MOFCOM Publishes Criteria For A Simplified Merger Review

by DLA Piper
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On 11 February 2014, China's merger review regulator, Antimonopoly Bureau at the Ministry of Commerce ("MOFCOM"), published criteria for a simplified merger review, the Interim Rules on Application Criteria of a Simplified Review, which came into effect on the next day. The criteria include three market share based thresholds and three categories of transactions (i.e. offshore joint ventures, outbound acquisitions and change of control between joint venture partners).

Criteria

A notifiable concentration is qualified for a simplified review if it meets one of the six criteria below: 

  1. In a concentration between competitors, the combined market share of all participating undertakings is less than 15%;
  2. In a concentration between undertakings in related upstream and downstream markets, the market share of the undertakings in both upstream and downstream markets is less than 25%;
  3. In a concentration which is neither between competitors nor between undertakings in vertically related markets, the market share of each undertaking is less than 25% in the markets related to the transaction;
  4. Undertakings set up a joint venture outside China and the joint venture does not engage in commercial activities in China;
  5. Undertakings acquire shares or assets of an overseas company which does not engage in commercial activities in China; or
  6. In a joint venture where two or more undertakings have joint control, one or more undertakings among them acquire sole control after the proposed concentration.

The threshold for horizontal merger is set at 15% and for vertical merger at 25% which are the same as those in the old European simplified merger review rules. Effective from 1 January 2014, the European Commission raised these thresholds to 20% and 30% respectively. Transactions notifiable in both China and EU may qualify for a simplified review in Europe but still have to go through the standard review in China.

A substantial portion of Chinese merger notification has been the joint venture notification. Many of them have no link to China and do not cause any anti-competitive effects on the Chinese market. A simplified review will greatly reduce the notification burden in such transactions. However, guidance is needed as to what constitute "commercial activities". Will the presence of a representative office disqualify the joint venture for a simplified review?

Exceptions

There are exceptional scenarios where a simplified review does not apply:

  • a) One undertaking acquires sole control of a joint venture over which it already has joint control, and it competes with the joint venture in the same relevant market;
  • b) The relevant market is difficult to define;
  • c) The concentration may cause a detrimental effect on market entry, technological progress, consumers and other related parties, or on national economic development.

A simplified merger review based on market share thresholds requires a clear definition of the relevant market and MOFCOM's acceptance of such definition. In practice, this is not always a straightforward case. Transaction parties and their counsel should assess the risks that MOFCOM holds a different view on the market definition, which may result in a protracted process to determine whether the case qualifies for a simplified review procedure.

Whether the transaction will cause a detrimental effect on market entry, technological progress, consumers or other related parties, or more broadly on national economic development, requires a comprehensive competition analysis. Conclusion are unlikely to be made in the procedure determination phase.

The exceptions listed above are non-exhaustive and MOFCOM has discretion not to apply a simplified review procedure to concentrations which may cause anti-competitive effects on the market.

Outlook

A simplified merger review regime has been discussed in China for a few years. Hundreds of notification reviewed by MOFCOM in recent years provide an empirical basis for a simplified review regime. While the necessary implementation rules covering review time, notification form requirement (short versus long) and procedural issues have not been issued at the same time, we understand that basic procedural rules had been considered by MOFCOM at the outset when it designed the simplified review regime. We expect that the rules will be refined in the future.

MOFCOM will likely follow the European Commission's practice to publish simplified notification cases it has officially accepted for review and disclose basic transaction information to the public. This will increase transparency and enable the public or relevant parties to comment. Companies preparing a merger notification are advised to discuss with their antitrust counsel so as to make a simplified review practically possible and obtain the clearance ideally in the phase one period (30 days).

With MOFCOM implementing a simplified review regime and stepping up its enforcement on fail-to-file transactions, companies will not be able to use MOFCOM's protracted review in unproblematic cases as an excuse for not making the notification.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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