With China’s economy booming, the nation’s competition regime is coming of age. After 13 years of deliberations, the anti-monopoly law (AML) of the People’s Republic of China (PRC) was promulgated by the standing committee of the National People’s Congress in August 2007, and will come into effect on 1 August 2008.
Following on from this, China’s State Council recently circulated for public comment the long-awaited draft regulations on the notification of concentrations of undertakings. The rules will form part of the implementing regulations for the new AML and are expected to replace the previous provisions set out in the 2006 rules on the acquisition of domestic enterprises by foreign investors.
The draft regulations resolve a number of issues stemming from the 2006 M&A rules, but at the same time present new items of concern that will affect China-related M&A transactions. Foreign investors will have to take this into account when setting out to acquire businesses and companies in China.
The draft rules
Unlike the 2006 M&A rules, which applied to only foreign-funded deals, under the draft rules concentrations of domestic Chinese companies are subject to merger review for the first time.
The draft rules set clearer notification thresholds for onshore and offshore deals compared with the 2006 rules. But alhough clearer notification thresholds are a welcome development, a number of questions remain unanswered.
For instance, it is unclear whether the proposed turnover thresholds will apply on a ‘group’ basis – as has been the case under the 2006 M&A rules – or whether the thresholds will only be applicable to the ‘undertaking’ under review.
If the turnover thresholds are determined on a group basis without taking into account the relevant market in question, it may generate a significant number of filings for transactions that do not, in reality, eliminate or limit competition in the relevant market.
Considerable uncertainty also remains over the proposed calculation method of turnover. Concerns have been raised that the thresholds do not reflect international best practice and will result in multinational companies having to notify the authorities about transactions which have no substantial effect on the Chinese market. Nonetheless, the thresholds will help alleviate the reporting burden on big multinational companies when they make acquisitions of small businesses.
There are further concerns that some of the thresholds under the draft rules are related to the parties’ turnover without differentiating the relevant market. In practice, this means that companies with businesses in multiple industries or multiple product lines may be required to make filings for small and unsubstantial deals.
That said, clearer notification exemptions have been provided. No merger filing or application for exemption of examination is required for intra-group restructuring if: one party possesses 50 per cent or more of the voting shares or assets of the other party in the concentration; or 50 per cent or more of the voting shares or assets of each party is possessed by the same third party (which is not a party to the deal).
Unlike the situation in many other established merger control regimes (including the EC and German merger control regimes), the draft rules do not exempt temporary share acquisitions by financial institutions that acquire shares merely for investment rather than strategic purposes.
The review authority must be notified should any material changes occur to the proposed concentration after the filing is made. A problem arises from the fact that there is no guidance on what will be considered to be a ‘material’ change to the key facts associated with the concentration.
A new mechanism for fast-track reviews is available for a concentration that “apparently will not result in any effect to exclude or limit competition”, but no details have been provided on how fast-track reviews will be conducted.
According to the draft rules, undertakings may apply to the reviewing authority to have the disclosed information treated confidentially on the grounds that its onward disclosure would have a material negative impact on the undertaking. This could not be assured under the 2006 M&A Rules.
The draft rules specify penalties ranging from prohibition from implementing the concentration, to the disposal of shares or assets, or the transfer of business within a stipulated timeframe. Despite the introduction of penalties, the authority in charge of merger control remains to be designated or constituted.
Although the draft rules are a welcome development, it is hoped that their final form will set clearer rules and guidance for companies considering M&A transactions affecting PRC markets. Such clarity is necessary to ensure that China’s competition regime acts as an incentive for further economic and social progress.
Andrew Halper is head of the China business group at Eversheds