Penalties Now Likely If M&A Deals are Closed Without China Anti-monopoly Approval

Three and a half years after commencement of the Anti-Monopoly Law (AML) in China, the Anti-Monopoly Bureau of China's Ministry of Commerce (Mofcom) has signalled its intention to finally begin penalising business operators who fail to notify their M&A deals to Mofcom in circumstances where such notification (and then pre-approval by Mofcom) is mandatory.

Interim Measures for Investigating and Disposing of Suspected Concentration of Business Operators Failing to Be Notified in Accordance with Law ("Interim Measures") were published on Mofcom's website on 5 January 2012, and are scheduled to come into effect on 1 February 2012.

According to the Interim Measures, Mofcom may enquire into any M&A deal where a third party reports a believed 'failure to notify' situation to Mofcom, or on its own initiative. In such circumstances, Mofcom will, if it considers there is a sufficient basis to believe that the notification obligation has been infringed, notify the relevant business operators involved in the transaction of the investigation, and provide them with an opportunity to explain the failure to notify within 30 days. Within 60 days of the response, Mofcom is then required to complete its initial investigation on this issue.

If Mofcom determines that there has been an infringement of the notification obligation:

1. the relevant business operators will be required to submit the required notification documents in relation to the transaction within 30 days (after which time the normal Mofcom merger review process and timelines apply); and
2. Mofcom may impose a fine up to RMB 500,000 on such business operators and order them to take relevant measures to restore the pre-transaction situation (including by disposing of relevant equity or assets within a specified time limit),

and such decisions by Mofcom may be made public.

According to the Interim Measures, whether or not a fine or other penalty is imposed on the relevant business operators will be determined taking into account such factors as the nature, degree and duration of the infringement conduct, as well as the result of assessment on competition impact - as determined from review of the notification once submitted. The relevant business operators involved also have a right to provide statements and written evidence in their defence during the investigation stage.

Interestingly, the Interim Measures also contemplate that Mofcom officials may (after obtaining relevant internal approvals) also conduct raids on the premises of the relevant business operators during this period, to gather information relating to the infringement through such measures as document review and seizure, and questioning of employees. Given that China does not recognise legal professional privilege, it is entirely possible that legal advice the business operators have received in relation to the notification obligation may be reviewed by the Mofcom officials as part of this process.

Adoption of the Interim Measures has been a long-awaited event in China, as although the AML itself provides Mofcom with power to fine business operators who fail to comply with the mandatory notification obligation, it has been clear for some time that this would be an unlikely occurrence until more detailed measures were published explaining the approach that would be taken to such cases. Draft versions of the Interim Measures surfaced during 2011, but it was not until late in the year that clear messages begin emanating from the Anti-Monopoly Bureau that finalisation was imminent.

Although it is thought not to have been a significant factor for Mofcom, it is not surprising that some foreign observers of China's regime have speculated that the three and a half year deferral (since commencement of the AML) of introduction of the measures may have partly been due to consideration of their potential adverse impact on domestic business operators in China. It is clear that there has been ongoing debate within the ranks of the Chinese government about the extent to which State Owned Enterprises (SOEs) - whose activities are often closely guided by high-level Chinese Ministries and Departments - should be accountable to the Anti-Monopoly Enforcement Authorities in China, and Mofcom officials have previously expressed some frustration at various failures by some SOEs to comply with the regime. Accordingly, Mofcom will no doubt be pleased that the Interim Measures are being implemented at a time when compliance by SOEs and other domestic entities appears (from anecdotal evidence, at least) to be much greater than it was in the initial period following commencement of the AML.

It is also notable that Article 20 of the Interim Measures provides that if Mofcom staff are found to be abusing or failing to appropriately exercise their powers, including by showing favouritism to any party during a review or relevant investigation, they shall be subject to criminal liabilities (where relevant) or other punishment. This may provide some additional comfort to multinationals who harbour fears that foreign deals may be subjected to more scrutiny than domestic deals in the context of 'failure to notify' investigations.

With commencement of the Interim Measures scheduled for 1 February 2012, all business operators conducting M&A deals (or other types of transactions that may trigger the notification obligation under the AM) should ensure they are fully informed about the tests that must be applied to determine if a deal is required to be notified to Mofcom for pre-approval. Unfortunately, several import aspects of these tests remain ambiguously worded, and thus it is important that business operators considering their application have access to the latest knowledge about Mofcom's approach to interpreting and applying the AML. If in any doubt, consultation with Mofcom about whether a proposed deal requires notification may be prudent, although the first step should be to seek advice from China anti-monopoly experts.