China's State Council has published draft Regulations on Notifications of Concentrations of Undertakings (the "Draft Regulations") for public comment. These are intended to implement the relatively general merger control provisions in China's new Anti-Monopoly Law ("AML"), which goes into effect on August 1 but did not contain any specific notification thresholds. (For more details on the AML, see our Commentary at www.jonesday.com/pubs/ pubs_detail.aspx?pubID=S4662.)
The Draft Regulations follow and generally improve upon an earlier informally circulated draft. They cover three main areas: the meaning of "obtaining control," specific notification thresholds, and various procedural issues.
The AML's merger notification scheme applies to "concentrations of undertakings [i.e., companies or entities]," which are defined by article 20 of the AML as either mergers or acquisitions of control through acquisition of equity, assets, or any other means by which one company acquires the ability to exercise "decisive influence" over another.
The Draft Regulations (in article 2) clarify this to include:
(1) Acquisition of 50 percent or more of the equity or assets of another undertaking;
(2) Becoming the largest shareholder or asset owner of another undertaking;
(3) Acquiring voting rights to "actually dominate" or determine half or more of the directors of another undertaking; and
(4) Exercising decisive influence over the decision-making of the production and operating policies of another undertaking.
One concern here is the overbreadth of the second item above, which does not include a minimum size threshold for becoming the largest shareholder of a company. It appears that any acquisition of shares that results in becoming the largest shareholder of a company - even if that shareholding is only two percent - would require notification, without regard to whether there is any indication of actual control or decision-making influence attached to that shareholding.
Another issue is the subjective nature of the third and fourth items above, which require parties to determine whether they will "actually dominate" or "exercise decisive influence over the decision-making" of the target company after the proposed acquisition. As with the determination of market share discussed below, such subjective criteria are difficult to apply in the premerger filing context and create uncertainty about whether filing really is required.
The AML does not specify merger notification thresholds and instead delegates to the State Council the authority to set and revise those thresholds.
The Draft Regulations (in article 3) provide three notification thresholds, exceeding any of which requires a merger filing pursuant to article 21 of the AML:
(1) The combined worldwide annual sales of all undertakings involved exceed RMB 9 billion [approximately US$1.3 billion], and the China sales of two undertakings each exceed RMB 300 million [US$43 million];
(2) The combined China annual sales of all undertakings exceed RMB 1.7 billion [US$243 million], and the China sales of two undertakings each exceed RMB 300 million [US$43 million]; or
(3) The concentration will result in an undertaking occupying a greater than 25 percent share in the relevant market in China.
The Draft Regulations state that more detailed rules will be issued by the Anti-Monopoly Enforcement Authority ("AMEA"). They further (in article 3) permit the AMEA to require parties to file notifications for transactions otherwise not meeting the above thresholds if the AMEA believes the transaction "may have the effect of eliminating or limiting competition," a power that also exists under the existing Foreign M&A Regulations and has the effect of injecting additional uncertainty.
These notification thresholds are a marked improvement over those in the existing Foreign M&A Regulations. In particular, with the possible exception of market share, the Draft Regulations eliminate notification thresholds based solely upon the characteristics of one party to the proposed concentration and instead require that "at least two" undertakings have China sales exceeding the RMB 300 million thresholds. Such one-party thresholds are prevalent in the existing Foreign M&A Regulations and technically capture all transactions involving one company with a substantial China presence.
However, there are still some significant issues with the proposed notification thresholds. First, there is no minimum size-of-transaction threshold, so the regulations will capture very small transactions if the parties themselves are of sufficient size worldwide and/or in China.
Second, there is no requirement that the transaction itself relate to or affect China. Notification is required if the parties exceed the sales or market-share thresholds, regardless of whether the transaction occurs in or affects China. Each notification threshold applies to "all undertakings participating in the concentration" and does not appear to be limited only to the specific portion of the seller's business or assets involved in the transaction. Similarly, the market-share threshold does not specifically require any horizontal overlap (i.e., any increase in market share as a result of the transaction). This means that transactions having no relationship with or impact on China must be reported as long as they involve parties that - independent of the transaction - already have substantial sales or market share in China.
Third, the market-share-based notification threshold is subjective and depends upon a number of determinations - including the definition of the relevant market - that often practically cannot be made without detailed analysis. This inherent subjectivity means that parties will be required to estimate market shares based on their own market definitions, and it will make it difficult for parties or the AMEA to know with certainty whether a transaction meets the notification thresholds.
The Draft Regulations also provide additional detail about the merger review process. Among other things, they:
• Require joint filings by merging parties or a sole filing by a party acquiring control;
• Set out details of a prefiling consultation process;
• Specify the information required for submission with a notification filing, require that all information be submitted in Chinese, and provide for supplemental information requests by the AMEA that suspend the time limit for initial review;
• Require notice of material changes occurring after a notification filing, which also may result in restarting the time limit for initial review;
• Provide a mechanism for the designation and protection of confidential information, to the extent the AMEA deems them "reasonable"; and
• Provide the potential for expedited initial review of transactions that "obviously will not result in the effect of eliminating or restricting competition."
Many of these procedural matters raise concerns, especially to the extent that they add to the already substantial discretion in the hands of the reviewing authority, the AMEA. The potential for supplemental information requests may make it very difficult to limit or predict with accuracy the time taken by the AMEA for merger review in difficult cases. Likewise, the scope of protection of confidential information appears somewhat unclear.
Nevertheless, the Draft Regulations by and large are substantial improvements both on prior informal drafts and on the existing and still effective Foreign M&A Regulations and show that the State Council has been considering input from all sides. We expect that the final regulations to be issued by the State Council and any subsequent detailed rules from the AMEA will evidence further improvement and accord with international standards.
Peter J. Wang, a Partner in Jones Day's Shanghai Office, is co-head of the Firm's international litigation practice and leads the antitrust/competition practice in China. Mr. Wang has extensive litigation and arbitration experience in the U.S., China, and around the world. He regularly advises clients inside and outside of China on complex commercial and international litigation, including patent, trade secrets, copyright and other technology and intellectual property matters. Mr. Wang also regularly advises on China- and U.S.-related antitrust/competition issues, including the Chinese merger review process. He also has helped to handle several significant U.S. government antitrust investigations of proposed mergers and acquisitions; in addition, he has been involved in several antitrust litigation matters. Mr. Wang is admitted to practice in California and the District of Columbia. He is a graduate of Princeton University (A.B. in Molecular Biology 1989) and the University of California, Berkeley (J.D. 1992). Yizhe Zhang is an Associate in Jones Day's Beijing Office who frequently assists clients on Chinese and U.S. antitrust merger review matters. Before joining the Firm, she worked for China's Antimonopoly Office at the Ministry of Commerce and was heavily involved in the drafting of the PRC Antimonopoly Law and other regulations for foreign mergers and acquisitions.