China to amend the merger control regime

by Dentons
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We thought you would be interested in learning about some recent developments in China's merger control rules. China launched its merger control regime in 2008 and based it on the European Union model. Those merger control laws will soon be amended.

The Ministry of Commerce of the People's Republic of China (MOFCOM) recently provided Dentons' Competition and Antitrust team in China with a near-final draft of the new law. This new law is the 2017 priority of new Director General Wu Zhenguo. It may be enacted late this year or early next year.

Here is a summary of the proposed key changes brought by this important new law.

The framework of the new law (draft)

The new law, Measures for Review of Concentration of Undertakings, will be comprehensive and will replace the old Measures for Review of Concentration of Undertakings and the Measures for Notification of Concentration of Undertakings. The draft consists of seven chapters and 70 articles, covering (i) the definition of concentration of undertakings, (ii) turnover calculation, (iii) procedures for making filings, (iv) procedures for reviewing filings and negotiating remedies and (v) investigation of concentrations of undertakings that do not meet the filing threshold.

Acquisition of control

The draft provides a list of circumstances constituting acquisition of control. One such circumstance is that the acquirer obtains the right to determine the senior management of the target. In this regard, the draft refers to China's Company Law for the meaning of "senior management" to include manager, vice manager, financial officer, board secretary and other staff prescribed in the articles of association.

This would change current practice, which does not find an acquisition of control simply because the acquirer has right to determine one or more senior managers absent the ability to control or veto important resolutions of the shareholders' meeting or the board. 

Interdependent transactions

The draft provides that if the same undertaking, through several parallel or consecutive transactions, acquires control over the target, then these transactions are interdependent and will be treated as one single concentration. Based on MOFCOM's current practice, in the case of interdependent transactions, the undertaking concerned should make merger filing before the first-step transaction is implemented, even if such step does not give the acquirer control over the target.

Geographic allocation of turnover

When allocating turnover to China, the current basis is that the location of the purchaser of the products or services provided by an undertaking is within the territory of China. The draft makes a minor change, with the new basis being whether the location of the purchaser is within the territory of China at the time it purchases the products or services.

The concept of control in turnover calculation

The draft makes a distinction between the concept of control in defining concentration of undertakings, and the concept of defining control in turnover calculation. For the former, the concept of control is broad and can even be found in an acquisition of less than a 10 percent share in a target. However, in order to simplify the determination, turnover calculation is relatively narrow. For example, it only includes the turnover of affiliates in which 50 percent or more of the shares are held. In this regard, the draft refers to China's Accounting Standards for the concept of control in turnover calculation.

Time limit for preliminary review

After receiving a filing, MOFCOM will normally conduct a preliminary review to check if the filing is complete and accepted. Previously, there was no express time limit in MOFCOM's rules for such preliminary review. The draft specifies that the preliminary review should be finished within five business days, and, if MOFCOM requires supplemental materials, it must definitively inform the notifying party of the supplemental information required.

Investigation of below-threshold concentrations of undertakings

China's current merger control rules allow MOFCOM to investigate concentrations of undertakings even if they are below the filing threshold, provided that MOFCOM has evidence showing that the concentrations have, or may have, the effect of eliminating or restricting competition. However, to our knowledge, MOFCOM has not thus far opened any investigation of concentrations that are below the filing threshold.

The draft provides procedures for such investigations. While the procedure itself is not novel, it may signal that MOFCOM is ready to start investigating below-threshold concentrations.

The background of this new move is similar to the "WhatsApp gap." In China, several high-profile transactions involving Internet companies, in which the concentrations occurred between the top two players in their relevant markets, led to consumer complaints. This may be motivating MOFCOM to intervene.

 

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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