SHEARMAN & STERLING LLP CLIENT PUBLICATION Mergers & Acquisitions 2008 China s New Anti-Monopoly Law Comes into Effect M&A Deals Subject to New Filing Thresholds On August 1, 2008, the new Anti-Monopoly Law of the People s Republic of China (the Anti-Monopoly Law ), a piece of legislation which has been widely viewed as an economic constitution for China s new market economy, became effective. The Anti- Monopoly Law is the first tangible product of China s extensive efforts to establish and enforce a comprehensive legal framework for combating anti-competitive activities. The Anti-Monopoly Law applies not only to activities in China, but also to activities outside of China that affect competition within China. Largely similar to competition laws in other jurisdictions, such as the United States and the European Union, the Anti- Monopoly Law provides a general legal framework prohibiting monopoly agreements, administrative monopolies and abuses of dominant market position, and sets out a comprehensive merger control review scheme. Unfortunately, it is currently unclear how the Anti-Monopoly Law will be implemented in practice, as the implementing rules are far from complete. This memorandum briefly describes the Anti-Monopoly Law and recent developments with respect to its interpretation and implementation. A. Enforcement Structure On August 1, 2008, an Anti-Monopoly Commission (the Anti-Monopoly Commission ) was established by the State Council pursuant to the Anti-Monopoly Law to promulgate anti-monopoly policies and to coordinate the enforcement efforts of the various government bodies responsible for enforcing the Anti-Monopoly Law. The Anti- Monopoly Commission is chaired by a senior leader of the State Council and is staffed with officials from the Ministry of Commerce ( MOFCOM ), the National Development and Reform Commission (the NDRC ) and the State Administration of Industry and Commerce (the SAIC ), together with certain Chinese scholars. Each of MOFCOM, the NDRC and the SAIC has been tasked by the State Council with enforcing different aspects of the Anti- Monopoly Law: Shearman & Sterling LLP is a limited liability partnership organized in the United States under the laws of the State of Delaware, which laws limit the personal liability of partners.
MOFCOM is responsible for merger control review; the NDRC is responsible for regulating pricing issues in monopoly agreements 1 ; and the SAIC is responsible for regulating monopoly agreement issues (other than those relating to pricing) and guarding against administrative monopolies 2 and abuses of dominant market position. Academics and practitioners view MOFCOM s sole responsibility for merger control review as a significant improvement 3. On the other hand, the division of enforcement responsibilities among three different agencies may result in inconsistent enforcement of the new Anti- Monopoly Law and may impede the development of coherent antitrust policies. How effective the Anti-Monopoly Commission will be in coordinating the enforcement efforts of MOFCOM, the NDRC and the SAIC remains to be seen. B. Merger Control 1. Definition of Concentration The Anti-Monopoly Law defines concentration as (i) a merger, (ii) a transaction where one or more parties obtain controlling power over another party through the acquisition of voting securities or assets, or (iii) a transaction where one or more parties obtain controlling power or exercise determinant influence over another party through contractual arrangements ( contractual control ). Similar to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the M&A Rules ), the Anti-Monopoly Law covers concentrations conducted within or outside of China, provided they meet the thresholds described below. While control is not expressly defined under the Anti-Monopoly Law, certain officials have suggested that a minority investor acquiring substantive veto rights over business operations would likely be deemed to have acquired contractual control. A MOFCOM official has also indicated that the establishment of a Sinoforeign joint venture over which foreign investor(s) have obtained control is also deemed a concentration for merger control filing purposes. It remains to be seen how the concept of control will be interpreted by MOFCOM in practice. What is clear at this stage is that in the absence of a change of control (including contractual control), a transaction will not be subject to merger control notification requirements. This principle was not expressly established under the M&A Rules. In addition, under the Anti-Monopoly Law, a group exemption is available to the parties to a concentration if they are members of one group. The Anti-Monopoly Law provides that no merger control notification is required for a concentration if one party holds more than 50% of the voting interests of each of the other parties, or if more than 50% of the voting interests of each party are held by one entity. 2. Filing Thresholds Following the announcement of the new enforcement regime, the State Council issued the Regulations on the Notification Thresholds of Concentration (the Notification Regulations ), the first set of implementing rules under the Anti-Monopoly Law. The Notification Regulations set out a series of turnover-based thresholds for filing concentration transactions and supersede the prior merger control filing thresholds under the M&A Rules. 1 2 3 The term monopoly agreements is defined under the Anti- Monopoly Law. Please see Section C of this memorandum for further information. The Anti-Monopoly Law describes administrative monopoly activities. Please see Section D of this memorandum for further information. Previously, both MOFCOM and the SAIC were empowered to conduct merger control review. According to the Notification Regulations, a merger control filing is required for a concentration if in the last preceding fiscal year: (i) the combined worldwide turnover of all parties to the concentration 4 exceeds RMB 4 A MOFCOM official has indicated that the turnover of a party means the total turnover of such party, including such party s turnover generated from both any business involved in the concentration and any business not involved in the Shearman & Sterling LLP is a limited liability partnership organized in the United States under the laws of the State of Delaware, which laws limit the personal liability of partners.
