This country-specific Q&A provides an overview to merger control laws and regulations that may occur in China.
It will cover jurisdictional thresholds, the substantive test, process, remedies, penalties, appeals as well as the author’s view on planned future reforms of the merger control regime.
This Q&A is part of the global guide to Merger Control. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/merger-control
The governing legislation
The Anti-Monopoly Law of the People's Republic of China (the “AML”), enacted in 2007 and first implemented on August 1, 2008, serves as the foundation of China’s merger control regime.
The follow-up regulations released by the PRC State Council (the so-called cabinet of China) and MOFCOM have clarified the enforcement structure of China’s merger control regime (the “Merger Control Regulations”). Such regulations include but are not limited to the following: Interim Provisions on Standards Used for Simple Cases of Concentrations of Business Operators (February 2014), Guiding Opinions on the Application for Concentration of Business Operators (June 2014), and Provisions on Imposing Restrictive Conditions on the Concentration of Business Operators (for Trial Implementation) (December 2014).
The relevant enforcement authority or authorities.
The merger review authority in China is the Ministry of Commerce of the People’s Republic of China (“MOFCOM”). MOFCOM, via its Anti-monopoly Bureau (“AMB”), is responsible for reviewing the concentration filings of business operators. MOFCOM may, at its own discretion, approve or reject a concentration transaction, either with or without remedy conditions.
Some important aspects and specific features of the merger control regime
Timeline for merger review
In general, Merger review in China can be divided into two stages, the pre-acceptance stage and the formal review stage. The pre-acceptance stage is the time between when a merger filing is made and its formal acceptance by MOFCOM. The time taken in this period is quite unpredictable, and can last several weeks or span several months. On the contrary, statutory deadlines have been set for the formal review process, which shall be strictly abided by MOFCOM. Generally speaking, MOFCOM has up to 180 calendar days for its formal review. For more information about the timeline for merger review, please refer to Section 5 of this Guide.
Unusually long review periods
In China, the length of time for reviews under the normal process is usually longer than in other jurisdictions. This is particularly true for conditional approval cases and prohibition cases. To our knowledge, in some conditional approval cases, the concerned parties whose reviews approach the 180-day limit even have been suggested by MOFCOM to withdraw and refile the transaction, causing the long timeline to be further extended, which was observed in the Glencore/Xstrata deal and the MediaTek/Mstar deal, in which the total review period for both of these cases exceeded 12 months.
MOFCOM may favour behavioural remedies to address potential competition concerns
In practice, MOFCOM utilizes both structural and behavioural remedies to address monopoly concerns, including divestiture of assets, mandatory licensing and “hold separate” provision which requires parties to the concentration to remain as market competitors for a certain period of time. Based on the publicized conditional approval cases, it seems that MOFCOM favours a heavier use of behavioural remedies to address potential competition concerns than their counterparts in most other jurisdictions.
Consideration of non-competition factors in the substantive assessment
MOFCOM usually considers both competition and non-competition factors (e.g. influence on national economic development) in its merger review process. For more details in this regard, please refer to Section 4.2 of this Guide.
National security review is also required for foreign investors' acquisition of actual control over domestic enterprises active in certain sectors.
As detailed in Article 31 of the AML, for foreign investors' acquisition of actual control over a domestic enterprise where national security is involved, a national security review shall be conducted in addition to a merger review.
Is mandatory notification compulsory or voluntary?
Merger filing is compulsory in China. Pursuant to Article 21 of the AML, a concentration transaction meeting the relevant revenue thresholds shall be filed for a merger review.
Is there a prohibition on completion or closing prior to clearance by the relevant authority? Are there possibilities for derogation or carve out?
According to Article 21 of the AML, a concentration transaction meeting the relevant revenue thresholds shall be filed for a merger review, and such concentration shall not be implemented before MOFCOM's clearance.
The scope of the prohibition.
There is no specific rule on the definition of “implementation” in China. It is generally understood that any actions that bring to the buyer actual control over the target company or an ability to influence the daily operation of the target company constitute implementation of a concentration transaction, and therefore are prohibited before MOFCOM's clearance. According to the penalty decisions published on MOFCOM’s official website, MOFCOM has always taken the position that behaviours such as the transferring of shares and the creation of a new legal entity (e.g., a joint venture) would clearly belong to the implementation of a concentration transaction.
The prohibition cannot be easily circumvented.
Traditionally, MOFCOM does not accept "carve-outs" where the assets and legal entities in China are transferred at a date later than the closing of the main transaction, or they are transferred to a trustee. In addition, if the carve-out does not make the China transaction an independent transaction separate from the global transaction, i.e. the two transactions are inter-conditioned and viewed as one transaction, then both transactions need to be cleared by MOFCOM before it can be implemented.
Derogation is not available.
There is no concept of “derogation” in the AML and relevant Merger Control Regulations, and to date MOFCOM has not granted a derogation. Thus, it can be said that derogation is not available in China.
What are the conditions of the test for control?
In China, to determine whether a proposed transaction is notifiable or not requires a two-step analyses: the first prong of the test is to determine whether a transaction is a “concentration” transaction, and the second prong of the test is to determine whether the relevant revenue thresholds are met.
