Name: Provisions of the State Council on the Notification of Concentration of Undertakings (Draft for Consultation) (《国务院关于经营者集中申报的规定 (征求意见稿)》), (the “Draft Provisions”)
Issuing authority: Legislative Office of the State Council
Consultation period: Ending on 12 April 2008
Subject: Anti-trust filing
The PRC Anti-monopoly Law (promulgated on 30 August 2007 and effective on 1 August 2008) regulates monopolistic conduct which has the effect of eliminating or restricting market competition within the PRC. One type of monopolistic conduct regulated by the PRC Anti-monopoly Law (the “AML”) is the concentration of undertakings that has or may have the effect of eliminating or restricting competition. A concentration of undertakings may not be implemented when the concentration reaches the notification thresholds set by the State Council unless a clearance is granted by the anti-monopoly law enforcement authority under the State Council after a prior notification is filed. The Legislative Office of the State Council has now issued the Draft Provisions to, amongst other things, clarify the meaning of “concentration of undertakings”, set out the proposed thresholds for the notification requirement, and establish an expedited preliminary review mechanism.
Highlights
- Under the PRC AML, “concentration of undertakings” expressly refers to: (1) a merger of undertakings; (2) an acquisition by an undertaking of control of any other undertaking(s) by acquiring its equity or assets; and (3) an undertaking’s acquisition of control over, or an undertaking’s exertion of a decisive influence on, any other undertaking(s) by contract or other means. The Draft Provisions clarify that:
- an acquisition by an undertaking of control of any other undertaking(s) includes (i) acquiring more than 50% of the voting shares or assets of another undertaking(s), (ii) becoming the largest holder of voting shares or assets of another undertaking(s), (iii) being able to direct, in real terms, a majority of the voting rights of another undertaking(s), (iv) being able to decide the election of over half the members on the board of directors of another undertaking(s), and (v) other situations determined by the anti-monopoly enforcement authority; and
- an undertaking’s exertion of a decisive influence on any other undertaking(s) means an undertaking having the ability to exert decisive influence on production or business decisions of another undertaking(s).
It will be of concern to companies that the mere fact of becoming the largest, even if still minority, holder of the voting shares or assets of another undertaking(s) will oblige them to notify when the thresholds are met. In addition, the concept of “exertion of a decisive influence on any other undertaking(s)” remains to be substantiated by the future practice of the anti-monopoly enforcement authority under the State Council.
The Draft Provisions set out the following proposed notification thresholds for the concentration of undertakings:
- the combined aggregate worldwide turnover of all the undertakings to the concentration in the last financial year is more than RMB 9 billion, and the turnover within the RPC of each of at least two of the undertakings to the concentration in the last financial year is over RMB 0.3 billion;
- the combined aggregate PRC turnover of all the undertakings to the concentration in the last financial year is more than RMB 1.7 billion and the PRC turnover of each of at least two of the undertakings to the concentration in the last financial year is over RMB 0.3 billion; or
- the concentration will result in the PRC market share of the undertakings participating in the concentration reaching 25% of the relevant market.
The removal of the differentiation between onshore transactions and offshore transactions in terms of thresholds should be welcomed. However, both the worldwide and Chinese turnover thresholds are set lower than the under the old regime, which combined with mandatory review will cause transactions which do not enjoy significant market position in the competition law sense or have too weak a nexus to the PRC economy to be easily caught by the Chinese merger control regime.
- The Draft Provisions provide that where concentrations do not reach the thresholds but the anti-monopoly enforcement authority under the State Council is of the view that the concentration would preclude or restrict competition, it may request the undertakings to make notifications. Many uncertainties brought about by the Draft Provisions will be created by this “notification on request” clause, which has been applicable to onshore transactions under the current merger control regime. This clause will impose a notification obligation and consequently a suspension obligation at any possible point on the concentration which the Anti-Monopoly Law does not apply to and such obligations are impossible to foresee.
- As far as the reporting obligation is concerned, the Draft Provisions clarify that, in the event of a merger between undertakings, the undertakings must jointly notify the relevant anti-monopoly law enforcement authority regarding the merger. In the event of an acquisition of control of an undertaking by another undertaking through a share or asset transfer, the notification obligation falls on the undertaking obtaining control. For an acquisition of control of, or the exertion of decisive influence over, an undertaking by another undertaking by contract or by other means, the notification obligation falls on the undertaking obtaining control or the ability to exert decisive influence.
- The Draft Provisions introduce an expedited preliminary review mechanism which still needs to be detailed by the anti-monopoly enforcement authority under the State Council. Hopefully this will occur soon.
The Draft Provisions also set out some procedural rules about notifications. Some problems still remain unsolved:
- It remains unclear whether the criteria according to which the completeness of the notification will be assessed will be limited to those specified in Article 9 of the Draft Provisions. This is very crucial as the 30-day review period only starts once notification is complete. It will be extremely difficult to get the clock started if the authority keeps resetting the clock because of incompleteness of the notification.
- Undertakings can apply for their documents and materials to be treated as confidential material when they believe that the leakage of the documents and materials they have submitted will have a material negative effect. Undertakings are expected to submit sound reasons for such treatment.
This confidentiality application procedure appears quite redundant and no clear time limit for the anti-monopoly enforcement authority to make a decision on such confidentiality applications is provided by the Draft Provisions.
Please contact Zili Shao zili.shao@linklaters.com tel: +86 21 2891 1868 or Fang Jian jian.fang@linklaters.com tel: +852 2901 5320 if you would like further details.
