With only 57 articles, the Anti-monopoly Law of the People's Republic of China ("AML") only covers the essential elements of PRC antitrust regime, leaving enforcement agencies the tasks of formulating detailed substantive and procedural rules. Since promulgation of the AML, Ministry of Commerce of the People's Republic of China ("MOFCOM") has been the most active in both enforcement and rule-making activities.
In less than one month after the landmark Panasonic-Sanyo PRC merger clearance, MOFCOM promulgated the Measures on Notification Filing in Connection with Concentration of Undertakings ("Filing Measures") on 21 November 2009, and the Measures on Anti-monopoly Review in Connection with Concentration of Undertakings ("Review Measures") on 24 November 2009. The drafts of these rules for comments were initially published in January 2009. Both set of rules will become operative as of 1 January 2010 and deal with procedural and substantive aspects of PRC merger control review.
In this Article, the terms "concentration and undertakings" and "merger" shall be used interchangeably. We will first examine the following merger control aspects as reflected in the new rules: (i) the criteria for determining whether a transaction is considered a concentration of undertaking, and (ii) issues related to calculation of turnover for the undertakings involved in a concentration, in order to determine whether the transaction has reached the threshold for merger notification. We will then look at the merger review investigative methods available to MOFCOM and the merger remedies mechanism under the new rules.
2. WILL JOINT VENTURE OR PARTIAL ACQUISITION BE SUBJECT TO PRC MERGER NOTIFICATION? – THE ANSWER REMAINS ELUSIVE.
Article 20 of the AML treats any of the following three instances as a merger:
(i) Combination of undertakings;
(ii) One undertaking gaining control over another undertaking through equity or assets acquisition; or
(iii) One undertaking gaining control over another undertaking or having the power to exert a decisive influence over another undertaking through contractual arrangement or otherwise.
In the Rules on Anti-monopoly Filing Thresholds for Concentration of Undertakings issued by State Council Anti-monopoly Commission on 3 August 2008 ("Filing Threshold Rules"), once a transaction is deemed a concentration of undertaking, it shall be subject to notification filing if the combined and respective turnovers of the participating undertakings meet the thresholds set out therein (See Section 3 below). However, neither the AML nor the Filing Threshold Rules explains the meaning of "control" or "decisive influence". Therefore, if a transaction is not a straight forward combination or 100% acquisition, the first question is to decide whether such transaction constitutes concentration of undertakings for purpose of merger notification.
The draft Filing Measures elaborated on the concept of gaining control or exerting decisive influence as follows:
(i) Acquiring 50% or more of the voting shares or assets of another undertaking;
(ii) Absent 50% or more of the voting shares or assets of another undertaking, nevertheless, through the acquisition of equity or assets, or through contractual means, etc., gaining the ability to decide the appointment of one or more members of the board of directors and key management positions, financial budgeting, operation and sales, pricing, major investment or other important management and operating decisions.
However, the officially promulgated Filing Measures (in Article 3) merely recites the definition set out in the AML, without any explanatory clauses. The removal of the specific clauses dealing with issues of control and decisive influence reflects MOFCOM's cautious approach to providing definitive rules on the subject. Nevertheless, the factors enumerated above will likely be taken into account by MOFCOM officials in determining whether an undertaking has gained control, or has gained the power to exert a decisive influence, over another undertaking as a result of a transaction.
Without clearly stated criteria, in many borderline cases, such as the establishment of joint venture or minority equity investment, the issue of "control" or "decisive influence" will still need to be determined on a case-by-case basis, subject to MOFCOM's discretion.
3. A MORE REFINED TURNOVER TEST
Once a transaction passes the control test, the turnovers of the parties are the remaining test for determining whether PRC merger notification obligation is triggered. The thresholds are either (i) combined worldwide turnover of RMB 10 billion, plus at least two of the parties each having turnover of RMB 400 million in PRC; or (ii) combined PRC turnover of RMB 2 billion, plus at least two of the parties each having turnover of RMB 400 million in PRC.
For calculation of turnovers, the Filing Measures provide that "turnover includes revenue received by the undertaking concerned through sale of goods and provision of services in the preceding accounting year, net of applicable taxes and surcharges." In addition, the Filing Measures also limit the "PRC turnover" to sales where the buyer is located within the territory of China. Although for PRC turnover, the Filing Measures do not expressly carve out sales to buyers located in Hong Kong, Macau and Taiwan, in practice, sales to those buyers usually excluded in calculating PRC turnover.
For calculation of a single party's turnover, affiliate sales are also included. Specifically, in addition to turnover of the undertaking which participates in the merger, the turnovers of the following entities are also included:
(i) Any other undertaking directly or indirectly controlled by the participating undertaking;
(ii) Any other undertaking directly or indirectly controlling the participating undertaking;
(iii) Any other undertaking directly or indirectly controlled by the undertaking referred to in item (ii) above;
(iv) Any other undertaking jointly controlled by two or more undertakings referred to in items (i) through (iii) above.