10 billion (approximately USD 1.46 billion or EUR 975 million) AND (ii) each of at least two parties to the concentration has a turnover in China exceeding RMB 400 million (approximately USD 58.3 million or EUR 39 million); OR (i) the combined turnover in China of all parties to the concentration exceeds RMB 2 billion (approximately USD 292 million or EUR 195 million) AND (ii) each of at least two parties to the concentration has a turnover in China exceeding RMB 400 million (approximately USD 58.3 million or EUR 39 million). According to the Notification Regulations, the methods for calculating turnover for entities in certain special industries, such as banking, insurance and securities and futures, will be formulated by MOFCOM in consultation with other government authorities. Such new methods are expected to result in a higher turnover threshold for participants in industries where the thresholds described above would otherwise be exceeded, in transactions that are not likely to have a significant market impact. Compared to the prior merger control filing thresholds, the new thresholds are more straightforward because of their exclusive focus on turnover-based indicators and are expected to bring the merger control regulations in China more in line with international best practices. However, Article 4 of the Notification Regulations provides that even if none of the criteria above are satisfied, if legally collected evidence shows that the concentration may have the effect of excluding or limiting competition, MOFCOM must initiate an investigation on the concentration. Although certain MOFCOM officials have indicated that this clause will only be invoked in exceptional cases, there are concerns that it provides MOFCOM with broad discretion to apply subjective criteria in determining when an investigation is warranted. 3. Review Periods Upon receipt of complete filing documents, MOFCOM has 30 days 5 to complete its preliminary review. This phase-one review is deemed cleared if no objection is raised or no investigation is instituted by MOFCOM within such 30-day period. If MOFCOM determines that a phase-two review is necessary, it must notify the filing party or parties 6 in writing. MOFCOM must complete its phase-two review within 90 days, with a possible extension of up to 60 days in certain exceptional cases 7. The phase-two review is deemed cleared if no objection is raised by MOFCOM within the specified review period. 4. Substantive Standards Although the principle underlying the Anti- Monopoly Law is that a concentration will be blocked if it is deemed to have the effect of precluding or restricting competition, it is not clear what substantive standards MOFCOM will use in its review of concentrations. The Anti- Monopoly Law provides that MOFCOM should take into consideration various factors when reviewing a merger control filing, such as market share, degree of market concentration and effect on market entry, technology advances, consumers and the development of national economy. In particular, it is not clear how MOFCOM will define and interpret market share and market concentration when reviewing merger control filings. A balancing analysis is permitted under the Anti-Monopoly Law. A particular concentration may be allowed to proceed if the parties can prove that the positive effects of a concentration outweigh its anti-competitive effects, or that the concentration is consistent with social public interests. It is not clear 5 It is not clear whether the term 30 days refers to business days or calendar days. concentration. It is not clear if MOFCOM will take this view in accepting and reviewing merger control filings. 6 7 The Anti-Monopoly Law does not indicate which party is responsible for filing. Previously, the acquiror or, in certain cases, the target was responsible for the filing. Such exceptional cases include situations where (i) the parties to a concentration agree on such extension, (ii) the submitted documents and information are inaccurate and further verification is required or (iii) significant changes occur to the concentration after the initial filing. 3
what criteria will be used to determine when social public interests apply. The Anti-Monopoly Law permits MOFCOM to impose restrictive conditions on an approved concentration in order to minimize any adverse effect on competition. This clause should provide MOFCOM with greater flexibility to preserve competition in China s markets without having to resort to blocking transactions. It is of course impossible to predict how MOFCOM will exercise this power in practice. 5. Penalties A concentration may not close until merger control clearance is granted by MOFCOM or following the lapse of the relevant waiting period. MOFCOM may reverse any concentration and impose a fine of up to RMB 500,000 (approximately USD 73,000 or EUR 47,000) if a concentration is completed without MOFCOM clearance. 6. National Security Review The Anti-Monopoly Law also provides that acquisitions by foreign investors of domestic companies which involve national security are subject to a national security review in addition to merger control filings. This clause expands the national economic security concept under the M&A Rules. It remains unclear if the national security review under the Anti- Monopoly Law overlaps with the national economic security review under the M&A Rules being conducted by MOFCOM and what criteria will trigger the national security review process. Experience to date suggests that the Chinese government has become significantly less receptive to transactions involving sales to foreign investors of controlling stakes in State-owned enterprises, especially those holding leading positions in their respective industries. C. Monopoly Agreements 1. Prohibited Activities Monopoly agreements under the Anti-Monopoly Law include both horizontal and vertical agreements. A monopoly agreement can take the form of an agreement, either written or oral, a joint decision or other concerted behavior. Prohibited horizontal agreements include: output or sale fixing; price fixing; market division; restriction on procurement or development of new technology or equipment; and boycotts. Vertical agreements are prohibited if they involve fixing or maintaining minimum resale prices. It is not clear in the Anti-Monopoly Law if a per se rule or a rule of reason approach will be applicable in the context of monopoly agreements. Certain Chinese lawyers take the view that horizontal monopoly agreements are unlawful per se and that vertical agreements should be subject to a rule of reason analysis in practice. 