02 April 2014

MOFCOM Takes a Major Step towards a Simplified Merger Control Procedure by Promulgating the Standards for Simple Cases

On February 11, 2014, China's Ministry of Commerce (MOFCOM) published the long-awaited Interim Provisions on the Standards for Simple Cases of Concentrations of Operators (the "Provisions"), which came into effect on February 12, 2014.The Provisions set forth the substantive criteria for determining which case may be treated as a simple case, yet the procedural rules are still missing.This article provides an analysis of the standards, discusses how the Provisions will change the current review process and explores the reasons for the lack of procedural rules.

I. Which case will qualify as a simple case?

According to the Provisions, cases meeting the below standards will be treated as simple cases:

A. for horizontal mergers: in a same relevant market, the collective market share of all operators concerned in the concentration is less than 15%;

B. for vertical mergers: the market share of each of the operators concerned in the concentration in each of the relevant upstream and downstream markets is less than 25%;

C. for mergers that are neither horizontal nor vertical: the market share of each of the operators concerned in the concentration in each of the markets is less than 25%;

D. for off-shore joint ventures: the off-shore joint venture does not engage in business operations in China;

E. for acquisitions of off-shore target: the off-shore target does not engage in business operations in China; and

F. for reduction of the number of existing controlling shareholders: the joint venture jointly controlled by two or more operators is controlled by one or more existing operators through the concentration.

II. Which case will disqualify as a simple case?

Cases meeting any of the abovementioned standards may nevertheless disqualify as simple cases under the following circumstances:

A. in case of a change from joint to sole control, there is horizontal overlap between the previously jointly controlled entity and the operator to acquire sole control over the entity;

B. the relevant market is difficult to define;

C. the concentration may cause adverse impact on market entry or technology development;

D. the concentration may cause adverse impact on consumers or other relevant operators;

E. the concentration may cause adverse impact on national economic development; or

F. other circumstances where competition may be adversely affected as determined by MOFCOM.

III. When can MOFCOM withdraw findings for simple cases?

In any of the following circumstance, MOFCOM can revoke the decision to treat a concentration as simple cases:

A. the notifying party conceals important information, or provides false or misleading materials;

B. a third party claims that the concentration has or may have the effect of elimination or restriction of competition, and can provide relevant evidence; or

C. MOFCOM discovers material changes of the transaction or the competition status in the relevant market.

IV. What is the difference with the Draft Provisions?

Back to April 2013, MOFCOM published the Draft Provisions to solicit comments from the public. Compared with the Draft Provisions, the Provisions didn't show significant changes but deleted the provision that MOFCOM will pursue the notifying parties' legal liabilities for concealing important information or providing false or misleading information.

Nevertheless, since such legal liabilities are provided under Article 52 of the PRC Anti-Monopoly Law (AML), MOFCOM is still entitled to apply Article 52 in case the notifying parties conceal information or provide fraudulent or misleading information in order for the case to be treated as a simple case.Under Article 52, the legal liabilities include a fine of less than RMB 20,000 on individuals, and a fine of less than RMB200,000 on entities.In serious cases, the fine may reach RMB100,000 for individuals and RMB1,000,000 for entities.

V. What is the difference with the EU standards?

The Provisions adopted by MOFCOM are similar to the standards previously adopted in EU for simplified procedures before 2014, especially the market share thresholds for horizontal and vertical mergers.

Nevertheless, on January 2014, the EU reformed the simplified procedures and expanded the scope for the application of simplified procedures.Under the amended rules, the combined market share threshold for horizontal mergers is raised from 15% to 20%, the market share threshold for vertical mergers is raised from 25% to 30%. Besides, a concentration may now also qualify for simplified procedures where the combined market shares of all operators are between 20% and 50%, but the increase in market share due to the merger is small ( for example, the HHI delta is less than 150)(1).

VI. How will the Provisions change the current merger control review process?

It is noteworthy that there is no procedural rule attached to this new regulation. In other word, the Provisions only contain the rules on how to identify simple cases, but without the rules on what a simplified procedure could be.Since MOFCOM is still not bound by any timeline in processing a simple case, currently it remains unclear to what extent the review period could be shortened with the promulgation of this new regulation.

We understand that there may be some practical reasons why procedure rules are still missing. For example, to determine whether a case may be treated as a simple case requires a substantive review, including determining the relevant market and verifying the market share data.However, under the current MOFCOM review process, a case will first go through a pre-acceptance process handled by the Consultation Division, which is mainly responsible for determining the completeness of the filing materials.Thus, in order to decide on whether a case is simple or not at the pre-acceptance stage, the case review divisions (i.e., the Legal Division and the Economic Division) will have to participate in the process.Otherwise, considering the limited administrative resources at the Consultation Division, conducting a substantive review at the pre-acceptance stage may further prolong the pre-acceptance period.Moreover, if the case review divisions do not participate in the preview process, it will be difficult for them to review and clear the case within a month after a case is officially accepted.

Therefore, to implement an efficient review process, the case review divisions may have to step in early in the process and further collaboration between the Consultation Division and the case review divisions may be necessary.This may fundamentally change the way the different divisions are currently functioning.Another way to solve this problem may require accumulation of enough "precedents" and the creation of a database so that MOFCOM can easily make reference to previous cases or industry data in the same market to make a decision.

VII. What will be the next step?

It is speculated that at the next step, MOFCOM will promulgate the relevant procedural rules or guidelines for handling simple cases.It is also possible that for simple cases, MOFCOM may even narrow the scope of information required from the notifying parties.

In general, enactment of the Provisions sends a very positive signal demonstrating that MOFCOM has been striving to improve efficiency.In practice, even before the Provisions were promulgated, an increasing number of cases we handled were cleared by the end of Phase 1.We believe that the simplified procedure, once officially established, will substantially change the current review process, and will benefit companies doing transactions that require merger control clearance in China.

(This article was originally written in Chinese, and the English version is a translation.)

Notes:

1.For example, in a merger between X and Y, where X has a market share of 45% and Y has a market share of 5%, the pre-transaction HHI is 2402, and the post-transaction HHI is 2500, so the delta is only 98. In this case, the transaction would qualify for the simplified procedure.

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