According to the relevant notification rules in China, a transaction is notifiable for merger filing only if it is a concentration of business operators, and a concentration of business operators means any of the following:
- merger between undertakings;
- acquisition of control over other undertaking(s) by an undertaking by way of acquiring shares or assets of the other undertaking(s);
- acquisition of control over, or the possibility of exercising decisive influence on, other undertaking(s) by an undertaking by way of contract or other means; or
- establishment of a joint venture which is jointly controlled by at least two undertakings.
The test for control.
Based on the relevant notification rules, a business operator acquiring control of, or being able to exercise decisive influence on, other business operators through a concentration transaction both belong to the situation of “change of control.” In general, the test for control will consider numerous legal and factual elements. Concentration agreements and the articles of association of the business operators are important bases for judgment, but the control test will also focus on whether there exists any de facto control.
In general, the following factors, among others, shall be taken into consideration when determining whether one business operator will gain control over another business operator through a concentration transaction:
- Purposes of the concentration transaction and future plans;
- The equity structure of the business operator both before and after the concentration transaction and the changes thereto;
- The matters for voting by the general meeting of the business operator, and the voting mechanisms, historical attendance and voting records of the general meeting;
- The composition and voting mechanisms of the board of directors or the board of supervisors of the business operator;
- The appointment and removal of the senior management personnel of the business operator;
- The shareholder-director relationship of the business operator, whether proxies are entrusted to exercise voting rights, whether there are parties acting in concert, etc.; and
- Whether there exist any significant business relationships, cooperation agreements, etc. between the business operator and the other business operator.
What are the conditions on minority interest in your jurisdiction?
There is no shareholding percentage safe harbour in China below which control is deemed not to arise (in the absence of other structural links between the parties).
Based on our experience, there are a great number of situations where the acquisition of minority interests fall under the merger control rules, and for which notification to MOFCOM is required for a merger review. Based on some notification cases whose decisions were released by MOFCOM, the lowest shareholding that was found to amount to control was 10%, which was the case of Teijin Frontier’s proposed acquisition in 2015 of a stake in Zhejiang Johnson Controls Wanfang Textile Technology Co., Ltd.
The assessment of control or decisive influence with respect to the acquisition of minority interests requires a case-by-case analysis. Based on the relevant MOFCOM regulations and the Anti-monopoly Bureau’s practice, an undertaking may be deemed to have control over another undertaking if it has veto rights over the other undertaking with respect to the following matters:
- the nomination, appointment and removal of senior executives;
- financial budgets;
- business plans;
- significant capital expenditures; and/or
- other rights that may influence the other undertaking’s day to day business operations.
Control or decisive influence can be excluded if the minority shareholders’ rights are deemed to only amount to so-called “minority protection rights.” Based on our experience, veto rights over the following matters are usually classified as minority protection rights: amendments to the articles of association, increases or decreases in registered capital, mergers and spin-offs, liquidation or winding up, etc.
What are the jurisdictional thresholds (turnover, assets, market share and/or local presence)?
Notification to MOFCOM for a business concentration is required as long as one of the turnover thresholds below is satisfied. As can be seen from the two turnover thresholds set out below, for the purpose of merger filings in China, in either case, there must be at least 2 business operators whose turnover in China exceeded RMB 400 million in their immediately preceding fiscal years.
- The total amount of global turnover of all business operators involved in such concentration exceeded RMB 10 billion and at least 2 of the business operators’ turnover in China exceeded RMB 400 million in their immediate previous fiscal year; or
- The total turnover in China of all business operators involved in the concentration exceeded RMB 2 billion and at least 2 business operators’ turnover in China exceeded RMB 400 million in their immediately preceding fiscal years.
How are turnover, assets and/or market shares valued or determined for the purposes of jurisdictional thresholds?
The parties taken into account when calculating the turnover of a business operator.
Pursuant to relevant Merger Control Regulations, the turnover of an individual business operator that participates in a concentration shall be the sum of the turnover of the following business operators:
- the individual business operator itself;
- other business operators directly or indirectly controlled by the business operator referred to in Item (1);
- other business operators who directly or indirectly control the business operator referred to in Item (1);
- other business operators directly or indirectly controlled by the business operators referred to in Item (3); and
- other business operators jointly controlled by two or more business operators among those referred to in Items (1) through (4).
And, most particularly, the turnover of an individual business operator that participates in a concentration transaction shall not include the turnover generated by transactions between and among the business operators listed in the preceding Items (1) through (5), and shall not include the turnover of business operators that it has sold or over which it no longer has a controlling power during or before the immediately preceding fiscal year.
Is there a particular exchange rate required to be used for turnover thresholds and asset values?
Usually, when translating the turnover in foreign currencies into Renminbi, the average of the central parity rates announced by the China Foreign Exchange Trading Centre supervised by the People’s Bank of China for the relevant fiscal year shall be applicable.
Do merger control rules apply to joint ventures (both new joint ventures and acquisitions of joint control over an existing business?
There are no separate thresholds for JVs.
There are no known separate thresholds for determining whether a concentration relating to JVs is notifiable or not. The aforesaid merger control rules in China also apply to JVs (both new joint ventures and acquisitions of joint control over an existing business operator).