Intra-group sales are not included in the calculation of sales turnover. In addition, the turnover between a jointly controlled entity and an unrelated third party shall be included, but shall only be counted once. However, in case an entity is jointly controlled by the participating undertakings, the Filing Measures do not specify the turnover of the jointly controlled entity shall be attributable to which of the controlling participating undertaking. The draft Review Measures provided that such sales shall be attributed to the jointly controlling parties proportionately. It remains to be seen whether such an approach can be acceptable to MOFCOM in the future.
Where a merger involves the acquisition of a portion of one or more undertakings, in respect of the seller, only turnover from the business involved in the transaction shall be counted. However, if the same undertakings carry out multiple mergers within two years between them, then even if each of such mergers fails to reach the prescribed filing threshold, the series of mergers shall be treated as a single concentration transaction, and the timing of the concentration shall be determined as the time of the last transaction. Further, the turnover calculation shall be the combined turnovers in the context of such multiple transactions. The "two- year period" above refers to the period from the date of consummation of the first concentration to the date of signing of concentration agreement for the last concentration.
4. MOFCOM'S INVESTIGATION METHODS
Under the newly promulgated Review Measures, MOFCOM can employ a number of methods to ascertain the relevant facts and evaluate competitive effect of the notified concentration. MOFCOM may on its own initiative, or upon request by relevant parties, conduct investigation and evidence gathering, and solicit the opinions of relevant parties and hold hearing(s). Such methods are consistent with MOFCOM's practice during recent anti-monopoly review cases. For instance, in the Panasonic-Sanyo case, in addition to reviewing relevant documents submitted by the applicants, MOFCOM also issued questionnaires to 39 competitors and downstream customers in respect of different products, conducted telephone interviews, and carried out field investigations in Shenzhen and other cities.
During the anti-monopoly review process, the merger parties may present their statements of facts and/or defences on the relevant notification matters in writing to MOFCOM. If a hearing is held, MOFCOM shall notify the attendees in writing in advance. An attendee may submit its opinion in writing to MOFCOM before the hearing. In general, MOFCOM will hold hearings with the representatives of participating undertakings and their competitors, upstream and downstream enterprises and other relevant enterprises. MOFCOM may, at its discretion, invite relevant expert(s), representatives of industrial association(s), representatives of relevant government agencies and consumer representatives to attend the hearing.
If any attendee wishes to present at a separate hearing due to confidentiality concerns (such as the preservation of trade secrets), a separate hearing may be arranged, and the content of such hearing shall be treated in accordance with the relevant confidentiality rules.
5. MERGER REMEDIES
According to the Review Measures, in respect of a merger which is not prohibited, MOFCOM may decide to impose thereon restrictive conditions (merger remedies) which will mitigate the merger's adverse competitive impact.
The remedies proposed by the merger parties shall be sufficient to remove or mitigate the competition concerns arising from the merger, and shall be practically feasible. Based on specific circumstances of the proposed concentration of undertakings, the restrictive conditions may include the following categories:
(i) Structural remedies, such as divesting part of the assets or business of the participating undertakings, etc.;
(ii) Behavioral remedies, such as granting access to infrastructure such as network or platform, or licensing key technology (including patent, know-how or other intellectual property rights), termination of exclusive agreements by the participating undertakings, etc.;
(iii) Hybrid remedies, which is a combination of structural remedies and behavioral remedies.
The draft Review Measure published in January 2009 provided that either the merger parties or MOFCOM may propose restrictive conditions to modify the plan of concentration. In the final version of the Review Measures, only the merger parties may propose restrictive conditions in light of the competition concerns arising from the merger. However, either MOFCOM or the merger parties may propose or suggest modifications to the originally proposed remedies.
In respect of a concentration of undertakings which has been approved subject to restrictive conditions, the implementation of the restrictive conditions shall be carried out under MOFCOM's supervision and review. The merger parties shall report to MOFCOM on the status of remedy implementation in accordance with the prescribed schedule.
Where the merger parties fail to implement the remedies, MOFCOM may order them to make rectification within prescribed period; if the participating undertakings fail to do so within the prescribed period, MOFCOM may impose sanctions on them in accordance with applicable provisions of AML.
MOFCOM has shown its intention to actively scrutinize the acquisition activities of both multinational companies and private equity funds which raise PRC competition concerns. The increasing sophistication of analytical framework and review procedures adopted by MOFCOM has placed a higher burden on the merger parties to support their filings with credible data, and present coherent and defensible positions on key issues such as whether control or decisive influence is gained, definition of relevant market, level of market concentration, and competitive impact of the proposed merger, etc.
As the bar of PRC merger review has risen higher, for any complex merger which raises PRC competition concerns, the practice capability of antitrust counsels will be subject to more tenuous test. Their ability to timely prepare and submit the merger notification documents, and to effectively interact with the merger control authority during the anti-monopoly review process, will play an important role in the success or failure of the deal.
Note: The News is prepared by John Jiang with assistance of Rachel Li and Frank Jiang from Zhong Lun Law Firm for reference purposes only, and should not be construed as legal advice.