Mergers and Acquisitions Triggering Anti Monopoly Paul Hastings by alicejenny

VIEWS: 14 PAGES: 11

									January 2010


 Mergers and Acquisitions Triggering Anti-Monopoly
 Filing and Review in the PRC: Filing Practice and Tips

 by David Livdahl / Jenny Sheng / Henry Li∗
 Paul, Hastings, Janofsky & Walker LLP, Beijing Office
 ∗
     David Livdahl is the Office Chair of Paul, Hastings, Janofsky & Walker LLP Beijing Office
     Jenny Sheng is an Associate of Paul, Hastings, Janofsky & Walker LLP Beijing Office
     Henry Li is a China Associate of Paul, Hastings, Janofsky & Walker LLP Beijing Office

 Since its reform and opening-up in the late               State Administration for Industry and
 1970s, the People’s Republic of China                     Commerce on Merging and Splitting of
 (“PRC”) used to focus its foreign                         Foreign-funded Enterprises,2 the Provisions
 investment related-legislation on foreign                 on the Takeover of Domestic Enterprises
 direct investment (such as green field                    by Foreign Investors (the “2006 M&A
 Sino-foreign    joint  venture   projects).               Rules”), 3 and the Guide for the Anti-
 However, it appears that, with the rapid                  Monopoly Declaration by a Foreign
 development of foreign investment into                    Investor in the Merger or Acquisition of a
 China in the past 20 years, greater                       Domestic Enterprise (the “2007 Filing
 legislative effort has been shifted to                    Guide”).4
 regulation of mergers and acquisitions
 (“M&A”), particularly, acquisitions of                    In addition, after the Anti-Monopoly Law
 domestic enterprises by foreign investors,                came into effect on August 1, 2008 , a
 and even offshore M & A transactions                      number      of    anti-monopoly    related
 (where the offshore acquirer or target has                regulations and guidelines have been
 existing investment in the PRC that meets                 issued.   On August 3, 2008, the State
 certain thresholds).                                      Council promulgated the Provisions of the
                                                           State Council on the Standard for the
 On August 30, 2007, the PRC Anti-                         Declaration of Concentration of Business
 Monopoly Law of the People’s Republic of                  Operators    (the   “Filing    Thresholds
 China (the “Anti-Monopoly Law”) 1 was                     Regulations”).5 On January 7, 2009, the
 finally enacted by the National People’s                  Anti-Monopoly     Bureau    of    MOFCOM
 Congress after more than a decade of                      promulgated the Guideline Regarding the
 drafting and various hearings and debates.                Filing of the Concentration of Business
 Before the issuance of the Anti-Monopoly                  Operators      (the      “2009      Filing
 Law, the PRC already had a variety of                     Guideline”) 6 and the Guideline regarding
 legislation addressing requirements for                   the Filing Documentation related to the
 anti-monopoly filing and review in M&A                    Concentration of Business Operators (the
 transactions, including, among others, the                “2009 Filing Documentation Guideline”) 7 .
 Regulations of the Ministry of Foreign                    On July 7, 2009, the Anti-Monopoly
 Trade and Economic Cooperation and the                    Committee of the State Council (the
                                                                                                         1
“Committee”) issued the Guideline for           monopoly review until this March when
Defining    the     Relevant   Market    (the   MOFCOM rejected the Coca-Cola-Huiyuan
“Relevant Market Guideline”).8 Also, as         deal. To date, MOFCOM has published six
a supplement to the Filing Thresholds           anti-monopoly review decisions. 11      On
Regulations, the Measures for Calculation       November 18, 2008, MOFCOM published
of Business Turnover for the Reporting of       its decision on the Belgium brewer, INBEV
Concentrations of Business Operators in         N.V./S.A.’s acquisition of Anheuser-Busch
the Financial Sector was jointly issued by      Companies Inc., which was the first case
MOFCOM, People’s Bank of China, China           published and also the first case where
Banking Regulatory Commission, China            restrictive conditions were imposed on the
Securities Regulatory Commission and            transaction parties by MOFCOM since the
China Insurance Regulatory Commission           AML came into effect on August 1, 2008.
on July 15, 2009 and became effective 30
days thereafter. Furthermore, as of the         On March 18, 2009, MOFCOM rejected
date of writing this article, MOFCOM has        Coca-Cola’s     anti-monopoly      filing in
issued five drafts of rules or measures         connection with Coca-Cola’s proposed
related to the filing and review of business    acquisition of China Huiyuan Juice Group
concentration transactions for soliciting the   Limited, which was the first M& A
public’s    suggestions      and    opinions,   transaction formally rejected by the PRC
including without limitation, the Draft         government in its anti-monopoly review.
Provisional         Measures       regarding    In its decision on Mitsubishi Rayon’s
Investigation of and Dealing with the           acquisition of Lucite International, which
Concentration of Business Operators that        was published on April 24, 2009, MOFCOM,
are not Reported According to the Law.9         for the first time, attached structural
                                                restrictive conditions to its approval
These new regulations and guidelines,           whereby, among others, the transaction
together with the new Anti-Monopoly Law         parties must spin off 50% of the
that became effective on August 1, 2008,        production capacity of Lucite China within
represent the beginning of a new era in         five years. About half a year later, similar
PRC’s merger control regime.         Before     structural restrictive conditions were again
August 1, 2008, merger control rules in         applied by MOFCOM to Pfizer’s acquisition
the PRC only covered foreign parties’           of Wyeth, and then to the Panasonic-
cross-border acquisitions of PRC domestic       Sanyo deal, the MOFCOM decisions for