Which entities or groups of entities should be taken into account for considering whether the jurisdictional thresholds are satisfied?
Generally speaking, the business operators that control a JV company after the transaction and the JV company itself should be taken into account for considering whether the jurisdictional thresholds are satisfied. MOFCOM has issued highly detailed rules in notations to the notification form to be used to identify the parties to a concentration.
Unlike the EU, a JV does not need to be “full-functional” to be notifiable in China.
Neither the AML nor other merger control regulations specify any express requirements under which a JV incorporated as a certain type of legal entity shall be exempted from notification. In the Maersk/MSC/CMA CGM joint venture transaction which was prohibited by MOFCOM in 2015, MOFCOM identified the proposed P3 Alliance as a “tight joint operation,” and concluded that notification to MOFCOM was required for merger review based on the fact that the proposed P3 Alliance would integrate all of the capacity of the concerned parties through the establishment of a network centre. This case highlighted the approach to be taken when analysing the notifiability of JV transactions.
In relation to “foreign-to-foreign” mergers, do the jurisdictional thresholds vary?
It makes no difference with respect to the jurisdictional thresholds whether the transaction is "foreign-to-foreign," i.e., whether the legal entities acquiring and being acquired are all located outside China.
The fact that the business operators participating in a "foreign-to-foreign" transaction are not incorporated in China does not exempt these concerned parties from notifying MOFCOM of such transactions. As long as the concerned parties in a "foreign-to-foreign" transaction can impact competition in China, as indicted by the fact that the relevant China turnover thresholds are met, the transaction is notifiable in China regardless of domicile or place of incorporation of the involved parties.
For voluntary filing regimes (only), are there any factors not related to competition that might influence the decision as to whether or not notify?
As mentioned above, merger filing is only required when the relevant jurisdictional thresholds have been satisfied.
Having said the above, there is also the concept of voluntary filing in China, but this concept is different from other jurisdictions. In China, voluntary filing shall only refer to situations where a business operator, on its own initiative, notifies of a concentration transaction that does not reach the merger filing thresholds.
Additional information: Jurisdictional Test
Some concentration transactions do not require notification to MOFCOM even though the relevant jurisdictional thresholds have been satisfied.
Business operators may be exempted from notification under the following circumstances, because the concentration are treated as re-organization within a group:
- one of the business operators involved in the concentration holds at least 50% of the voting shares or assets of each of the other business operators; or
- at least 50% of the voting shares or assets of each business operator involved in the concentration are held by one business operator not involved in the concentration.
MOFCOM may investigate a concentration transaction even though the jurisdictional thresholds have not been satisfied.
Pursuant to Article 4 of the Provisions of the State Council on Notification Thresholds for Concentrations of Undertakings, promulgated by the PRC State Council on 3 August 2008, where a concentration transaction does not meet the jurisdictional threshold, but facts and evidence collected in accordance with the prescribed procedures establish that the concentration transaction in question has or may have the effect of eliminating or restricting competition, MOFCOM shall initiate an investigation into the concentration transaction.
Separate measures for the calculation of turnover shall be applied to business operators in the financial industry.
Based on the particularities of the financial industry, MOFCOM and other authorities formulated a regulation entitled Measures for the Calculation of Turnover with respect to the Declaration of Concentrations of Business Operators in the Financial Industry in 2009, setting out the measures for the calculation of turnover of business operators in the financial industry. Business operators in the financial industry, such as banking financial institutions, securities companies, futures companies, fund management companies and insurance companies shall use the calculation measures stipulated in this regulation when calculating their turnovers for merger filing purposes.
What is the substantive test applied by the relevant authority to assess whether or not to clear the merger, or to clear it subject to remedies?
The substantive test is conducted by MOFCOM to assess whether the concentration transaction will or may have the effect of eliminating or restricting competition in the relevant market.
The Interim Provisions on Evaluating the Impact of Concentration of Business Operators on Competition, promulgated by MOFCOM on 29 August 2011, expressly cites numerous factors that MOFCOM will consider when applying the substantive test, and the methodology for applying each factor in a merger review process. Among these factors, market share and the degree of concentration by reference to the Herfindahl-Hirschman Index are deemed to be the most important factors that MOFCOM will consider. In addition, according to the relevant provisions in this regulation, when assessing whether to clear or prohibit a concentration transaction, MOFCOM will evaluate whether the concentration transaction will give rise to any anti-competitive effects, such as unilateral effects, co-ordinated effects, vertical concerns and conglomerate effects. Meanwhile, MOFCOM will also consider whether there exist any defences, such as public interests, economic efficiency, business operators on the verge of bankruptcy, etc.
Are non-competitive factors relevant?
MOFCOM will also take non-competition factors into consideration in the substantive assessment.
Article 1 of the AML stipulates that the AML has been formulated to safeguard the interests of consumers and the public interest, and to promote the healthy development of the socialist market economy. Article 27 of the AML requires MOFCOM to consider both competition and non-competition factors in its merger review process, and specifically defines the scope of these non-competition factors to include influence on national economic development, influence on technological progress, as well as influence on consumers and other business operators. Consequently, in some cases, MOFCOM has to consult with industry regulators such as the NDRC, MIIT, or the Ministry of Agriculture during the merger review process.
