China’s Anti-Monopoly Law (“AML”) was enacted in 2008. After 14 years, AML concluded its first amendment on June 24, 2022. The Amended AML will take effect on August 1, 2022. The Amended AML introduces significant changes to the merger filing regime in China. To further the purpose of the Amended AML, China’s premier antitrust agency, the State Administration for Market Regulation (“SAMR”), published draft implementation rules on notification threshold (“Threshold Rules”) and review of concentration of undertaking (“Review Rules”) on June 27, 2022. The two draft rules are still at the public consultation stage and are likely to be further revised before August 1, 2022. Nevertheless, as they are currently written, the draft rules entail important changes to the existing rules that require close attention from companies for compliance purpose.
1.The turnover threshold is adjusted upwards incrementally.
There are two general conditions for mandatory notification under the Amended AML— (1) turnover threshold and (2) change of control. Based on Article 3 of the Threshold Rules, the turnover threshold is adjusted to either of the two conditions:
(1) the worldwide turnover of all the business operators involved in the concentration exceeds 12 billion yuan (from 10 billion yuan) collectively in the last fiscal year, and the turnover in China of at least two business operators among them exceeds 800 million yuan (from 400 million yuan) separately in the last fiscal year; or
(2) the turnover in China of all the business operators involved in the concentration exceeds 4 billion yuan (from 2 billion yuan) collectively in the last fiscal year, and the turnover in China of at least two business operators among them exceeds 800 million yuan (from 400 million yuan) separately in the last fiscal year.
We believe that the incremental increase in the turnover threshold reflects SAMR’s plan to devote limited administrative resources into more complex cases. If the changes to the turnover threshold are accepted in the final version of the Threshold Rules, it may conceivably result in fewer notifiable transactions, lessening the current burden on the SAMR.
2.Extra notification burden is instituted for transactions involving “large” undertakings.
The acquisition of nascent competitors by well-established industry leaders or killer acquisition has been a significant concern for antitrust authorities all over the world in recent years. In order to address the concerns, the Amended AML requires notification to be made in relation to transactions involving a “large” undertaking and a relatively smaller undertaking who has close nexus to the China market even if the turnover threshold is not met.
Article 4 of the Threshold Rules states that even if the turnover threshold is not met, the transaction must be reported to SAMR if the following conditions are met:
(1) The turnover of one of the operators participating in the concentration in China in the previous fiscal year exceeded 100 billion yuan; and
(2) The market value (or valuation) of other parties to the concentration as specified shall not be less than 800 million yuan, and the turnover in China in the previous fiscal year shall account for more than one third of its worldwide turnover.
We believe that Article 4 of the Threshold Rules is intended to capture transactions involving a “large” undertaking and start-ups/nascent competitors. It remains to be seen how the above two-prong test will be implemented in practice as the determination of the market value of an undertaking to the concentration can be subject to reasonable disagreements.
3.SAMR has the right to require notification for transactions that may impede market competition.
In order to address the ever-changing competition landscape of various industries while affording SAMR more discretion in reviewing concerned transactions, Article 5 of the Threshold Rules states that if there is evidence that a transaction may impede market competition regardless whether the turnover threshold is met or not, SAMR has the right to notify by written notice the undertaking and require the undertaking involved the transaction to submit a merger notification within 180 days from the notification date. Article 7 of the Review Rules further states that (1) if the transaction has not been implemented by the notification date, the undertakings must stop the implementation until receiving clearance; (2) if the transaction has been implemented by the notification date, SAMR reserves the right to take necessary steps to restore market competition.
4.Penalty for failure to notify is significantly increased.
Under Article 58 of the Amended AML as well as Section on Legal Liability in Review Rules, the pecuniary penalty for failure to notify is increased to (1) no more than 10 percent of last year’s sales revenue of the concerned undertaking if the concentration of undertakings has or may have an effect of excluding or limiting competition; (2) not more than 5 million yuan if the concentration of undertakings does not have an effect of excluding or limiting competition. By contrast, under the AML, the pecuniary penalty for failure to notify is capped at 500,000 yuan.
Furthermore, Article 64 of the Amended AML states “where a business operator is subject to an administrative penalty due to a violation of this Law, the violation shall be entered into the business operator’s credit records pursuant to the relevant provisions of the Law, and the information shall be disclosed to the public.” Based on our experiences, we understand that a blemish on the credit record will affect a company's corporate image and have a negative impact on the company's goodwill and future bidding activities, etc.
In summary, compared to AML, the penalty for failure to notify is significantly heightened from the perspective of both the pecuniary penalty and the negative impact on credit records. Therefore, companies are advised to be more prudent in determining whether a merger notification should be filed.
5.What constitutes control is further clarified.
Since the enactment of AML in 2008, what constitutes control has been a perplexing issue for undertaking in determining whether the notification obligation is triggered. In order to provide further guidance on what constitutes control, Article 4 of the Review Rules enumerates several factors that are indicative of control including holding voting rights or similar rights of other operators, influence on the decision-making and management of other operators such as the appointment and removal of senior management personnel, financial budget, business plan, etc.
We believe that the enumerated list does not reflect a change in attitude regarding control by SAMR. Rather, the enumeration fleshes out SAMR’s approach towards the control question that has been adopted in previous cases and intends to provide more clarification to undertakings in determining their notification obligations.
6.What constitutes gun jumping is further clarified.
Under the AML, undertakings should not implement the concentration before receiving clearance. Nevertheless, what constitutes “the implementation of concentration” can be ambiguous. In order to provide clear guidance, Article 7 of the Review Rules adds a definition of “implementation of concentration”, which refers to the act of gaining control over other operators or exerting decisive influence on them, including but not limited to completing the registration of changes of shareholders or rights, appointing senior management personnel, actually participating in business decision-making and management, exchanging sensitive information with other operators, and substantially integrating business, etc.
Similar to the control question, the newly-added definition of “implementation of concentration” in Article 7 of the Review Rule does not signal a change in the SAMR’s approach in analyzing the issue, but rather is intended to provide further compliance guidance to companies.
7.A classified and graded review system is introduced.
Article 6 of the Review Rules states that SAMR will establish a classified and graded review system in order to improve review efficiency. Based on the information we have, the classified and graded review system will at least include the delegation of power to conduct merger review to five province-level market regulators by SAMR in relation to certain filings qualified for simple procedures.
It remains to be seen how the classified and graded review system and the delegation will affect the merger review both substantively and procedurally.
Conclusion
In summary, SAMR has launched public consultation on the draft implementation rules in furtherance of the purpose of the Amended AML. This alert provides a short overview of the important changes to the existing merger control regime in China the draft implementation rules introduced. It is important to note that the draft implementation rules are still subject to change by SAMR. We will update you if the draft rules are further revised or adopted.
