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Legal Update

MOFCOM invites comments on draft regulations on simple merger cases - What procedural benefits will simple merger cases have?

17 April 2013
Mayer Brown JSM Legal Update

The draft Interim Regulations on Standards for Simple Cases of Concentrations of Business Operators (Draft Simple Cases Regulations) was published for comment on the website of the Ministry of Commerce (MOFCOM) on 3 April 2013. The deadline for submitting comments on the Draft Simple Cases Regulations is 2 May 2013.

The Draft Simple Cases Regulations is a pared down and somewhat less ambitious version of MOFCOM's draft Interim Provisions on the Classification of Concentrations of Business Operators (Draft Classification Provisions) published in May of last year. By spelling out the categories of cases that merit an accelerated or simplified review procedure, the new draft is a step in the direction of a fast-track procedure for straight-forward cases. The Draft Simple Cases Regulations is however silent on the procedural benefits of a case being classified as "simple" and notifying parties will therefore have to wait a bit longer for further guidance on the point from MOFCOM.

Steps toward a simplified procedure

The Draft Simple Cases Regulations clarifies the standards MOFCOM will use to distinguish simple cases from other cases meriting a more detailed investigation. In that respect, the new draft draws heavily on the European Commission's Notice on a simplified procedure and in particular Section II of that Notice which sets out categories of concentrations suitable for treatment under the EU's simplified review mechanism. Whereas the Draft Classification Provisions issued last year sought to identify three categories of case (simple, normal and major cases) on the basis of market share levels, HHI figures and other factors, the new draft rules have taken the less ambitious though likely better approach of seeking only to distinguish simple cases. Unfortunately while the new draft rules can tell you what a simple case is likely to be, they offer no guidance whatsoever as to the likely procedural benefits of such a classification. Logically, there should be an accelerated review as discussed further below.

What's a simple case?

The Draft Simple Cases Regulations identifies six categories of simple case:

  • Horizontal concentrations where the aggregate market share of the parties in all horizontal markets is less than 15 percent. The market share threshold here is the same as in the EU though higher than envisaged in the Draft Classification Provisions;
  • Vertical concentrations where the aggregate market share of the parties in all vertically related markets is less than 25 percent. The market share threshold is again the same as in the EU;
  • Concentrations without any vertical relationship between the parties where the aggregate market share of the parties in each market is less than 25 percent. Typically one would expect this category of case to be a "conglomerate" case though the formulation used by MOFCOM does not seem confined to the conglomerate scenario. In that respect, and unlike the EU Commission's Notice on a simplified procedure, there is no reference to "closely related neighbouring markets". The absence of wording of this kind may be taken to suggest that any case where a party has a market share of 25 percent or more is not a simplified case. This seems an implausible interpretation although it is to be hoped that the final form Simple Cases Regulations will clarify the position;
  • Concentrations which involve the establishment of a joint venture outside China, where the joint venture does not conduct economic activities in China;
  • Concentrations which involve an acquisition of the equity or assets of a foreign enterprise, where the foreign enterprise does not conduct economic activities in China;
  • Concentrations which entail a change of control in respect of an existing joint venture where post-transaction the joint venture will be controlled by one or more of the parties who jointly controlled the joint venture before the transaction.

Unsurprisingly, MOFCOM retains a significant level of discretion - as does the EU Commission in the EU context - to re-categorise cases falling within the above classes as non-simple where certain additional factors are present. In particular, the following factors would suggest that a more careful assessment is required and allow for a clawback type mechanism:

  • Concentrations which entail a change of control in respect of an existing joint venture where post-transaction the joint venture will be solely controlled by a party who is a competitor of the joint venture;
  • Concentrations where it is difficult to define the relevant markets;
  • Concentrations which may cause adverse effects on market entry or technological progress;
  • Concentrations which may have an adverse impact on consumers or other relevant business operators;
  • Concentrations which may have an adverse impact on the development of the Chinese economy; or
  • Other concentrations which may in MOFCOM's opinion have an adverse impact on competition.

The procedural benefits of a simple case

The categorisation proposed in the Draft Simple Cases Regulations is largely uncontroversial. A glaring omission from the draft however is any mention of an indicative merger review timeframe for simple cases or other procedural benefits which a simplified case might justify.

In its Draft Classification Provisions, MOFCOM had indicated a simple case could expect to be cleared in Phase I absent "special circumstances". This is the minimum parties would be entitled to expect but equally there should be an opportunity for a reduced filing burden and some guarantee that the pre-acceptance phase - prior to a filing being declared complete - would not be longer than appropriate for a simple case. Presently, the pre-acceptance phase for arguably simple cases is no shorter than the pre-acceptance phase for more complex cases and this is largely a function of available resources within MOFCOM (something new procedural mechanisms will do little to address).

In any event, the Draft Simple Cases Regulations provides no answers to these questions though it is understood that MOFCOM hopes to further flesh out a fast-track procedure for simple cases during the course of 2013.

For inquiries related to this Legal Update, please contact Hannah Ha, John Hickin, Philip Monaghan or your usual contacts with our firm.

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