Are there different tests that apply to particular sectors?
There is no obvious difference in MOFCOM’s substantive tests for different sectors during the merger filing process. That said, MOFCOM will typically pay more attention to industries which are of strategic importance to China, such as energy, agriculture, technology, etc.
Another issue that we wish to stress is that, as detailed in Article 31 of the AML, for foreign investors' acquisition of actual control over a domestic enterprise where national security is involved, a national security review shall be conducted in addition to a merger review. This provision mainly applies to sectors relating to national security, such as agriculture, energy and resources, infrastructure, transportation, technology, military industry and businesses in the vicinity of military facilities, etc.
Are ancillary restraints covered by the authority’s clearance decision?
According to a footnote on the Notification form published by MOFCOM, the parties to a concentration must submit non-compete agreements or clauses concluded between/among them, if any. This shows that ancillary restraints will be also considered by MOFCOM during the merger review process. However, due to the lack of sufficient transparency during competition reviews and in publishing case decisions, we have little knowledge of whether there are any situations where a concentration transaction with ancillary restraints have been cleared or challenged by MOFCOM. Therefore, it is unclear what kind of ancillary restrictions are permissible and what kind of ancillary restrictions are forbidden by MOFCOM.
For mandatory filing regimes, is there a statutory deadline for notification of the transaction?
There is no statutory deadline to notify of a concentration transaction in China. The notifying party only needs to notify of a concentration transaction before it is implemented and typically after the execution of the concentration agreement.
What is the earliest time or stage in the transaction at which a notification can be made?
In principle, a notification can be made no earlier than the signing of a binding transaction agreement, and a formally signed transaction agreement shall be submitted to MOFCOM together with the notification form. The reason is that MOFCOM does not want to spend administrative resources unless there is certainty for the transaction that it reviews.
However, under some special circumstances, such as for public takeovers, a merger filing can be made prior to the execution of a binding transaction agreement. To make an early filing, the notifying party shall provide strong evidence to prove that an executed binding agreement is not available due to special transactional arrangements, mandatory requirements or any other legitimate reasons. In this situation, alternative materials such as relevant memorandums, draft agreements or tender offers shall be submitted together with the key terms of the transaction instead, and an executed binding agreement shall be submitted to MOFCOM when it becomes available.
What is the basic timetable for the authority’s review?
In general, merger reviews in China can be divided into two stages, the pre-acceptance stage and the formal review stage. The time taken during the pre-acceptance stage is quite unpredictable, while the time taken in the formal review stage is subject to a statutory time limit.
The time taken during the pre-acceptance period is quite unpredictable.
There is no statutory time limit for the pre-acceptance period. Based on our experience, MOFCOM will not start the formal review process unless they view the filed notification package as complete. MOFCOM tends to ask many questions during the pre-acceptance period, and will typically require the concerned parties to supply additional information. It is only when MOFCOM is satisfied with the initial filing and the supplemental information provided by the parties that it will issue a formal Case Establishment Notice, indicating that the notification has been formally accepted by MOFCOM, which starts the clock for the formal review period mentioned below.
In light of the above, the time between initial submission of the notification package and its formal acceptance by MOFCOM is quite unpredictable, which can last several weeks or span several months. MOFCOM’s workload and its internal priorities, the filer’s responsiveness to MOFCOM’s information requests and the complexity of the case will all affect the length of this period.
The formal review is subject to a statutory time limit.
Articles 25 and 26 of the AML establish a specific timeline for the formal review process: a preliminary review that lasts up to 30 calendar days (Phase I), a more detailed review that lasts up to 90 calendar days (Phase II), and an extension period that can last up to 60 calendar days (extended Phase II or Phase III). In total, MOFCOM has 180 calendar days for its formal review.
1) Preliminary Examination: Phase I
MOFCOM shall, within 30 days upon the formal acceptance of a merger filing, conduct a preliminary examination of the concentration transaction so notified, and make a written decision on whether or not to conduct a further examination.
There are no substantive thresholds for MOFCOM to commence a Phase II review. Sometimes it could do so simply because it does not have sufficient time to complete its review in Phase I. In practice, most cases under normal procedures will proceed to Phase II.
2) Further Examination: Phase II and extended Phase II (or Phase III)
Where the MOFCOM Anti-monopoly Bureau decides to conduct a further examination, it shall, within 90 days from the date of such decision, complete the examination and make a final decision on whether to clear or prohibit the concentration transaction.
MOFCOM has full discretion to move into the extended Phase II (or Phase III) which shall last no more than 60 calendar days, provided that the business operators to the concentration agree to extend the time limit for the examination, the documents or materials submitted by the relevant business operators are inaccurate and require further verification, or the relevant circumstances have undergone significant changes after the declaration by the business operators.
Under what circumstances the basic timetable may be extended, reset or frozen?
Extension of timetable for pre-acceptance period.
There is no statutory time limit for the pre-acceptance period. Where the documents and materials submitted by the notifying parties are incomplete or inaccurate, MOFCOM will request the parties to make supplementary submissions or modifications, or to provide satisfactory clarifications or explanations. MOFCOM’s requests for further information are the primary reason for the extended length of this period.
