On March 21, 2014, the PRC Ministry of Commerce (“MOFCOM”) announced that it decided to publicize the decisions of administrative penalties of undertakings which did not submit a notification prior to the implementation of their concentration. These decisions involved undeclared concentrations formally investigated after May 1, 2014 in accordance with the Anti-Monopoly Law (“AML”) of the PRC and the Interim Measures on Investigation of Failure to File Concentration of Undertakings (“Interim Measures”). As for those formally investigated before May 1, 2014, MOFCOM will still impose administrative penalties if necessary but may choose not to announce such decisions. In order to facilitate the implementation of this policy, MOFCOM had set up a hotline phone number (+86 10 65198998) for whistleblower complaints.
Though there is no any substantive change of the merger rules, the new approach of publicizing the penalty decisions has a significant deterrence effect on the parties to a notifiable merger and will greatly increase the transparency of anti-monopoly law enforcement.
Mainly Limited Financial Loss at Stake Before
According to the AML, a concentration of undertakings that meet the regulatory thresholds stipulated in the Provisions of the State Council on Declaration of Concentration of Undertakings is subject to MOFCOM’s merger review approval. No merger that reaches the thresholds may be implemented without obtaining prior clearance from MOFCOM. Most of the undertakings comply with the AML in fulfilling their notification obligations. Nevertheless, there still are cases where the undertakings were in violation of the AML while no prior notification was submitted. In light of this, MOFCOM implemented the Interim Measures in February 2012.
The Interim Measures do not increase the cost for non-compliance besides the penalties specified under the AML. They mainly clarify the criteria of undeclared concentration of undertakings and the procedure involved in the investigation of undeclared concentration of undertakings. Under the Interim Measures, the non-filers may face punishments including (a) restoration to situation prevailing prior to the implementation of the concentration through dissolution of the concentration, disposition of shares or assets, transfer of business, and other necessary measures and/or (b) a fine of up to RMB 500,000 (approximately USD 81,000). In practice, the restoration measure is rarely if not never taken by MOFCOM and the limited fine might only be a negligible financial loss for non-filers given that they usually have a very strong financial position. The cost of violating the law is much lower compared to the costs associated with the potential delay of the concentration due to the extremely long review process. This might explain why the overall outcome of the Interim Measures is unsatisfactory.
Reputation at Stake Now
The new approach that resorts more to public announcement does not aggravate the punishment on the violators. However, it threatens the reputation of the violators. This applies particularly to multinational companies, public listed companies and those in the pre-IPO stage who had previously established a good reputation and credit in China. In fact, they may suffer from reputational damage which could be beyond remedy. Therefore, companies should take the new regulatory regime seriously when planning and implementing a merger. The risks associated with the reputational damage must be taken into account.
MOFCOM had previously received complaints of non-notified cases and imposed penalties for non-compliance. According to a press conference held by MOFCOM on February 27, 2014, MOFCOM had investigated nine concentrations that had not been notified by the end of October 2013, and two of these had been settled. However, those settled cases were never published and the identities of companies involved were never disclosed. MOFCOM is now taking on a more active role in the enforcement of the Interim Measures. As a result of setting up a hotline, it is much easier to file a complaint to MOFCOM. We expect that there will be more non-filers uncovered under the new regime while no such decision has yet been published at the time of this writing.
Public announcement of administrative penalties decisions on non-filers increases the cost of not fulfilling the obligations to submit a notification and wait for MOFCOM’s clearance. Under the pressure of the new approach, it is anticipated that, the undertakings to a merger would become more willing to promptly submit notification to MOFCOM and act in a more responsible manner. .As a result, MOFCOM’s heavy workload in merger review might be even more intensified. Nonetheless, procedural rules on simple case merger review – Guiding Opinions on Notification of Simple Cases of Concentration of Undertakings, which were implemented on 18 April, 2014, would ameliorate the situation to some extent. Reduced paperwork and shorter expected waiting period for clearance would incentivize the undertakings to submit a merger notification before the implementation of their concentration. It is advised that the undertakings should be cautious in fulfilling their obligations to pre-notify in response to stricter regulatory regime.