Merger control: China's new anti-monopoly law

The Provisions of the State Council on Notification Thresholds of Concentrations of Undertakings were published by the State Council on 3 August, 2008, and came into effect on the same day.

After months of speculation, some guidance on the merger control regime under the Anti-Monopoly Law (AML) has been issued. However, apart from providing slightly improved thresholds compared to the draft provided to the public in March, the long-awaited provisions did not elicit excitement from the business community, as was previously anticipated.

These new thresholds, without supporting provisions on procedures, could have a significant impact on cross-border M&A given they could cause considerable uncertainties and delays to deals completing.

The first step - not a breakthrough

When China’s AML was adopted last August, it was expected that it would be fleshed out with approximately 40 implementing rules, guidelines and regulations within 12 months. However, two days after the AML is effective, the first implementation shot is in relation to the merger control regime – an area of Chinese competition law that was fairly active prior to the adoption of the AML.

The Provisions, comprising only five clauses, are significantly slimmed down from the Draft Provisions on the Notification of Concentration between Undertakings that were issued in March for public consultation. As Articles 1 and 5 cover the aim and effective date of the Provisions, only three Articles actually include substantive content. The change of the Provisions’ name speaks for itself: almost all of the procedure-related provisions under the Draft Provisions were removed. Accordingly, the aspects which were subject to heated debate, including:

• the constituents of concentration;
• the criteria for the completeness; and
• confidentiality

have been left unaddressed for future implementing rules, without any definite timelines.

While it is understandable that a balance is difficult to strike between an authority aiming to maximise discretion and the legal and business communities seeking more certainty and transparency, the lack of predictability, especially on procedural issues, is disappointing.

Failure to define 'change of control'/'exertion of decisive influence'

Article 2 of the Provisions restates the notion of 'concentration' of undertakings in exactly the same terms as Article 20 of the AML, which depicts different forms (i.e. by merger, by acquisition of equity or assets, by contract, etc) a concentration can take, but remains silent as to how a concentration could be quantified. The controversial definitions regarding “change of control” and “exertion of decisive influence” contained in the Draft Provisions have now been dropped, which leaves further uncertainty.

Commended efforts on notification thresholds

The one area in which the legal and business community, through input during the consultative period, has had a positive impact is seen in Article 3 of the Provisions which sets out the slightly increased thresholds for triggering the notification requirement. The new thresholds for notification are that:

• the combined aggregate worldwide turnover of all undertakings to the concentration in the last financial year is more than RMB10bn (£759m) and the turnover within the PRC of each of at least two of the undertakings to the concentration in the last financial year is over RMB400m (£30.4m); or
• the combined aggregate PRC turnover of all the undertakings to the concentration in the last financial year is more than RMB2bn (£152m) and the PRC turnover of each of at least two undertakings to the concentration in the last financial year is over RMB400m.

Moreover, the broadly criticised market share threshold has finally been dropped, leaving the turnover as the only threshold base.

However, no guidance has been given as to the general turnover calculation methodology. This is the case even though Article 3 of the Provisions empowers the competent commerce authority under the State Council and other relevant departments to set forth a specific turnover calculation methodology by considering the actual circumstances of some special industries and areas, in particular banks, insurance, securities, and futures.

Article 4 of the Draft Provisions provides that notifications may be requested for those transactions, which fall short of thresholds but have or may have the effect of precluding or restricting competition. This provision was fiercely criticised on the ground that the transparency, legal certainty and predictability would be damaged. The Provisions now compromise by replacing the power to ask for notification with the power to conduct an investigation, but without explaining what actions could be taken following the investigation.

From the Anti-Monopoly Enforcement Authority to the competent commerce authority under the State Council

Attention has also been drawn to the wording change from the “Anti-Monopoly Enforcement Authority” under the AML and Draft Provisions to “the competent commerce authority under the State Council” under the Provisions. This seems to indicate that the Ministry of Commerce (as the commerce authority under the State Council) will take charge of merger control and its local agencies may not be designated.

Although the three-pronged authority mechanism for the new AML regime has recently been the subject of frequent reports, the State Administration for Industry and Commerce is the only authority that has officially announced the establishment of its Anti-Monopoly and Anti-Unfair Competition Bureau. This bureau is expected to cover non-price related behaviours such as anti-competitive agreements, administrative monopolies and abuses of dominance.

The Chinese media has also reported on the establishment of the Anti-Monopoly Commission of the State Council, and the formation of an antitrust investigation bureau under the Ministry of Commerce which will be responsible for handling merger control reviews. It is also reported that a special bureau under the National Development and Reform Commission will deal with price-related monopoly agreements.