Extension of timetable for formal reviews.
As described above, there is statutory time limit for the formal review process, and such timetable shall not be extended by any events, including an offer of remedies by the notifying parties or the interventions of third parties.
Having said the above, to our knowledge, in some conditional approval cases where MOFCOM requires additional information or agreement cannot be reached with MOFCOM at the end of the extended Phase II (or Phase III), the notifying parties may choose to withdraw and refile the notification to restart the timetable. In addition to the Glencore/Xstrata deal and the MediaTek/MStar deal mentioned above, the Western Digital/Hitachi Storage deal and the Marubeni/Gavilon deal also encountered this situation.
Are there any circumstances in which the review timetable can be shortened?
As far as we know, there are no regulations that expressly provide for circumstances under which the review timetable in China can be shortened. However, simple cases as described below in section 6.2, unlike normal cases, often take less time for review and are generally cleared in Phase I.
Which party is responsible for submitting the filing? Who is responsible for filing in cases of acquisitions of joint control and the creation of new joint ventures?
The Party responsible for filing depends on the form of the concentration transaction. For a concentration transaction conducted by way of a merger, all of the business operators participating in the merger are obliged to submit a merger notification. When it comes to other forms of concentration transactions, the notifying party shall be the business operator who will obtain control or decisive influence over the target company after the concentration transaction, and the other business operators are required to provide necessary support. If the party responsible for filing fails to carry out this obligation, other business operators may voluntarily submit a merger notification.
When creating new JVs, the business operator who will obtain control or decisive influence over the JV shall be responsible for the filing.
What information is required in the filing form?
There are two sets of merger review procedures in China, the normal review procedure and the simplified review procedure. Different notification forms have been developed for these two different merger review procedures, and the scope of information required to be provided under these two procedures also differs from each other.
Normal review procedure
With respect to a normal case review, the information that the notifying party shall provide on the notification form includes but is not limited to the following:
- Basic information on the parties to the concentration: contact information, power of attorney (if any), turnover for the immediately preceding fiscal year and audited financial reports, main business, shareholding structure, ultimate controller, affiliated entities inside and outside of China, etc.;
- Description of the concentration transaction: concentration agreement, transaction amount, description of the transaction, equity and control structures before and after the transaction, joint venture enterprise (if applicable), etc.;
- Relevant market definition and competition analysis: definition of the relevant market and reasons for the concentration, market data of the parties to the concentration and its main competitors, impact of the concentration on market competition, etc.;
- Other information: supply and demand structures in the relevant market, market entry information, whether the transaction involves bankrupt enterprises or enterprises on the verge of bankruptcy; information on industry associations in the relevant market; opinions of parties related to the transaction; compliance matters related to this transaction and Chinese compliance matters related to parties to the concentration, etc.
Simplified review procedure
Pursuant to Article 2 of the Interim Provisions on the Standards Applicable to Simple Cases of Concentrations of Undertakings promulgated by MOFCOM on February 11, 2014, a concentration of business operators shall be considered a simple case if it falls under the following circumstances:
- Where, in the same relevant market, the combined market share of all undertakings participating in the concentration is less than 15%;
- Where an upstream-downstream relationship exists among the undertakings participating in the concentration, the respective market share of such undertakings in each of the upstream and the downstream markets is less than 25%;
- Where the undertakings participating in the concentration are neither in the same relevant market nor have any upstream-downstream relationship, their market share in each market relevant to the concentration is less than 25%;
- Undertakings to the concentration have established a joint venture outside of China and such joint venture does not engage in any economic activities in China;
- Undertakings to the concentration have acquired the equity or assets of an overseas enterprise which does not engage in any economic activities in China;
- A joint venture jointly controlled by two or more undertakings becomes controlled by one or more of such undertakings through the concentration.
Generally speaking, the notifying party needs to provide less information under the simplified review procedure. A simplified notification form is available for simple cases, for which the following information is not required to be provided: business licenses of the parties to the concentration’s affiliated entities in China, supply and demand structures in the relevant market, market entry information, horizontal or vertical cooperation agreements, possible efficiencies of the concentration, whether the transaction involves bankrupt enterprises or enterprises on the verge of bankruptcy, etc. However, the notifying party must provide information about its reasoning for seeking application of the simplified review procedure.
Which supporting documents, if any, must be filed with the authority?
When submitting the confidential notification form to MOFCOM, the supporting documents below shall be filed with MOFCOM:
- Certificate of incorporation of the notifying party;
- Power of attorney (POA) provided by each of the business operators to the concentration, respectively, if they are represented by attorneys;
- Annual reports and audited financial statements for the immediately preceding fiscal year of each of the business operators to the concentration;
- Fully signed version of the transaction documents provided by the notifying party;
- Market reports and comparable documents that were specifically prepared with respect to the concentration or the affected markets;
- Statement of authenticity (SOA) provided by the notifying party.
Generally speaking, all the supporting documents listed above shall be translated into Chinese, and both the original version and its translation shall be submitted to MOFCOM for review. However, if there is no ready-made Chinese translation and the original document is too long, a summary in Chinese may also be sufficient.
