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July 25, 2014

China’s Merger Control Rules Changing: Ministry of Commerce (MOFCOM) Publishes New Draft Regulations on Remedies and Simple Cases

China’s Ministry of Commerce recently issued two new draft regulations. The first provides a wider range of potential remedies to obtain the clearance of a concentration (e.g., a merger, acquisition, joint venture, etc.); the other defines the standards for “simple” merger cases that are eligible for a “fast-track” clearance procedure.


China’s Ministry of Commerce (MOFCOM) recently published for public comment two new regulations regarding merger control. One is a draft regulation on acceptable conditions that could remedy objections to a concentration (merger, acquisition or joint venture) (Merger Remedy Draft), the other a draft regulation on the standards applicable to cases that are regarded as “simple” merger cases and so eligible for a fast-track procedure (Simple Case Draft).

The first proposed regulation should provide greater certainty as to the remedies and the procedures for offering remedies in order to obtain clearance of a concentration. The second regulation clarifies what are to be considered “simple” cases that are unlikely to have any concern from a competition perspective. A simple case would be eligible for a fast-track procedure to be published later. Given the delays and uncertainties arising in many merger control cases over the last few years, these initiatives are welcome.

Merger Remedy Draft Regulation

Since 5 July 2010, MOFCOM has had in place an interim regulation on asset and business divestitures. The new draft Merger Remedy Regulation, similar to rules in the European Union and United States, would cover a much wider range of potential remedies, not only asset and business divestitures. It now includes “behavioural” remedies and provides greater details for structural remedies, the timing of the remedy negotiation process and how and when the remedies should be adopted.

According to Article 5 of the Merger Remedy Draft, behavioural remedies include opening a network, platform or other infrastructure, licensing key technology (including patents, proprietary technology or other intellectual property) or terminating an exclusive arrangement.

Under Article 6 of the Merger Remedy Draft, if a business is being divested, there is a requirement that the divested business have all the essential elements needed for effective competition in the relevant market, including such rights and interests as the divesting party’s tangible assets, intangible assets, equity interests, key personnel and customer or supply agreements.

The Merger Remedy Draft provides that the notifying party should offer remedies within the time limit set by MOFCOM. If the notifying party does not meet the time limit or if the proposed remedies do not effectively address the competitive concerns, MOFCOM will block the transaction. MOFCOM would negotiate with the notifying party if remedies are proposed within the time limit. If accepted the remedies will be included as conditions that must be satisfied in order to obtain clearance from MOFCOM. If the notifying party needs to propose changes to remedies, they should submit the proposal at least 20 days before the final merger review deadline.

The Merger Remedy Draft provides how long different types of remedies will generally remain in place. Behavioural remedies will remain in place for 10 years unless otherwise stated in MOFCOM’s decision. For asset or business divestitures, the divesting party will have six months to find a purchaser and conclude a sale contract unless otherwise stated in MOFCOM’s decision, or MOFCOM agrees to extend that deadline, which it may do by up to three months. According to draft Article 31, concerned parties can apply to MOFCOM to change or release restrictive conditions (i.e., remedies) after MOFCOM’s decision has become effective.

Section IV of the Merger Remedy Draft requires that if divestiture is a condition of clearance, the divesting party must engage either a supervisory trustee to oversee the process or a divestiture trustee to handle the sale. Article 27 provides that the divestiture trustee has the authority to sell the business being divested without specifying a reserve price. Such a power does not appear in the current interim regulation on asset and business divestitures.

The Merger Remedy Draft is much wider in scope than the currently applicable regulations and is regarded as an important step toward transparency in MOFCOM procedures.

Simple Case Draft Regulation

The draft regulation on simple cases defines what cases will be regarded as simple cases and therefore subject to a fast-track procedure, speeding up clearance of such simple cases in merger control filings. Cases satisfying the following criteria will be classified as “simple”:

  1. Total market share of the business operators involved in the concentration accounts for less than 15 per cent in the same relevant market

  2. Market share of the business operators involved in the concentration accounts for less than 25 per cent in both the upstream and downstream markets if they do business in upstream and downstream markets

  3. Market share of the business operators involved in the concentration accounts for less than 25 per cent in any market if they do not conduct business in upstream and downstream markets;

  4. Business operators involved in the concentration establish a joint venture/joint ventures overseas, and the overseas joint ventures are not operating a business in China

  5. In a merger case related to the acquisition of stakes or assets of an overseas enterprise, the concerned overseas enterprise is not operating a business in China

  6. A joint venture jointly controlled by more than two business operators comes under the control of one, or more than one, of those business operators through a concentration

Notwithstanding the above, under the following circumstances a concentration will not be treated as a simple case:

  1. A joint venture jointly controlled by more than two business operators comes under the control of one of the business operators and the controlling business operator is competing with the joint venture in the same relevant market

  2. The concerned relevant market is difficult to define

  3. The concentration may result in negative impact on market entry and technical improvement

  4. The concentration may result in negative impacts on consumers and other concerned business operators

  5. The concentration may result in negative impacts on national economic development

  6. Under other circumstances MOFCOM deems that the concentration may result in negative impacts on market competition

Furthermore, MOFCOM may revoke classification as a simple case under the following circumstances:

  1. The notifying party conceals important facts, or provides false material or misleading information

  2. A third party claims the concentration may eliminate or restrict competition and provides relevant evidence thereof

  3. MOFCOM finds that the concentration or competitive conditions on the relevant market has changed materially

The above criteria appears to largely mirror the European Commission’s standards for a simplified procedure under EU merger control rules.

It should be noted that the draft regulation does not go further to provide that a summary or short review process will be applied to a “simple” case. It is expected that a further fast-track merger control process will be published soon, including a simplified merger notification form, the aim being that MOFCOM clear a simple case within 30 days (i.e., within Phase I). A simple concentration will therefore benefit from a forthcoming fast-track regulation.

This draft regulation also makes it clear that even if a joint venture is not operating in China, notification to MOFCOM is nevertheless required if the revenue thresholds and other criteria for notification are satisfied. This newly published draft strongly suggests the rejection by MOFCOM of an argument that notification is not necessary if there is no effect on the relevant market in China—that argument appears to have fallen on deaf ears .

© 2014 McDermott Will & Emery

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About this Author

Henry Chen, McDermott Will Emery China, Partner
Partner

Henry Chen is a partner of MWE China Law Offices based in Shanghai.

In addition to his international experience at Baker & McKenzie and Herbert Smith, Henry has practiced for more than 10 years with domestic law firms.  From 2002 to 2006, Henry pursued his education in the United States with the New York University School of Law and the University of Washington School of Law.

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Frank Schoneveld is a partner in the Brussels office of the international law firm of McDermott Will & Emery and a senior consultant at MWE China Law in Shanghai.  He has advised clients for over 20 years on EU competition law, EU regulatory law, international trade law and more recently China's new Anti-Monopoly Law.

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