companies and offshore acquisitions where       which were published on , respectively,
the acquirer or the target had pre-existing     September 29, 2009 and October 30, 2009.
business activities in the PRC that met the     The Panasonic-Sanyo deal probably will be
filing thresholds under the 2006 M&A Rules.     regarded as a milestone case in respect of
The     Anti-Monopoly    Law    and   Filing    China’s anti-monopoly review of offshore
Thresholds Regulations will supersede           M&A transactions because in this case,
Articles 51 through 54 of the 2006 M&A          MOFCOM, for the first time, compelled
Rules and expand the merger control             divestments outside of China. It appears
regime to cover merger and acquisition          that the PRC government has taken a
activities between domestic companies in        more aggressive approach in its anti-
the PRC (including so-called foreign            monopoly review of M & A transactions
invested enterprises which are technically      since the promulgation of the AML.
“domestic PRC companies)”.
                                                Companies registered outside the PRC
Although anti-monopoly review of M& A           need to be aware that a merger or
transactions was first introduced into China    acquisition occurring outside the PRC may
in 2003 with the issuance of the                trigger anti-monopoly review and filing
Provisional Rules on the Takeover of            with the relevant PRC governmental
Domestic     Enterprises      by     Foreign    authorities if such offshore merger or
Investors 10 (which was subsequently            acquisition meets any of the new statutory
replaced by the 2006 M & A Rules), we           thresholds under the Filing Thresholds
have not seen an M& A transaction blocked       Regulations. Interestingly, we note that
by the PRC government in its anti-              all the above-mentioned three cases
                                                                                               2
whose anti-monopoly review decisions              merger     control. 14      In  fact,  the
have been published by MOFCOM to date,            establishment of the Committee is viewed
were offshore M & A transactions.12               as a compromise to address the demand
                                                  by some to create one unified enforcement
In addition, under the Anti-Monopoly Law          agency and resistance to that concept by
and the new Filing Thresholds Regulations,        those who preferred maintaining the
even if an offshore acquisition does not          existing division of power among different
meet the new thresholds, if such offshore         authorities under the State Council.
acquisition is deemed harmful to the
“national economic security” of the PRC           In this article, we will discuss: 1) the
domestic market, it will still need MOFCOM        criteria for determining the necessity of
review.                                           filing an anti-monopoly review report for
                                                  an offshore acquisition; 2) a summary of
We have assisted several multi-national           the reporting requirements; and 3) several
companies in their anti-monopoly review           practical tips regarding anti-monopoly
with MOFCOM and SAIC. Recently, we                review and filing procedures based on our
have noticed that the PRC governmental            experience with MOFCOM.
authorities have tightened enforcement of
anti-monopoly review of M&A transactions.
                                                  I.    When Must an Anti-Monopoly
For instance, the Anti-Monopoly Bureau,                 Review Report for an Offshore
previously under MOFCOM’s Treaty and                    Acquisition Be Filed
Law Department, has been removed from
the Treaty and Law Department and has             1.    Activities   Triggering         Anti-
become a new bureau under MOFCOM.                       Monopoly Review
The anti-monopoly review procedures
                                                  Under the Anti-Monopoly Law and the
could become a key tool for the PRC
                                                  Filing Thresholds Regulations, the State
government to control and supervise
                                                  Council has delegated to MOFCOM the
foreign investment in China.
                                                  right to investigate any consolidation of
                                                  business operators which eliminates or
Under the Anti-Monopoly Law, China will
                                                  restricts competition, regardless whether
establish     a     two-tier    anti-monopoly
                                                  the consolidation occurs within or outside
regulatory system, i.e., the Committee and
                                                  the PRC.     We believe that the Anti-
the Anti-Monopoly Enforcement Authorities
                                                  Monopoly Bureau under MOFCOM will play
(“Enforcement         Authorities”).       The
                                                  the key role in any such investigation. A
Committee 13 will be responsible for
                                                  consolidation of business operators refers
organizing, coordinating, and supervising
                                                  to       the     following     (“Business
anti-monopoly related activities.          The
                                                  Consolidation”):
Committee’s functions mainly involve
formulation of competition policies and
guidelines and coordination of enforcement        (i)   merger of business operators;
activities,     while     the     Enforcement
Authorities are responsible for enforcement.      (ii) a business operator acquires control
Although the Anti-Monopoly Law does not                over other business operators by
specify the composition of the Enforcement             acquiring shares or assets; and
Authorities, it is generally believed that the
Enforcement Authorities would include the         (iii) a business operator acquires control
                                                        over other business operators 15 or
three ministries that separately undertake
                                                        becomes capable of exerting decisive