If the notifying party is a foreign company, a notarized certificate of incorporation is required. If the notifying party has submitted such document to MOFCOM in a recent merger filing, it may be exempted from submitting an updated original version for the next three years, provided that the information contained in the notarized certificate of incorporation remains unchanged.
Typically, the POA and SOA provided by the notifying party or parties to the concentration shall be signed by the legal representative or the authorized representative of such business operators, and be affixed with the business operator’s seal.
Is there a filing fee? If so, please specify the amount in local currency.
There is no filing fee in China charged by MOFCOM.
Is there a public announcement that a notification has been filed?
MOFCOM will not publicly announce that notifying parties have made a notification. However, for simple cases, MOFCOM publishes a Public Notice Form for public comment immediately following its formal acceptance of such notifications.
Does the authority seek or invite the views of third parties?
As mentioned above, in China, relevant factors such as the influence on national economic development, influence on technological progress, as well as influence on consumers and other business operators shall be taken into consideration during the merger review process. To achieve this objective, MOFCOM may solicit the opinions of other government agencies, relevant industry associations, upstream suppliers, downstream customers and competitors of the parties to the concentration under some circumstances. The government agencies to be consulted are mainly industry regulators, such as the Ministry of Industry and Information Technology, the National Development and Reform Commission, and the State Administration for Industry and Commerce, as the case may be.
For cases under the normal review procedure, MOFCOM usually solicits third party opinions by way of a survey questionnaire, or by way of telephone consultation and site visits. In some extreme cases where the concentration transaction is quite complex, MOFCOM may hold public hearings and invite the above mentioned third parties to provide comments on the concentration transaction.
Simple cases are presumed not to be problematic and will not raise competition concerns in China. Therefore, under the simplified review procedure, MOFCOM will mainly invite the views of third parties with respect to whether the concerned concentrations are qualified as simple cases. Third parties may submit written opinions to MOFCOM in this regard during the public comment period which lasts only 10 calendar days.
What information may be published by the authority or made available to third parties?
Information that will be made public by MOFCOM
Information published on the Public Notice Form under the simplified merger procedure
For cases filed under the normal review procedure, MOFCOM does not make any immediate public announcements about its receipt or formal acceptance of merger notifications during its review process. Neither will it publish any documents submitted by the notifying party to the public during the merger review process.
For simple cases, MOFCOM will publish a Public Notice Form for public comment immediately following its formal acceptance of the notification. The Public Notice Form for the simple cases will still be available on MOFCOM’s website after the end of the 10 calendar day public comment period. The Public Notice Form is prepared and submitted by the notifying party, and it outlines basic information of the transaction, with a brief introduction of undertakings to the concentration and reasons for seeking application of the simplified review procedure.
Information published on the decisions that MOFCOM has made
For unconditionally approved cases, MOFCOM will publish a case list on its website quarterly. Information contained in the case list is quite limited, and includes only the name of the transaction, undertakings to the concentration and the approval date.
MOFCOM will only make detailed public announcements under circumstances where it has prohibited a concentration or where it has imposed conditions on a concentration. In both cases, MOFCOM will make the announcement right after the decision is made. These public announcements are available on MOFCOM's official website. Such public announcements generally contain the timetable of MOFCOM's review process, basic information of the transaction and the parties concerned, the definition of the relevant market, MOFCOM's competitive analysis and its final decision. MOFCOM also makes public the remedial solutions which have been submitted by the notifying parties and agreed to by MOFCOM, as well as MOFCOM’s conditional approval decisions.
Information that may be made available to third parties
When submitting a confidential notification form and its supporting materials, the notifying party is also required to submit a non-confidential version of the notification materials. In the non-confidential version of the submission documents, the parties to the concentration may redact certain confidential information. For the non-confidential notification form, information such as turnover, value of the transaction, market share figures, and other data may be submitted in the form of a range. In addition, supporting materials such as powers of attorney, annual reports, and contact information of main competitors are not required to be attached to the non-confidential notification form.
Non-confidential version documents are typically used by MOFCOM to solicit opinions from third parties during its merger review process. Based on our experience, if the notifying parties conceal too much information in the non-confidential version document, MOFCOM may challenge the document and ask for the notifying party to disclose more information in the non-confidential version in order to better inform interested third parties. Since the non-confidential version document is submitted by the notifying party, MOFCOM will not re-confirm with the parties to the concentration whether it can disclose the information on the non-confidential version document to third parties, and the parties will also have no opportunity to review the document disclosed by MOFCOM to third parties prior to publication.
Does the authority cooperate with antitrust authorities in other jurisdictions?
MOFCOM may cooperate with antitrust authorities in other jurisdictions in accordance with relevant bilateral or multilateral agreements. MOFCOM has signed MOUs on antitrust cooperation with at least 10 countries, including the US, EU, Japan, South Korea, Canada, UK, Australia, Russia, South Africa and Kenya.
In principle, MOFCOM may share information with antitrust authorities in other jurisdictions without notifying the parties to the concentration, but it shall not disclose a party’s business secrets to another authority without obtaining the party’s waiver, and since legitimate business secrets are legally protected, there is no legal consequence if a party refuses to grant such a waiver.
