China’s Anti-Monopoly Law (AML) was enacted in 2008 and has remained largely unchanged until 24 June 2022 when a first amendment was introduced.
The Amended AML proposes significant changes to the merger filing regime in China, taking effect on 1 August 2022. To explain the changes, 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).
Both documents are still at the public consultation stage and are likely to be further revised before the Amended AML comes into effect on 1 August 2022. However, the draft rules entail important changes that require close attention from local and international companies wishing to ensure ongoing compliance.
In this article we provide a summary of the important changes to the existing merger control regime in China and the draft implementation rules introduced.
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:
- the worldwide turnover of all the business operators involved in the concentration exceeds 12 billion yuan (approx. USD 1.79 billion) (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 (approx. USD 119 million) (from 400 million yuan) separately in the last fiscal year; or
- the turnover in China of all the business operators involved in the concentration exceeds 4 billion yuan (approx. USD 600 million) (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 (approx. USD 119 million), (from 400 million yuan) separately in the last fiscal year. The incremental increase in the turnover threshold reflects SAMR’s plan to allocate limited administrative resources to 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
Acquisitions of nascent competitors by well-established industry leaders or killer acquisitions have been a source of significant concern for antitrust authorities all over the world in recent years. Addressing these concerns, the Amended AML requires a notification to be made in relation to transactions involving a “large” undertaking and a relatively smaller undertaking with a 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:
- The turnover of one of the operators participating in the concentration in China in the previous fiscal year exceeded 100 billion yuan (approx. USD 15 billion); and
- The market value (or valuation) of other parties to the concentration as specified shall not be less than 800 million yuan (approx. USD 119 million), and the turnover in China in the previous fiscal year shall account for more than one third of its worldwide turnover.
Article 4 of the Threshold Rules intends to capture transactions involving a “large” undertaking of start-ups/nascent competitors. It remains to be seen, however, 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
Article 5 of the Threshold Rules states that regardless of the turnover threshold being met or not, if there is evidence that a transaction may impede market competition then SAMR as 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. This change is to assist in addressing the ever-changing competition landscape of various industries while providing SAMR more discretion in reviewing concerned transactions.
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 has increased to:
- 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; or
- not more than 5 million yuan (approx. USD 746,000) 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 (approx. USD 75,000). 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 experience, a blemished credit record will affect a company's corporate image and have a negative impact on its goodwill and future bidding activities.
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. 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. To provide further guidance on what constitutes control, Article 4 of the Review Rules lists 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 and / or business plan.
The list does not reflect a change in attitude regarding control by SAMR. Rather, it 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 current AML, undertakings should not implement the concentration before receiving clearance. However, 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.
Similar to the control question, the newly-added definition of “implementation of concentration” 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.
