On 27 November 2009, the Anti-Monopoly Bureau of China’s Ministry of Commerce (MOFCOM) published two new guidance measures concerning the notification and review of mergers under the Anti-Monopoly Law (AML). They are:
In this Client Alert, we highlight key elements of the Notification Measures, which provide clarity on several issues previously plagued by uncertainty due to the ambiguous and unsettled nature of a draft version of the measures published in January 2009 - but also omit a crucial definition that leaves the mandatory notification status of many transactions up in the air.
A further Client Alert will be issued shortly, containing information on key aspects of the Review Measures (which primarily set out the process MOFCOM will follow when reviewing notified transactions).
Highlights of the finalised Notification Measures
The finalised Notification Measures are scheduled to come into effect on 1 January 2010, and provide welcome guidance for business operators engaged in transactions in respect of which it is necessary to assess whether the AML merger control regime applies.
That regime requires that transactions which qualify as a "concentration" (a concept discussed further below) be notified to MOFCOM for review and prior-approval if the business operators participating in the concentration transaction meet certain worldwide and/or China-specific turnover thresholds1 (Mandatory Notification Turnover Thresholds). In this context, the finalised Notification Measures:
A summary of the guidance provided on these matters is set out below.
The Notification Measures also state that if a party obliged to submit a notification fails to do so, the other business operators participating in the relevant concentration transaction may do so instead.
Problems with the finalised Notification Measures
Under Article 20 of the AML, a concentration is defined as including, inter alia:
The draft version of the Notification Measures that was published by MOFCOM for consultation purposes in January 2009 explained how the phrase "acquisition of control" should be interpreted in this context. Specifically, it provided that an acquisition of control will occur where a business operator acquires more than 50% of the voting shares or assets of another business operator, or where two business operators establish a new joint venture enterprise. Additionally, the draft provided that an acquisition of control will occur in other circumstances (such as where less than 50% of the voting shares or assets are obtained) where an undertaking gains the ability to, inter alia:
Although there were several ambiguous and uncertain aspects of these draft measures, they did provide a useful level of guidance regarding the types of transactions that MOFCOM considered would be likely to warrant notification and review under the AML. In many cases, businesses engaging in transactions that clearly fell outside the criteria for "acquisition of control" described in the draft, could be sufficiently satisfied that their deal was not required to be submitted to MOFCOM and that no consultation with the regulator was necessary on this issue.
Unfortunately, the finalised Notification Measures omit any definition or explanation of the phrase "acquisition of control". There is now no official guidance from the Chinese authorities on this point, and the high level of uncertainty that existed immediately after the commencement the AML in August 2008 (and before publication of the draft Notification Measures in January 2009) regarding which non-merger M&A transactions qualify as concentrations under the AML has now returned.
It is likely that MOFCOM will revisit this issue in later guidelines or measures, and that the relevant provisions that appeared in the draft Notification Measures were removed from the finalised version due to continuing debate within MOFCOM and associated agencies about the scope of deals that should properly fall for review under the AML's merger control regime.
Implications of the finalised Notification Measures
The finalised Notification Measures will be welcomed by the business sector, as they provide a level of clarity on several matters (particularly relating to the turnover calculation process under the Mandatory Notification Turnover Thresholds) that are fundamental to an application of the AML merger control regime to business transactions.
However, there will also be concern and frustration over MOFCOM's failure to include in the finalised document a clear definition of the crucial concept "acquisition of control".
In practical terms, the main implication for the business sector from this omission is that many acquisitions of shares or assets (including relevant new joint ventures) between business operators that meet the Mandatory Notification Turnover Thresholds may now have to be the subject of formal or informal consultation with MOFCOM - in order for parties to obtain clear guidance on whether MOFCOM believes it should be the subject of a notification.
To avoid risk, it will not be sufficient to assume that transactions which do not qualify as a 'concentration' under competition regimes with broadly analogous mandatory notification criteria (such as the European Union) will also be considered by MOFCOM to fall outside the scope of its merger review powers.
1. The relevant turnover threshold provisions specify that notification will be mandatory if both of the following two limbs are met, by reference to the last financial year: Limb 1: At least 2 business operators involved in the concentration each have turnover in China of RMB 400m (US$58.6m) or more; and Limb 2: The global turnover of all business operators involved in the concentration combined is RMB 10b (US$293m) or more OR the China turnover of all business operators involved in the concentration combined is RMB 2b (US$1.46b) or more.
For inquiries related to this Client Alert, please contact:
Hannah Ha ( )
John Hickin ( )
Gerry O'Brien ( )
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