Based on our experience, MOFCOM usually pays special attention to the merger review progress in other jurisdictions in the context of a multi-jurisdictional merger filing, the notifying party is expected to keep MOFCOM posted of such progress.
What kind of remedies are acceptable to the authority? How often are behavioural remedies accepted in comparison with major merger control jurisdictions, such as the EU or US?
Typical remedial measures
Remedies accepted and approved by MOFCOM typically include the following restrictive conditions:
- Structural conditions, namely asset and/or business disposals, including divestiture of tangible assets and/or intangible assets, such as intellectual property rights.
- Behavioural conditions, such as opening infrastructure, licensing key technology, terminating exclusive agreements and “hold separate”, among which “hold separate” is a unique type of behavioural condition which seems to be favoured by MOFCOM.
- Comprehensive conditions which include both behavioural and structural conditions.
In practice, MOFCOM has traditionally tended to prefer behavioural remedies to structural remedies, making China the most prolific user of non-structural remedies.
Requirement for divestment remedies
An up-front buyer is required under certain circumstances
Under any of the following circumstances, MOFCOM may require a party under divestment obligations to find suitable buyers and to sign a binding sales agreement before a concentration transaction can be executed: (i) where there are greater risks for maintaining the competitiveness and marketability of the business to be divested before divestment; (ii) where the identity of a buyer is determined based on whether the business under divestment may regain competitiveness in the market; or (iii) where a third party claims rights on the business under divestment.
The third party purchasers of the businesses to be divested require MOFCOM approval for suitability
The party required to divest has either a 6 month deadline or a timeline as set out in MOFCOM's decision to find a suitable purchaser and enter into the final binding agreements related to the disposal. Unless it is otherwise agreed by MOFCOM, a party under divestment obligations shall nominate at least three potential buyers for MOFCOM to choose from.
Generally speaking, third party purchasers shall satisfy the following conditions to be a qualified buyer: (i) they should be independent of the parties to the concentration, (ii) they should possess the necessary resources and capabilities, and be willing to use the business to be divested to participate in market competition, (iii) they have obtained the approval of other regulatory authorities, (iv) they shall not borrow funds from the business operators participating in the concentration to purchase the business to be divested, and (v) they should meet other requirements raised by MOFCOM, depending on the specific circumstances of the concentration transaction.
What procedure applies in the event that remedies are required in order to secure clearance?
The Regulations on Imposing Restrictive Conditions on Concentrations of Undertakings (for Trial Implementation) (the “Remedy Regulations”), promulgated by MOFCOM on 4 December 2014, detail rules on the procedure for offering remedies.
Timeline for offering remedies
Business operators to the concentration may negotiate with MOFCOM regarding offering remedies either before or after MOFCOM informs the parties that the concentration will or may have the effect of eliminating or restricting competition. Pursuant to Article 6 of the Remedy Regulations, a final remedy proposal shall be submitted to MOFCOM no later than 20 days before the end of Phase II. Otherwise, MOFCOM will have right to prohibit the concentration transaction.
In practice, the negotiation between MOFCOM and the concerned parties generally occurs in Phase II, and remedies in some cases are accepted and determined in the extended Phase II (or Phase III). Most commonly, the remedies are offered by the acquiring party, but MOFCOM has in the past accepted remedies from both the acquiring party and the selling party (e.g., by both Microsoft and Nokia in the Microsoft/Nokia transaction).
Remedy proposals will be market tested by MOFCOM
MOFCOM will evaluate the remedies offered by the parties. When conducting a market test, MOFCOM may seek opinions of the relevant government authorities, industry associations, business operators and consumers in the relevant market by way of issuing questionnaires, convening hearings, organizing experts to conduct feasibility studies, etc.
MOFCOM may not waive a demand for a formal remedy even though a remedy is agreed in other jurisdictions
Based on our experience, what MOFCOM is most concerned about is whether the concentration transaction will give rise to any competition concerns within the China market. If the answer is yes, a formal remedy may be imposed on the concerned parties before a clearance decision can be made. Since a remedy agreed upon in other jurisdictions may not be able to resolve the competition concerns in the China market, and the implementation of such remedy is beyond the control of MOFCOM, we do not believe that MOFCOM would grant the parties to the concentration a waiver for a formal remedy merely based on the fact that a remedy has been agreed upon in another jurisdiction.
What are the penalties for failure to notify, late notification and breaches of a prohibition on closing?
Penalties for failure to notify, late notification and breaches of a prohibition on closing
The AML and the Merger Control Regulations have not set up separate legal liabilities for failures to notify, late notifications and breaches of a prohibition on closing, and they all belong to the situation of implementation of a notifiable concentration transaction without obtaining MOFCOM’s clearance decision.
Pursuant to Article 40 of the AML, where the business operators implement the concentration in violation of the AML, MOFCOM may impose a fine of no more than RMB 500,000, it may also issue an order to unwind the transaction, by ordering them to stop the concentration, to dispose of the shares or assets, transfer the business or adopt other necessary measures to return to the state prior to the concentration. MOFCOM has so far not imposed penalties other than fines for failures to notify. For those who take the initiative to report to MOFCOM about their failure to submit a filing, MOFCOM generally imposes reduced fines (if any), as is reflected in the penalty decisions published by MOFCOM on its official website.
