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The Anti-monopoly Law (AML), which came into force on August 1, 2008, introduces a new legal regime of merger control. Alexandre Vincent and Elaine Zhu from CMS argue the implementation of the notifiable concentrations should be suspended until clearance by MOFCOM.

According to Article 21 of the AML, any concentration between business operators meeting jurisdictional thresholds provided by the State Council is required to be notified to the competent Anti-monopoly Enforcement Agency for merger control, – the Ministry of Commerce (MOFCOM), for review.

It is compulsory to notify concentrations which trigger the jurisdictional thresholds. The notification is a pre-concentration procedure and has a suspension effect. Companies which put a concentration into effect (i) without filing a notification, (ii) despite an obligation to suspend such concentration until clearance has been given, (iii) despite a prohibition decision or (iv) in breach of an ancillary condition to a clearance decision, will face serious legal liabilities, including a fine of up to RMB500,000 (US$73,000).

The AML itself is silent on the jurisdictional thresholds but empowers the State Council to issue further implementing rules on this. Such a mechanism is more flexible for the government authorities to adjust the thresholds from time to time, according to market changes.

The State Council issued a draft of the Rules on the Notification for the Concentration of Business Operators on March 27, 2008 to collect public comments. In order to make it more practical for business operators to comply with the merger control rules of the AML, the draft rule attempted to clarify some substantive and procedural issues which are not addressed in the AML, including the jurisdictional thresholds.

On August 3, 2008, the State Council promulgated the final rule with a different name – the Rules on the Notification Thresholds for the Concentration of Business Operators (Threshold Rule), which became effective on the same date. It is disappointing that the long-awaited Threshold Rule only contains five articles, which only focuses on the jurisdictional thresholds. Other important issues addressed in the earlier draft, such as the definition of “control” and “decisive influence”, confidentiality and expedited preliminary review, were removed from the final rule.

Concentration

As stated in Article 2 of The Threshold Rule, transactions that constitute a concentration of business operators, include:

• mergers;

• equity or asset acquisitions, through which the acquirer obtains control over other business operators; or

• contracts or other arrangements, through which the acquirer obtains control of or decisive influence over other business operators.

The Threshold Rule merely repeats the same provision in the AML but does not provide any further clarification.

To consider whether an acquirer will have control of or decisive influence over other business operators, it is necessary to analyse all the rights (such as voting rights) that the acquirer is able to exercise as a result of the concentration. However, to what extent the acquirer is regarded as having control of or decisive influence over other business operator is not clearly defined in the AML. In the draft rule the definitions of “control” and “decisive influence” were given¹ which may still be useful for reference purposes although they were eventually removed from the Threshold Rule. Further implementing rules are expected to clarify this issue.

Jurisdictional Thresholds

The Threshold Rule provides that a concentration must be notified if it meets Threshold 1 and either one of the two parts of Threshold 2²:

Threshold 1: The turnover in China of at least two parties to the concentration exceeds RMB400 million each in the last fiscal year;

AND

Threshold 2: The total worldwide turnover of all parties to the concentration exceeds RMB10 billion in the preceding fiscal year;

OR

The total turnover in China of all parties to the concentration exceeds RMB2 billion in the preceding fiscal year.

The Chinese authorities, in line with international practice, choose the turnover thresholds applicable to all sectors. Not only the worldwide turnover but also the China-wide turnover of the parties is taken into consideration. Turnover is an important factor to objectively reflect a business operator’s market power and is easier and more definite for business operators to obtain and analyze.

The new turnover thresholds require that the China-wide turnover of at least two parties to a concentration should exceed RMB400 million each (Threshold 1). Therefore, a transaction between two companies, one with a large presence in China but the other with a small scale business in China, which probably raises less competition concerns, may not be subject to notification. This is seen as an improvement to the previous jurisdictional thresholds under foreign merger and acquisition rules, which only referred to one party’s business in China.

A third threshold of market share in the earlier draft rule³, has also been removed from the final Threshold Rule. The authorities received a high number of complaints about this threshold who complained it caused legal uncertainty. The impracticalities for a business operator to measure their market share correctly triggers another difficult issue, that being the precise method of defining a relevant market, which has not yet been clarified in law.

Calculation of Turnover

To make the turnover thresholds more practical for business operators to follow, further guidelines on the method of calculating turnover are still expected to be issued. Although this issue has not yet been clarified by law, the turnover of the whole corporate group of a transaction party is calculated according to the existing practice of MOFCOM.

In principle, the jurisdictional thresholds apply to all business sectors. Article 4 of the Threshold Rule sets out that due to the special characteristics of financial industries, such as banking, insurance, securities and futures, the calculation of turnover for these industries will follow further implementing rules to be issued by MOFCOM.

MOFCOM’s Discretionary Powers

It should be noted that even a concentration which does not meet the jurisdictional thresholds may still be subject to review by MOFCOM if it finds that the concentration has or is possible to have the effect of eliminating or restricting competition on the basis of duly obtained evidence⁴.

Criticisms include the discretionary powers of MOFCOM that will cause uncertainty. It is unclear in the the Threshold Rule what extent the evidence is considered “sufficient” in order to prove that a concentration below the thresholds has or is possible to have the effect of eliminating or restricting competition. The procedures, methods and time limit of collecting evidence by MOFCOM are not addressed. Such uncertainties could therefore make business operators act overly cautious.

Conclusion

The Threshold Rule is the first supportive rule issued for the implementation of the AML. Although it still leaves important issues open, it makes progress in the overall legislation process. Further relevant guidelines or rules are expected to be formulated and promulgated to give a clearer picture for business operators to follow.

The above article reflects the competition law legal framework as of 20 August 2008.

About the Authors

Alexandre Vincent, a Senior Associate at CMS Shanghai office, is a member of the firm’s Commercial Group. Elaine Zhu, an Associate, is a member of the firm’s Commercial Group in the Shanghai office.

Endnotes

1. An acquirer is regarded as having control of another business operator if it:

(1) owns more than 50% or majority voting shares or assets of another business operator;

(2) is in actual control of a majority of the voting rights of another business operator; or

(3) is decisive to the appointment of no less than half of the board members of another business operator.

2. If an acquirer is able to decide the production and operation of another business operator, it is deemed as having a decisive influence over another business operator.

3. Article 3 of the Threshold Rule.

4. The market share in China of the parties to a concentration exceeds 25% as a result of the concentration.

Article 4 of the Threshold Rule.

This entry was posted on Wednesday, September 17th, 2008 at 5:05 pm and is filed under China Legal News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.