  

These Interim Measures take effect on [Date].