Other adverse consequences for failures to notify, late notifications and breaches of a prohibition on closing
In addition to the above mentioned legal consequences, failure to notify of a transaction may also do harm to a business operator’s reputation, because the penalty decisions imposed on such business operators will be published on MOFCOM’s official website. Besides this, the future expansion of the concerned parties in China might also be affected, due to the fact that MOFCOM may pay special attention to filers with a history of non-compliance, and thus the length of the review procedures may be less predictable.
What are the penalties for incomplete or misleading information in the notification or in response to the authority’s questions?
Pursuant to Article 52 of the AML, business operators that provide incomplete or misleading information to MOFCOM may be ordered to: make rectification, pay a fine of less than RMB100,000 (for individuals), and a fine of less than RMB 1,000,000 (for legal entities). The fine imposed on such business operators shall depend on the seriousness of its violation, if such violation is not serious, the fine imposed on individuals and legal entities shall be no more than RMB 20,000 and RMB 200,000 respectively, and MOFCOM has wide discretion to decide whether a wrongdoing is serious or not.
To date, MOFCOM has not published any penalty decisions for providing incomplete or misleading information.
Can the authority’s decision be appealed to a court? In particular, can third parties who are not involved in the transaction appeal the decision?
According to Article 53 of the AML, MOFCOM’s merger review decision can be challenged by way of administrative review and administrative litigation, and the administrative review procedure must precede any administrative litigation. In other words, if the parties to the concentration are not satisfied with MOFCOM’s decision, they cannot appeal such decision to a court directly before requesting a further administrative review.
According to the relevant PRC law with respect to administrative reviews and administrative litigation, the request for an administrative review for MOFCOM’s merger review decision shall be made within 2 months of issuance of such decision. The review will be handled by the MOFCOM legal department. MOFCOM shall complete the administrative review within 60 days from the date it accepts an application. When the circumstances are deemed to be complex, this 60-day time limit can be extended by another 30 days.
It is only when the parties to the concentration remain unsatisfied with the result of MOFCOM’s administrative review, may they submit the case for judicial review to a Beijing Intermediate Court within 15 days following the administrative review decision, with a possibility that such appeal may fall under the jurisdiction of a Beijing High Court. A competent people's court shall render a first instance judgment within six months from the day that the case is opened. Extension of this time limit shall be approved by a higher level people’s court. If the parties refuse to accept the first instance judgment by a competent people's court, they shall have the right to file an appeal with a higher level people's court within 15 days of being served with the written judgment. In handling appellate cases, a competent people's court shall make a final judgment within three months from the day of receiving the appeal.
Besides the business operators to the concentration, third parties whose lawful interests are closely linked to MOFCOM’s merger review decision can also challenge such decisions by way of administrative review and administrative litigation, provided that they can prove their lawful rights and interests are harmed by such decision.
To our knowledge, no administrative litigation has been brought against MOFCOM’s merger review decisions to date.
What are the recent trends in the approach of the relevant authority to enforcement, procedure and substantive assessment?
MOFCOM’s review process has been expedited due to the introduction of the simplified review procedure and its internal restructuring.
The simplified review procedure regime has become more and more mature in China. In 2015, 75% of the concentrations (237 cases) reviewed fell within the scope of simple cases and all of them were unconditionally cleared.
In September 2015, the MOFCOM Anti-monopoly Bureau underwent a major restructuring, with the previous Consultation Division being changed into the Merger Review Division III. As a result, no division is in charge of pre-acceptance reviews in all cases and the case handling divisions are performing reviews both before and after case establishment. Due to the introduction of the simplified review procedure and MOFCOM’s internal restructuring, MOFCOM’s efficiency in performing merger reviews is improving, and the average review periods have witnessed a substantial drop.
IP related concentration transactions are attracting more attention from MOFCOM.
In the past few years, MOFCOM has imposed restrictions on an increasing number of concentration transactions involving intellectual property (IP), such as the Microsoft/Nokia deal, Nokia/Alcatel-Lucent deal, Merck/AZ Electronics deal and NXP/Freescale deal, which demonstrates that IP-related cases are an area of focus for MOFCOM.
Are there any future developments or planned reforms of the merger control regime in your jurisdiction?
Merger Control Regulations in China are expected to offer greater clarity for business operators.
According to a speech by Mr. Han Chunlin, a deputy Director General of the Anti-monopoly Bureau of MOFCOM, given at the Antitrust and IP forum held in Shanghai on 9 July 2016, the Measures for Review of Concentrations Between Undertakings and the Measures for Notification of Concentrations Between Undertakings are under amendment, and it is possible that these two regulations will be integrated into a single draft with an aim to offer more clarity to companies.
MOFCOM may increase fines imposed on the non-filers in future amendments of the AML.
In a recent speech given by Mr. Shang Ming, the former Director General of the MOFCOM Anti-monopoly Bureau, at the 2015 China Competition Policy Forum held in Beijing on October 22, 2015, he commented that the current penalties prescribed in the AML for failure to notify are too lenient, and MOFCOM is endeavouring to increase such penalties in future amendments of the AML in order to make those non-filers subject to a monetary penalty that is much higher than the cost of making typical merger filings.