Since the 2003 issuance of the Provisions on the Takeover of Domestic Enterprises by Foreign Investor ("Old Rule"), the Ministry of Commerce ("MOFCOM") has handled more than 500 pre-merger filings. Among those filings, 85% to 95% of mergers were passed after initial review, while the rest triggered expanded review, and in some cases, hearings. We are not aware of any announced or disclosed merger being rejected by MOFCOM.

Upon the implementation of the Anti-monopoly Law ("AML") on August 1, 2008, the AML and the Rule on Notification of Concentration by Undertakings ("New Rule") form the basis for the new pre-merger filing system, replacing the system under the Old Rule.

New Pre-Merger Notification Thresholds

The New Rule issued on August 3, 2008, consists of five articles focusing on thresholds for pre-merger notification in China. According to the New Rule, an undertakings must report to MOFCOM if a transaction triggers either of the following thresholds:

(1) The total global turnover for the previous fiscal year for all parties to the transaction exceeds RMB 10 billion (approximately USD 1.46 billion), and at least two of the parties respectively have a turnover exceeding RMB 400 million (approximately USD 58 million) within the territory of the PRC in the previous fiscal year; or

(2) The total turnover in the territory of the PRC for the previous fiscal year for all parties to the transaction exceeds RMB 2 billion (approximately USD 292 million), and at least two of the parties respectively have a turnover exceeding RMB 400 million (approximately USD 58 million) in the territory of the PRC in the previous fiscal year.

At an antitrust conference in July, a MOFCOM official indicated that around 3% of the total registered business entities in China would trigger the threshold for PRC turnover for individual parties if it were set at RMB 300 million, representing approximately 14,760 foreign and domestic companies.

Significantly, under Article 4 of the New Rule, even if a transaction does not trigger either of the notification thresholds, MOFCOM still has the right to conduct pre-merger investigation if the transaction is shown by MOFCOM to have the "effect of eliminating or restricting competition."

Approval System under AML and New Rule 

MOFCOM has indicated it will soon form an "Anti-monopoly Bureau" on the basis of its current "Anti-monopoly Investigation Office," which will be a permanent authority specialized in investigating and reviewing all pre-merger notifications under the AML after August 1, 2008. The AML has provided principles for disapproving pre-merger filings in Article 28, namely – any concentration by undertakings that will or may eliminate or restrict market competition. During an antitrust conference, a MOFCOM official noted that the following examples where a merger might "eliminate or restrict market competition": 

  • Increases in barriers to market access;
  • Reductions in opportunities for other competitors to enter into the market;
  • Weakening of other competitors' desire to enter into the market;
  • Elimination of competitors;
  • Strengthening of controlling power of the market by the company with a dominant position in the market.

Under the AML, applications are usually completed and approved within 30 days after the submission. Under the New Rule, MOFCOM will approve those cases that obviously do no harm to competition in an "expedited initial reviewing period." The investigation may be extended to 90 days after submission if MOFCOM determines that further investigation is necessary. According to the AML, MOFCOM has been authorized to issue a final extension period of an additional 60 days upon written decision. MOFCOM should issue its final decision of investigation in the following forms:

  • Approve
  • Disapprove
  • Approve with condition

Implementation

The critical question will be how the AML and the New Rule are actually implemented in practice. In this regard, expected written decisions in cases of disapproval, or approval with conditions, will be useful tools.