anti-monopoly         related     enforcement
                                                        influence   over   other    business
activities,     namely,       the     National          operators 16 by way of contract or
Development and Reform Commission                       otherwise.
(“NDRC”), SAIC, and MOFCOM. The NDRC
primarily    oversees      monopoly     pricing   2.    Anti-Monopoly Filing Thresholds
concerns; the SAIC is mainly responsible
                                                  The Filing Thresholds Regulations also
for regulating abuse of market dominance,
                                                  provide that where a proposed Business
while the Anti-Monopoly Bureau of
                                                  Consolidation reaches any of the following
MOFCOM will mainly be in charge of
                                                                                                3
thresholds,    filing   with    MOFCOM        is   The Filing Thresholds Regulations are only
required:                                          triggered if the PRC business volume of
                                                   each of the two parties exceeds RMB400
                                                   million (approximately US$58 million).
(i)   the worldwide business volume of the
      business operators involved in the           Thus, if only one party involved in the
      consolidation exceeds RMB10 billion in       acquisition has PRC business volume
      the previous accounting year and             exceeding     RMB400     million,      the
      there are at least two business              consolidation is not subject to anti-
      operators involved, each having a            monopoly filing even though the business
      business volume exceeding RMB400             volume of all business operators involved
      million in the PRC in the previous           exceeds RMB2 billion in the PRC or
      accounting year;17 or                        exceeds RMB 10 billion worldwide.       In
                                                   addition, the new thresholds do not take
(ii) business volume in the PRC of all             into consideration the total number of the
     business operators involved in the
                                                   parties’ PRC subsidiaries nor does it
     consolidation exceeds RMB2 billion in
                                                   consider the total value of assets or
     the previous accounting year and
     there are at least two business               market share the relevant parties possess
     operators involved, each having a             in the PRC.
     business volume exceeding RMB400
     million in the PRC in the previous
                                                   3.    Practices and Suggestions
     accounting year;
                                                   Investors considering projects in the PRC
Although it is unclear under the Filing
                                                   should note the following:
Thresholds       Regulations    whether     the
business volume of a party involved in the
acquisition includes the business volume of        (i)   The Filing Thresholds Regulations do
all of the party's affiliates within and                 not define the terms “control” and
outside the PRC (particularly if the acquirer            “decisive influence.” As such, it is
is a special purpose vehicle formed for a                unclear whether veto rights typically
                                                         requested by a private equity investor
specific    acquisition),    based   on     our
                                                         acquiring a minority equity interest in
experience and our informal discussions
                                                         a domestic company would constitute
with officials at MOFCOM, we understand                  “decisive influence.” However, based
that the sales volume of a party's affiliates            on our informal inquiries with officials
should be included when calculating the                  at the Anti-Monopoly Bureau of
party's business volume.18 Since the Filing              MOFCOM and which views are also
Thresholds Regulations do not define the                 reflected in the Draft Provisional
term      "affiliates,"   MOFCOM       officials         Measures regarding the Filing of
suggested referring to the definition of                 Concentration of Business Operators
"affiliates" in the 2007 Filing Guide.19 The             as discussed above (see footnote 14),
2007 Filing Guide suggests that "affiliates"             obtaining typical minority shareholder
                                                         protection rights is very likely to
should include, with respect to any party,
                                                         require filing.     As such, even a
any other person that, directly or                       minority shareholding in an acquired
indirectly, controls, is controlled by, is               company may trigger PRC anti-
under common control with such party, or                 monopoly filing review if such
is otherwise affiliated to such party.                   minority shareholder is able to use its
                                                         de facto veto rights to exert “decisive
Foreign companies that intend to acquire                 influence”     over     production    or
smaller Chinese companies may be                         operational decisions of its target
pleased to learn that compared to the                    company, such as adoption of budget
2006 M&A Rules, the “two-party business                  or business plans, or rights to approve
                                                         or    reject   significant   investment
volume test” under the Filing Thresholds
                                                         decisions.
Regulations sets higher standards than the
2006 M&A Rules, where a filing with
                                                   (ii) The Filing Thresholds Regulations
MOFCOM was triggered if either the foreign              contain a “catch-all” provision under
acquirer or the target company had more                 which MOFCOM is granted the power
than RMB1.5 billion of business in the PRC.             to require filing if such authority

