To increase the incentives for compliance in the name of
transparency of law enforcement, China's Ministry of Commerce
("MOFCOM") has decided to publicize its decisions to
penalize companies which fail to notify concentrations that meet
the regulatory thresholds for notifications under China's
Anti-Monopoly Law (the "AML").1 This new disclosure rule will take
effect on May 1, 2014 but will not have retroactive
effect. MOFCOM has provided a hotline (+86 10 6519 8998) for
tip-offs from the public for suspected violations. The new
rule will at minimum cause reputational damage to companies which
fail to notify their proposed concentrations. More
importantly, MOFCOM's Anti-Monopoly Bureau expects the number
of non-filings to decrease and the number of notifiable merger
review notifications to increase.
Concentrations Subject to Anti-monopoly
Notification
The AML requires where a "concentration" between
operators reaches certain "turnover thresholds", the
acquirer or, in the case of a merger, both parties are required to
file a notification before such concentration can be
implemented.2
A "concentration" is (i) a merger of operators; (ii) an
operator's acquisition of a controlling right in another
operator through the acquisition of equity or assets (including
establishment of joint ventures); or (iii) an operator's
acquisition of a controlling right in another operator or its
ability to exercise decisive influence over another operator by
contract or other means.3
The "turnover thresholds" are met if (i) the combined
aggregate global turnover realized by all the participating
operators in the previous accounting year exceeds RMB 10 billion
(US$ 1.61 billion) with at least two operators each achieving a
turnover of more than RMB 400 million (US$ 64.41
million) within China;4 or (ii) the combined aggregate turnover
realized by all the participating operators within China in the
previous accounting year exceeds RMB 2 billion (US$ 322.06
milllion) with at least two operators each achieving a turnover of
more than RMB 400 million (US$ 64.41 million) within
China.5
However, "controlling right" and "decisive
influence" are not defined in relevant laws and
regulations. We understand that in addition to acquisition of
50% or more of equity or assets of another operator,
"control" will also be conferred when an operator gains
the power to decide another operator's management and business
operation without owning 50% or more equity or assets of the
latter, such as by obtaining a veto right through a minority
shareholding.
Penalties for Failure to Notify
Pursuant to the AML and the Interim Measures for Investigating and
Handling Failure to Notify Concentrations of Operators (the
"Interim Measures"),6 MOFCOM is authorized to initiate an
investigation if there is prima facie evidence, either
presented by whistleblowers or obtained through other channels,
indicating that a company fails to notify a notifiable
transaction.7 MOFCOM may
impose a fine of up to RMB 500,000 (US$ 80,515) if it finds
the operators implemented the concentration without legal
declaration. MOFCOM may also unwind the concentration, order a
disposition of shares or assets within a specified time limit,
transfer of business within a specified time limit and/or other
necessary measures.8
Before the new disclosure rule was released, it is widely believed
that many purely domestic transactions have gone unreported,
whether or not notifiable under relevant laws and
regulations. From August 2008 (when the AML came into effect)
through the first quarter of 2014, 793 transactions were decided by
MOFCOM. Only 60 of these 793 transactions-i.e., 7.6%-were
domestic-to-domestic.9 To this date, MOFCOM has rejected one
transaction, and imposed conditions to clearance on 22
others. All 23 of the cases involved foreign companies, and 20
of them involved transactions between foreign companies
exclusively. However, third-party data appears to suggest that
there is no dearth of large domestic-to-domestic M&A
transactions in China, contrary to what the small number of
domestic-to-domestic MOFCOM decisions may
suggest. Domestic-to-domestic transactions account for
approximately 80% of M&A deals with a Chinese target.10 Thus, it appears that the great
majority of reportable domestic-to-domestic transactions were not
notified.
MOFCOM has long recognized the incidents of under-reported
concentrations and stepped up its enforcement against failure to
notify. By the end of October 2013, it had investigated nine
transactions that should have been notified, and completed two of
the nine investigations (without naming the parties).11 The new disclosure rule
reflects MOFCOM's determination to intensify the detection of
violations, which will in turn incentivize companies to comply with
notification requirements by adding the power to inflict
reputational damage to MOFCOM's arsenal of penalties.
1 See
"MOFCOM to Publicize Administrative Penalties for Illegal
Implementation of Concentrations," China National Government
(Mar. 30, 2014), available at http://www.gov.cn/xinwen/2014-03/20/content_2642405.htm.
2 See Art. 21 of the AML.
3 See Art. 20 of the AML.
4 For the purpose of calculation of turnover, excluding Hong Kong, Macau and Taiwan. Exchange rate is approximately RMB 6.21 = USD 1.00.
5 See Art. 3 of the Provisions of the State Council on the Thresholds for Declaring Concentration of Operators [2008], State Council Decree No. 529. The Measures for Calculating the Turnover for the Declaration of Concentration in the Financial Industry [2009] shall apply to the calculation of turnovers of banking institutions, securities companies, futures companies, fund management companies, insurance companies and other financial institutions.
6 The Interim Measures were promulgated by MOFCOM on Dec. 30, 2011 and became effective on Feb. 1, 2012.
7 See Art. 4 of the Interim Measures.
8 See Art. 13 of the Interim Measures.
9 The calculation is based on MOFCOM's published unconditional clearance on a quarterly basis and public announcements on conditional approvals and one ban.
10 See Yan Sobel, "Domestic-to-Domestic Transactions-A Gap in China's Merger Control Regime?" Antitrust Source (Feb 2014) at 5.
11 See "Press Release for Business Review 2013 (III): Making Efforts to Well Develop Anti-Monopoly Review of Concentration of Operators to Maintain the Fair Competition Order," MOFCOM Press Release (Dec. 5, 2013).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.