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Focus: China – Competition Law – August 2008

State Council sets thresholds for notification of acquisitions

In brief: The PRC State Council has set the thresholds for when notification is required of mergers and acquisitions under China's new Anti-Monopoly Law, which came into effect on 1 August 2008. Partner Nigel Papi (view CV) and Senior Associates Ross Keene and Katherine Yu discuss the new thresholds and other issues in relation to the review of mergers and acquisitions under the new law.

How does it affect you?

  • The new regulations issued by the State Council stipulate turnover-based thresholds to determine whether a transaction needs to be notified to the PRC authorities.
  • Confirmation of which PRC authorities will enforce the law, and further clarification as to the processes to be followed in lodging anti-monopoly notifications, is expected to follow soon.

Background

China's Anti-Monopoly Law (AML) came into force on 1 August 2008. As noted in our Allens Focus: China – Competition Law – September 2007, one key element of the new law is that any merger, acquisition or other transaction whereby one party gains control over, or the ability to exercise decisive influence upon, another party needs to be notified to the authorities if the transaction meets certain thresholds. Under the previous M&A Regulations issued in 2006, notification was only required where the transaction involved a foreign investor. Notification under the AML (which has replaced notification under the M&A Regulations) applies to all transactions that meet the thresholds, including not only foreign acquisitions but also wholly domestic transactions.

The AML states that transactions subject to review will be assessed against a number of factors relating to the degree of concentration in the relevant market and the impact of the transaction on the market. If the transaction will or may eliminate or restrict competition, the authorities have the power either to prohibit the transaction or to impose conditions on the transaction proceeding. Moreover, the notification and review requirements under the AML have more 'teeth' than under the M&A Regulations in that, if parties implement a transaction without approval or otherwise in breach of the AML, in addition to ordering that the transaction be unwound, the authorities can impose a fine of up to RMB 500,000.

One key issue that was left unresolved under the AML was the definition of the thresholds above which a transaction would need to be notified to the authorities.

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Thresholds defined

On 3 August 2008, the State Council issued the Regulations on Notification Thresholds with respect to Concentrations of Business Operators (the Regulations). The Regulations provide that a merger, acquisition or other transaction whereby one party gains control over, or the ability to exercise decisive influence upon, another party must be notified if, during the previous financial year:

  • total worldwide turnover for all parties to the transaction was in excess of RMB 10 billion and at least two parties each had turnover in China of more than RMB 400 million; or
  • total turnover in China of all parties to the transaction exceeded RMB 2 billion and at least two parties each had turnover in China of more than RMB 400 million.

There are a number of points to note under these thresholds.

  • Early drafts of the Regulations stipulated a further threshold for notification, which would be triggered if the parties had at least a 25 per cent share of a relevant market in the PRC. The removal of this market share-based threshold is a positive step for companies operating in the PRC, since there will often be uncertainty and room for debate as to how broadly or narrowly the market should be defined, which will, in turn, create uncertainty as to whether the market share threshold has been exceeded. The authorities may have agreed that such uncertainty was undesirable, hence the decision to base the thresholds solely on turnover, which will be relatively straightforward to calculate. Nonetheless, if the turnover thresholds are satisfied, then the definition of the market, and hence the degree of market share held, will be critical issues to be addressed by the parties in their notification and to be assessed by the authorities.
  • The M&A Regulations specified a number of different types of thresholds for notification, including not only turnover and market share thresholds but also thresholds based on the number of companies acquired by the parties in China in the previous year, and the value of assets held in China. The simpler approach taken under the new Regulations is a positive development.
  • The fact that at least two parties to the transaction need to have substantial turnover in the PRC should ensure that some transactions undertaken with small counterparties will not require notification. However, the Regulations do not set a minimum value for notifiable transactions, so any transaction between two parties with substantial operations in the PRC will need to be reported regardless of the size of the transaction. In addition, even if a transaction is wholly offshore and none of the underlying companies or assets that are relevant to the particular transaction are located in China, parties should be aware that notification in the PRC could technically still be required if the relevant global and PRC turnover thresholds are met by the parties to the transaction.
  • Unlike the M&A Regulations, the Regulations do not specify whether the transaction parties will be aggregated with their affiliates when calculating turnover. This may be clarified in future regulations. In practice, the authorities may well take the view that affiliates' turnover should be aggregated.
  • One positive step under the Regulations is that, with respect to the definition of what is a 'concentration' (ie a merger or acquisition for which notification may be required), becoming the largest shareholder in a company is no longer equated with obtaining control of that company. This approach, which was taken under an earlier draft of the Regulations, could have created significant uncertainty, since changes to the identity of the largest shareholder of a company (such as a large public company) can quite commonly occur without there being any change in the actual control of the company.
  • Even if a transaction does not meet the thresholds, if it is apparent that the transaction will or may eliminate or restrict competition, the authorities will investigate the transaction on anti-monopoly grounds.

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Further issues

We note the following further issues in relation to anti-monopoly notifications.

  • It appears likely that the Ministry of Commerce will be given the power to review anti-monopoly notifications. However, an official announcement as to how enforcement of the AML will be divided between the different PRC government departments is still to come.
  • Earlier drafts of the Regulations provided guidance on a number of procedural matters related to the making of anti-monopoly notifications, but such guidance was not ultimately included in the Regulations. We expect that further guidance will be provided in due course. In the meantime, companies may wish to consult the notification guidelines issued by the Anti-Trust Investigation Office of the Ministry of Commerce in March 2007 (in relation to notifications under the M&A Regulations). Assuming the Ministry of Commerce will continue to be the responsible authority, these guidelines may provide some indication of the approach that should be taken under the AML.

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Conclusion

The Regulations have provided timely definition of the thresholds for merger notifications under the PRC Anti-Monopoly Law. In addition, it is expected that the departments responsible for reviewing merger notifications, and for enforcement of other aspects of the AML, will be confirmed shortly. Once those authorities assume their new functions, they can be expected to issue further regulations on those parts of the AML for which they are responsible.

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