Authored by Michael Gu (email@example.com)
During the first week after the Chinese New Year Holiday, the Ministry of Commerce (“MOFCOM”) published long-awaited rules on merger control cases subject to summary procedure, i.e. Interim Provisions on Standards Applied for Simple Cases of Concentration of Undertakings (“Interim Provisions”). The Interim Provisions came into effect on 12 February 2014. It has taken more than 10 months for MOFCOM to finally promulgate the Interim Provisions since the consultation draft was published for seeking public comments on 3 April 2013. However, compared with last year’s consultation draft, which contained only 7 articles, the Interim Provisions is even simpler with 6 articles in total. Except where the Interim Provisions dropped one article and made a few clarifications, no significant improvement or changes have been made to the consultation draft. The Interim Provisions mainly set out the criteria for concentrations that are suitable for treatment under the simplified review procedure. Though the Interim Provisions do not address some key procedural issues in relation to simple cases, it is expected that MOFCOM will soon release relevant supporting procedural rules and further optimize the merger control review mechanism.
Qualifications of Simple Cases
Under Article 2 of the Interim Provisions, six types of mergers are considered simple concentration cases. Among them, three types are assessed in accordance with the relevant market share thresholds of the parties to the concentration while the other three are assessed to relatively more objective and qualitative criteria.
MOFCOM takes a “market share thresholds” approach similar to that of EU, although the specific thresholds are lower than those adopted by the EU’s simplified procedure regulation. Concentrations that may go through the simplified procedure include scenarios: (1) where the combined market share of the parties to the concentration is lower than 15% for a horizontal merger; (2) where each party has a market share of less than 25% in its own market for a vertical merger; and (3) where each party has a market share of less than 25% in each market in connection with a conglomerate merger (non-horizontal and non-vertical concentration).
In addition, the Interim Provisions identified three non-market share tests for simple cases which either lack a China nexus or merely strengthen the control over a joint venture: (1) where the parties to the concentration establish a joint venture outside of China and such joint venture does not engage in economic activity in China; (2) where the parties to the concentration acquire the equity interests or assets of a foreign enterprise and the foreign enterprise does not engage in economic activity in China; and (3) where one or more parties acquires sole control or enhances their control of a joint venture over which one or more parties already have joint control.
Exceptions and Revocation
Article 3 of the Interim Provisions provides clarifications on the concentration that shall not be treated as a “simple case” even it falls into one of the categories referred to in Article 2 of the Interim Provisions. In particular, MOFCOM seems to follow the simplified procedure regulation of EU in the sense that MOFCOM will not apply the simplified procedure for two types of cases which are also generally excluded under the EU regulation. These two types of cases include scenarios: (1) where it is difficult to define the relevant markets affected by the concentration; and (2) where a joint venture that is jointly controlled by two or more business operators becomes controlled by one of those business operators through the concentration, and such business operator and the joint venture are competitors in the same relevant market.
Aside from the above two scenarios, MOFCOM has also excluded several other types of concentrations under more complicated and more subjective standards. For example, MOFCOM will not accept a concentration under the simplified procedure if that concentration would harm market access, technological progress, consumers, other business operators, or national economic development. Furthermore, MOFCOM reserves a discretionary power to determine whether the concentration shall not be regarded as a “simple case” under other scenarios where a potential negative impact on market competition might arise.
The exceptional circumstances provided under the Interim Provisions should be limited to the unusual cases in which a concentration may eliminate or reduce competition. However, the identification of such circumstances would involve detailed examination, and thus, might pose extra burden on both the notifying parties and MOFCOM and also raise uncertainty on the status of “simple cases”.
The Interim Provisions not only provide guidance on the “exceptions” but also lay down the circumstances where MOFCOM may cancel its determination of the “simple case” if: (1) the notifying party covers up important situations or provides false materials or misleading information; (2) a third party claims that the concentration of business operators has or might have the effect of eliminating or restricting competition and it can provide relevant evidence; or (3) MOFCOM finds that a major change has occurred in connection with the concentration or relevant market competition.
Too Simple to Address Procedural Issues
As mentioned above, the Interim Provisions are too simple. In particular, the Interim Provisions do not address any procedural issues with respect to the simplified procedure or “fast track” review, such as the requirements for submission documents, short-form decisions, consequences of the designation of the “simple case” status, the timing for determination of the “simple case” status, review timeline, and so on. MOFCOM is anticipated to publish separate regulations to provide details and guidance on these important procedural issues.
Due to the lack of a short form procedure and limited headcount, MOFCOM has been struggling to handle and conclude the increased number of cases during the statutory time period in recent years. Many merger notifications enter into phase two review just because MOFCOM cannot complete its review in the 30-day preliminary review period (phase one) rather than because of competition concerns raised by the concentration. Thus, it has become urgent and necessary for MOFCOM to adopt a simplified procedure or “fast track” in its review of concentration cases.
The simplified procedure will substantially reduce MOFCOM’s workload and allow MOFCOM to focus its resources on the more important cases with real competition concerns. The average review period for concentration of undertakings will therefore be shortened accordingly. Hopefully, the concentrations that qualify as simple cases can be cleared during phase one (30 days of acceptance) when applying the simplified procedure.
The issuance of Interim Provisions is encouraging and demonstrates MOFCOM’s continued effort to improve the efficiency and transparency of the merger control review. According to the Interim Provisions, the simplified procedure will be applicable to cases with negligible or no competition concerns. In practice, a number of mergers may qualify as “simple” and may benefit from the to-be implemented “fast track” review. The pressing issue is when MOFCOM will issue formal procedural regulations to implement the Interim Provisions.