On September 29th 2015, the Ministry of Commerce of the P.R.C (“MOFCOM”) published four administrative decisions on penalties for illegal activities involved in the concentration of undertakings on its official website. This is the second time that China’s authority responsible for merger control released its penalty decisions on undertakings which failed to abide by laws and regulations relevant to anti-monopoly notification obligation.
Brief Introduction of the Cases
According to the penalty decisions issued against Fujian Electronics & Information (Group) Co., Ltd (“FJEI”) by the MOFCOM, FJEI was imposed a fine of RMB 150,000 for failure to file a pre-notification to the authority with respect to acquisition of 35 percent of shares of Shenzhen Chino Communication Co., Ltd (“SCC”). The decision suggests that the investigation was trigged by complaint of third parties during the period of MOFCOM’s public notification for the concentration between SCC and FJEI’s holding company, namely Fujian Furi Electronics Co., Ltd.
In the Shanghai Fosun Pharmaceutical Industry Development Co., Ltd. (“FPID”) case, FPID’s parent company, Shanghai Fosun Pharmaceutical (Group) Co., Ltd notified and applied for consultation with MOFCOM about the proposed purchase of 65 percent shares of a target company through FPID and an off-shore subsidiary. Within the period of negotiation, FPID completed the transfer of shares without MOFCOM’s approval. Therefore, FPID was fined RMB 200,000 for violating relevant laws and regulations.
The third case is also relevant to implementing the concentration before obtaining MOFCOM’s approval. In accordance with MOFCOM’s decision, on November 3 2014, CSR Nanjing Puzhen Co., Ltd (“Nanjing Puzhen”) and Bombardier Transportation Group Sweden Co., Ltd (“Bombardier Sweden”) concluded an agreement to establish a joint venture where each party owns 50 percent shares. In December, the transaction parties notified the MOFCOM about the potential transaction. However, before the notification, both parties have already appointed directors and management to the joint venture, and the joint venture has gained the business license. Considering that the parties actively filed the concentration notification and showed the cooperative attitude towards MOFCOM’s investigation, Nanjing Puzhen and Bombardier Sweden were separately fined RMB 150,000 by the MOFCOM in the end.
In the last case, Bestv New Media Co., Ltd and Microsoft Corporation were each fined RMB 200,000 for unnotified establishment of joint venture. This case is also triggered by complainants.
Concentrations Subject to Anti-monopoly Notification
The Anti-Monopoly Law (the “AML”) stipulates where a "concentration" between undertakings reaches certain turnover thresholds, the concentration should be notified to the MOFCOM for anti-monopoly review before the concentration is implemented.
A “concentration” is (i) a merger of undertakings; (ii) an undertaking’s acquisition of a controlling right in another undertaking through the acquisition of equity or assets (including establishment of joint ventures); or (iii) an undertaking’s acquisition of a controlling right in another undertaking or its ability to exercise decisive influence over another undertaking by contract or other means.
The “turnover thresholds” are met if (i) the collective global turnover of the concentration undertakings in the previous fiscal year exceeds RMB 10 billion with at least two undertakings each achieving a turnover of more than RMB 400 million within China; or (ii) the collective turnover of all the concentration undertakings within China in the previous fiscal year exceeds RMB 2 billion with at least two undertakings each achieving a turnover of more than RMB 400 million within China.
For the purpose of the AML, “control” means controlling or exercising decisive influence over a company. Chinese regulators would identify “Control” based on multiple legal and factual elements, such as (i) the purpose of the concentration transaction and future plans; (ii) the equity structure of other undertakings both before and after the concentration transaction; (iii) the matters for voting by the general meeting of other undertakings, and the voting mechanisms; (iv) the composition and voting mechanisms of the board of directors or the board of supervisors of the other undertakings; (v) the appointment and removal of the senior management personnel of the other undertakings; (vi) the shareholder-director relationship of other undertakings; and (iiv) whether there is a significant business relationship between the undertaking and other undertakings, etc.
It is worth noting that in the FJEI case, MOFCOM identified that the transfer of 35% shares which is below 50% constituted “control” under the AML and therefore the transaction parties should perform the notification obligation.
Failure to Notify a Concentration
According to the currently released cases, failure to notify a concentration refers to the following conditions:
a. Reaching the turnover thresholds but fail to notify MOFCOM;
b. Filing a notification to MOFCOM after implementing the concentration; and
c. Conducting implementation behaviors before obtaining the official approval.
All the above-mentioned acts may be considered as fail to perform the notification obligation under the AML by the authority. Under some certain circumstances the transaction has been notified to MOFCOM, if the concentration parties engage in any implementation behavior prior to the official approval, they may still be considered as violation of the AML.
Implementation Behaviors Prior to Official Approval
The second and the third case suggests that behaviors such as transfer of the equities, receipt of business license and appointment of directors or managements before getting the approval of MOFCOM could be viewed as failure to notify the concentration by the authority. Besides, according to our experiences, behaviors such as transferring ownership of property and asset, relocating important staffs, exchanging competitively sensitive information including but not limited to the prices and planned output of commodities and so on might breach the AML as well.
Penalties for Failure to Notify
Pursuant to the AML and the Interim Measures for Investigating and Handling Failure to Notify Concentrations of Undertakings (the “Interim Measures”), MOFCOM may impose a fine of up to RMB 500,000 if it finds the undertakings implemented the concentration without legal notification and approval. MOFCOM may also reinstate the concentration, order a disposition of shares or assets within a specified time limit, transfer of business within a specified time limit and/or other necessary measures.
In brief, we considered the following issues should be noted with respect to the cases.
First, it is quite obvious that MOFCOM has paid great efforts on the concentration enforcement these years. The procedural transparency with the publication of information on penalties for failure to notify concentrations and failure to comply with restrictive conditions imposed by MOFCOM has been significantly improved. We can expect more normative and stricter enforcement in the future.
Second, with respect to sources of case, complaints from the third party are still the main channel of triggering investigation which reminds the undertakings the importance of the antitrust compliance during merger and acquisition activities.
Third, after assessing the competitive effects of the transactions, MOFCOM concluded that all the concentrations would not eliminate or restrict competition in the relevant market. Therefore, whether the transaction will eliminate or restrict competition in relevant market will not affect the notification obligation of the undertakings
Fourth, the undertakings were fined up to RMB 200,000 which is less than the imposed penalty (RMB 300,000) in the last year and the maximum penalty (RMB 500,000) for violations of concentration control rules. It is not clear how the amount is determined.
Considering the negative influence might be trigged by unnotified concentration, it is advisable to pay attention to and seek professional advice from antitrust counselors to provide guidance for mergers and acquisitions.