Authored by Michael Gu (firstname.lastname@example.org) and Yu Shuitian from AnJie Law Firm
MOFCOM released the amended Guiding Opinions on Notification of Concentration of Undertakings (“Guiding Opinions”) on June 6, 2014. The amendments significantly expanded the content of the previous 2009 version of the Guiding Opinions. The number of articles in the Guiding Opinions is now 30, in comparison to 12 of the 2009 version. This is the third regulation on merger control issued by MOFCOM in 2014. Another merger control related regulation concerning the imposition restrictive conditions is currently being drafted and might be published this year as well. Among other things, four important areas of merger control filing that gave rise to a great deal of discussion in the past have now been clarified under the Guiding Opinions. These four areas include definition of control, calculation of turnover, status of joint venture in identifying concentration and pre-notification consultation.
Definition of Control
According to Article 20 of the Anti-monopoly Law of China (“AML”), the concentration of undertakings refers to three types of transaction: (1) merger of undertakings, (2) acquiring control of the other undertaking through acquisition of shares or assets and (3) acquiring control of the other undertaking by contract or other means, or acquiring the ability to exercise decisive influence over the other undertaking. However, both the AML and MOFCOM regulations provide no guidance on how to identify “control or decisive influence” in the past. The Guiding Opinions are the first official written rules on definition of control and clarify this area of law to a great extent. Under the Guiding Opinions, distinctions could be drawn between independent control and joint control, though their definitions are not provided. Moreover, concentration agreement and articles of association of other undertakings are regarded as primary sources of reference in identifying control or decisive influence. Other factors to be considered include:
(1) purpose of the transaction and future plan;
(2) shareholding structures of other undertakings before and after the transaction and the changes;
(3) matters subject to voting in shareholders’ meetings and relevant voting mechanism, as well as its pervious attendance record and voting results;
(4) composition of other undertakings’ board of directors and board of supervisors and their respective voting mechanism;
(5) appointment and removal of senior management of other undertakings;
(6) relationship among the shareholders of other undertakings and relationship among the directors of other undertakings, existence of commission to exercise voting rights, persons acting in concert, etc; and
(7) existence among the undertakings of major business relationship, cooperation agreement, etc.
The Guiding Opinions leave the question open as to whether minority shareholder protection mechanism (e.g. certain veto rights) would lead to de facto joint control. We understand that under some circumstances, the veto rights exercisable by the minority shareholder might not necessarily imply the joint control of such minority shareholder. Given the complicated nature of such a controversial issue, MOFCOM might want to maintain flexibility and decide on this issue on a case-by-case basis.
Status of Joint Venture in Identifying Concentration
The AML is ambiguous as to the status of joint venture in identifying concentration. The footnote of the notification form (Amended in 2012) covers identification of participating undertakings in the cases of newly established joint venture and transaction involving a pre-existing entity, but it did not discuss the notifiability of joint venture. The number of notifications of establishment of joint venture is very likely to rise in the future as the volume of such cases increases gradually. This calls for the need to clarify this issue.
Article 4 of the Guiding Opinions provides that:
- if at least two undertakings are in joint control of a newly established joint venture, there is a concentration of undertakings;
- if one undertaking is in independent control of the joint venture and other undertakings are not in control, there is no concentration of undertakings.
This Article along with Article 20 of the AML set out practical instructions on analyzing the status of joint venture in identifying concentration. Notwithstanding that, the Guiding Opinions are still silent on the distinction between full-function joint venture and non-full-function joint venture, which is provided under the EU merger control regime. In China, the current situation is that both full-function joint venture and non-full-function joint venture need to be notified as long as it meets filing threshold.
Calculation of Turnover
The Guiding Opinions absorbed Articles 4 to 7 of the Measures on Notification of Concentration of Undertakings (“Notification Measures”), which cover the scope of turnover, meaning of “within the territory of China”, calculation of turnover of a single undertaking, calculation of combined turnover of all the undertakings, and specific calculation method regarding acquisition in part and several acquisitions within two successive years.
The Guiding Opinions make further additions and clarifications to the rules stated above as below:
- turnover within the territory of China includes import to China by the undertakings but does not include export out of China to other countries;
- turnover of a single participating undertaking does not contain turnover of undertakings that were sold or not in control of in the preceding accounting year;
- if a participating undertakings is jointly controlled by two or more undertakings, its turnover includes all controlling entities’ turnover; and
- for partial acquisition, if the seller is not in control of the sold part after the transaction, only revenue related to the sold part will be incorporated.
Practical Guidance on Pre-notification Consultation
The Guiding Opinions provide more detailed practical guideline on pre-notification consultation.
The issues that could be discussed during the pre-notification consultation include:
- notifiability of the transaction, including whether there is a concentration of undertakings that reaches regulatory threshold;
- materials that need to be submitted along with the notification form, including the type, form, content and level of details of the information to be submitted;
- specific legal and factual issues, including the definition of relevant product market and relevant geographic market, and applicability of Interim Provisions on Standards Applied for Simple Cases of Concentration of Undertakings;
- submission and review procedure, including the timing of notification, the notifying party, the time limit on notification and review, simple case notification procedure and standard notification procedure, and review procedure; and
- other relate issues, such as undeclared concentrations.
In practice, prior to the Guiding Opinions, the notifying parties might be concerned about the overwhelming load of paperwork associated with pre-notification consultation, and thus be discouraged from making such an application. By providing clearer guidance on the application for pre-notification consultation, the notifying parties are now well aware of the documents that need to be prepared. Nevertheless, the Guiding Opinions do not specify the legal nature of pre-notification consultations as either advisory or legally binding. Without explicit characterization, it can be presumed that the pre-notification consultation is still advisory in nature.
The Guiding Opinions consolidate a number of regulations related to merger control, including the Notification Measures, the 2009 version of the Guiding Opinions and some of the footnotes of the notification form. The Guiding Opinions are now a one-stop guideline on merger control filing that reveals MOFCOM’s effort to further optimize the merger control regime. In particular, the definition of control incorporates theories and practical experiences that have been largely followed in recent years. Comprehensive and detailed instructions are of great guiding importance to the notifying parties by increasing the predictability and the convenience of merger control filing.