The PRC Ministry of Commerce ("MOFCOM") has just released its first public decision imposing a fine for failing to notify a transaction under the PRC Anti-Monopoly Law ("AML"). This decision relates to the 2013 acquisition by Tsinghua Unigroup of RDA Microelectronics, which closed earlier this year.
The AML Merger Control System
China's AML includes a mandatory pre-closing merger control system for transactions meeting certain thresholds. These thresholds are very low: each of the buyer and the target must have sales in China in excess of RMB 400 million (USD 65 million), and the combined sales of the buyer and the target must exceed (i) RMB 10 billion (USD 1.5 billion) on a worldwide basis, or (ii) RMB 2 billion (USD 325 million) in China. Thus, any acquisition by a large multinational of a business that generates more than USD 65 million revenues in China must be notified. In addition, the merger control system captures joint ventures without regard to being “full-function” even if they have nothing to do with China.
Failure to notify a transaction can be subject to a fine of up to RMB 500,000 (USD 80,000). In addition, MOFCOM has the power to unwind a transaction although it is unclear whether this power can only be exercised in case the non-notified transaction is anti-competitive.
The Tsinghua Unigroup Decision
MOFCOM announced earlier this year that it would start cracking down on transactions that were not notified, despite meeting the AML thresholds.
The decision released on December 2 relates to RDA Microelectronics’ 2013 acquisition by Tsinghua Unigroup, a transaction valued at almost USD 1 billion. It is unclear when MOFCOM found out about the buyer’s failure to file. According to the decision, the transaction was closed in 2014. MOFCOM found that the transaction did not have adverse effects on competition. It imposed a fine of RMB 300,000 (approximately USD 48,000) for the failure to file.
The Tsinghua Unigroup decision teaches important lessons about how MOFCOM will handle merger filings under the China AML:
- The decision is a clear signal that companies failing to notify their transactions to MOFCOM run a significant risk. The filing form for the notification of transactions under the AML requires the parties to report any transaction in the past 3 years in the relevant market. This may be a way for MOFCOM to obtain information about transaction that were not notified. Complaints from customers and competitors as well as media reports are other potential sources. The fines for failure to notify are very low, compared to the fines that are imposed in other jurisdictions (see our prior alert on gun jumping. More important than the monetary fines is the risk of losing political capital with MOFCOM, a very powerful ministry companies need to work with for all sorts of approvals in their daily operations.
- Certain companies may have decided not to file transactions in China because of the significant delays that MOFCOM’s review can create. MOFCOM has recently implemented a system of simplified procedures to enable certain transactions to be cleared faster. This simplified procedure has only been in place for a few months. While it is clear that the review procedure has been significantly shortened cases benefiting from the simplified procedure (most transactions were cleared in the first 30 days review period), it seems that the pre-acceptance period still is long (between one and two months).
- Interestingly, the Tsinghua Unigroup decision concerned the acquisition of a company by a Chinese state-controlled buyer. This may demonstrate MOFCOM’s desire to show that the AML applies equally to all companies instead of unfairly targeting foreigners.
- The decision concerns a pretty straightforward omission to notify a transaction that has effects in China. It would have been interesting to see whether MOFCOM will go after transactions that technically meet the thresholds but that in substance concerned only offshore activities (for example, a joint venture between 2 multinationals that meets the revenues thresholds but whose object is the sale of products only in Belgium).