2. Exemptions Article 15 of the Anti-Monopoly Law contains a number of potentially broad exemptions. Generally, a horizontal or a vertical agreement may be exempted if the agreement was entered into for the purposes of: technology improvement; enhancing the competitiveness of small and medium-size enterprises; improving product quality, lowering costs, improving efficiency, standardizing product types or implementing specialization; social public interests, such as energy saving, environmental protection and disaster relief or aid; or dealing with a drastic fall in sales volume or a substantial surplus of production due to macro-economic depression. Parties seeking to rely on an exemption bear the burden of proving the existence of one or more of the foregoing purposes in the agreement and that the agreement (i) will not substantially impede competition in the relevant markets and (ii) will enable consumers to share the benefits derived from the agreement. In addition, a 4
broader exemption is provided under the Anti- Monopoly Law under which a monopoly agreement may be exempted if the agreement was reached for the purpose of protecting legitimate interests in international trade and foreign economic cooperation. In light of the broad nature of these exemptions numerous practitioners have urged that detailed guidance be issued so that these exemptions will not be abused. 3. Penalties A violation of the monopoly agreement provisions under the Anti-Monopoly Law may result in MOFCOM imposing a fine of up to 10% of the sales revenue of the breaching party for the preceding fiscal year, and all illegal income of such party may be confiscated. If a monopoly agreement has been concluded but has not yet been implemented, the fine may be lowered to a maximum of RMB 500,000. D. Administrative Monopoly The Anti-Monopoly Law provides that government authorities are prohibited from limiting or lessening competition, including by requiring entities or individuals to purchase products or services from enterprises designated by such authorities, or by imposing discriminatory treatment that unfairly favors local enterprises or that prohibits outside enterprises from entering a local market. However, the Anti-Monopoly Law provides protection to certain dominant State-owned enterprises that are viewed as critical to China's national economy and national security, such as State-owned enterprises in the telecom, electricity and oil and gas industries. It is unclear how vigorously the Anti-Monopoly Law will be enforced against administrative monopolies and the monopolistic activities of certain State-owned enterprises. E. Abuse of Dominant Market Position transactions with parties without due cause, coercive transactions and price discrimination. The Anti-Monopoly Law specifies various factors to be considered in determining whether a dominant market position exists, including market share, ability to control the sales market or procurement market, financial status, technical conditions and market entry barriers. A single market share reaching one-half or more, a combined market share of two entities reaching two-thirds or more, or a combined market share of three entities reaching threequarters or more, will lead to a presumption of dominant market position, which may be rebutted with sufficient evidence to the contrary. The Anti-Monopoly Law provides a safe harbor under which an entity is not presumed to hold a dominant market position if its market share is below 10%. F. Administrative and Judicial Review Article 53 of the Anti-Monopoly Law provides that a claim challenging any decision by MOFCOM to prohibit or permit, or impose restrictive conditions on, a concentration is subject to an administrative review before a lawsuit can be filed. By contrast, the parties are permitted to either file for administrative review or file a lawsuit for all other claims under the Anti-Monopoly Law. G. Civil Liability for Damages Parties in violation of the Anti-Monopoly Law are liable for losses or damages caused by their monopolistic activities. The Supreme People s Court of China recently indicated that Chinese courts should accept anti-monopoly related civil claims as long as the general civil procedural requirements are met. It remains to be seen whether the Anti-Monopoly Law will lead to antitrust lawsuits in China or if it will fuel consumer activism against big corporations. Under the Anti-Monopoly Law, entities with dominant market positions are prohibited from engaging in certain behavior, such as selling commodities at an unfairly high price or purchasing at an unfairly low price, refusing 5
************************** This memorandum is intended only as a general discussion of these issues. It should not be regarded as legal advice. We would be pleased to provide additional details or advice about specific situations if desired. If you wish to receive more information on the topics covered in this memorandum, please feel free to contact your regular Shearman & Sterling contact person or any of the following: Lee Edwards Beijing +86.10.5922.8001 lee.edwards@shearman.com Paul Strecker Hong Kong +852.2978.8083 paul.strecker@shearman.com Gregory Puff Hong Kong +852.2978.8082 gregory.puff@shearman.com Shearman & Sterling LLP is a limited liability partnership organized in the United States under the laws of the State of Delaware, which laws limit the personal liability of partners.