In an effort to increase the speed and transparency of its merger review process, China has now released initial drafts of two regulations: one aimed at defining “simple” merger cases, and another at greater clarity on remedies for mergers that raise antitrust concerns. 

As we discussed previously in our review of 2012 antitrust developments in China, some commentators view the Chinese process as slower and less open than those in the U.S. or the European Union.  The new draft regulations, which China’s Ministry of Commerce (“MOFCOM”) has now released for public comment, are among several ongoing initiatives to streamline and clarify China’s merger review process, which has been in place only since 2008.

Regulation on Defining “Simple” Cases

The rules that could speed up the merger review process do so by permitting MOFCOM to identify “simple” cases that are unlikely to raise competitive concerns and can therefore be cleared more quickly.  It is not yet clear what consequences will flow from being identified as a “simple” case – the consequences could be access to a short-form merger filing, as in the EU, or other procedures for more efficient decision-making on transactions that do not raise concerns with MOFCOM, including a shorter time period for the review of simple cases. 

The draft regulation – which is not dissimilar to draft proposals recently announced by the European Commission – designates as “simple” three (arguably narrow) cases premised upon the merging parties having low market share post-merger:

  • Horizontal mergers in which the parties together have under 15% share in a relevant market;
  • Vertical mergers in which the parties have (a) a vertical relationship, and (b) under 25% share in the “vertical market”; and
  • Mergers where the parties (a) do not have a vertical relationship, and (b) have under 25% share in all markets.

The remaining “simple” designations are reserved for certain joint ventures, including those that do not engage in economic activity in China, and acquisitions of non-Chinese entities that do not engage in economic activity in China.

There are, however, significant exceptions that provide MOFCOM with broad discretion to perform an in-depth merger review, even where a merger otherwise qualifies as simple or has previously been designated as simple.  For example, MOFCOM will not classify as simple otherwise-eligible mergers where it is difficult to define the relevant market, where consumers or “other relevant business operators” might be harmed, or where the merger might harm Chinese “national economic development.”  (In this regard, the Chinese simple merger regulation diverges from the analogous standard in the EU, which is more focused on consumer welfare than on a merger’s impact on rivals or national interests.)  In addition, even where MOFCOM has previously classified a merger as simple, it can revoke that classification, such as when it receives complaints from third parties or perceives changed circumstances in an industry. 

Given MOFCOM’s powers to withhold or revoke “simple” classification, it will remain to be seen to what extent the regulation operates to speed the process of merger review.  Indeed, at the moment, the speed of merger review appears not to have changed significantly; in the first quarter of 2013, MOFCOM cleared 45 mergers unconditionally – a 24% decline from the 59 mergers MOFCOM cleared in the last quarter of 2012.  Only time will tell whether these reforms actually speed review in cases in which extended review is unnecessary to conclude that the merger will not produce anticompetitive effects.

Regulation on Imposing Remedies

As with the draft regulation on “simple” cases, the draft regulation that outlines merger remedies provides MOFCOM with flexible authority in assessing, enforcing, and modifying remedies it imposes when it determines that a merger poses concerns.  Generally speaking, that process permits the parties to propose their own remedies, and, similar to the process in the U.S. and the EU, MOFCOM may finalize its decision on remedies in consultation with other agencies, third-party businesses, and/or consumers.  MOFCOM then publishes a review decision that becomes the basis for implementing the mandated remedies.

Under the draft regulation, MOFCOM can modify and enforce the remedies after it orders them.  MOFCOM can modify existing remedies upon request of the merging parties, such as when there are significant changes to the transaction or to market conditions.  It can also impose sanctions for noncompliance with MOFCOM’s order.  In that connection, MOFCOM can fine the parties up to 500,000 RMB (approximately $81,000 USD) for noncompliance, and, in serious cases, it can unwind a merger.  This power represents a departure from practice in the U.S., where generally the antitrust authorities would seek a court order to fine parties or reverse a merger.  In addition, the Chinese government may criminally prosecute MOFCOM officials who abuse or neglect their merger enforcement duties.

Importantly, the draft regulation also provides detailed discussion of two different forms of remedies: (1) structural remedies (e.g., divestitures of assets) and (2) behavioral remedies (e.g., mandated access requirements and nondiscrimination provisions), which appear to be used for horizontal mergers in China, unlike in the U.S. or the EU.

As to structural remedies, the regulation provides detailed guidance on how divestitures should be accomplished.  Typically, the divesting party has six months by which to accomplish a divestiture, subject to MOFCOM’s approval, at which point a trustee then locates a proper buyer and concludes the agency-mandated sale, again with MOFCOM’s approval.  In certain instances, MOFCOM can require “fix-it-first” divestitures under which divestitures are accomplished before the merger closes.

The proposed rules addressing behavioral remedies are important because, in recent years, China has demonstrated its willingness to impose behavioral remedies in both horizontal and vertical transactions, as it did last year when hardware manufacturer Western Digital Corp. acquired Hitachi Global Storage Technologies (as we have discussed in a previous alert).  The draft rules may signal that these recent remedies are not isolated events but part of a comprehensive regulatory program that will encompass behavioral remedies going forward.  Under the draft regulation, behavioral remedies will run for ten years unless MOFCOM specifies otherwise.

These draft regulations are, by and large, consistent with the general processes and standards employed in the U.S. and the EU, with several differences, as we note above.  MOFCOM now turns to gathering public comment on those draft regulations.