                                                                                                    4
    believes that a transaction could           dispose of the shares or assets within a
    potentially    exclude    or     restrict   specified period of time, transfer business
    competition     even    though      such    within a specified period of time, take
    transaction does not meet the               other necessary measures to return to the
    statutory thresholds. We have been
                                                status quo ante, and may impose a fine of
    told that the anti-monopoly authority
                                                up to RMB500,000.
    will factor in “national security” 20
    related concerns when exercising such
    discretionary power, and transactions       In addition, under the Anti-Monopoly Law,
    involving state-supported industries,       any      unrelated   parties  (such    as
    key industrial sectors, military-related    competitors) may report on others’
    industries, and infrastructure related      activities. As such, even if the relevant
    projects can expect to receive extra        parties fail to report their proposed
    scrutiny. As such, it is possible that      offshore acquisition to MOFCOM, their
    in true green-field joint ventures          competitors may report the offshore
    where both parties contribute cash,         acquisition to MOFCOM, which can require
    requiring the Chinese party to adhere
                                                a filing or even unwind the transaction.
    to certain non-compete obligations
    (common in many joint ventures)             Any such examination of the transaction
    may trigger anti-monopoly filing            by MOFCOM could be embarrassing for the
    requirements.                               related parties from a public relations
                                                perspective, even if the parties are not
Certain foreign investors who are parties       forced by MOFCOM to unwind the
to an offshore acquisition and who have         transaction.
PRC subsidiaries have decided not to
report and file their offshore acquisitions     Our sources have suggested that MOFCOM
with the PRC governmental authorities,          is likely to take a much more critical view
believing that their offshore acquisition       of any transaction that is undertaken as a
does not meet the PRC filing thresholds.        result of MOFCOM’s initiative. At the same
This is often the case if the offshore          time, MOFCOM has indicated that it is by
acquisition will not require any statutory      no means seeking to bar all foreign
approval with the relevant PRC authorities      acquisitions and joint ventures involving
for changes in shareholdings and other          industrial targets.
structures in the PRC subsidiaries.

We do not recommend avoiding anti-              II. Summary    of        the    Reporting
monopoly filing with the PRC government             Requirements
if such acquisition meets the threshold         Based on our inquiries at the Anti-
standards. MOFCOM is reviewing offshore         Monopoly Bureau of MOFCOM, the 2009
acquisitions where the parties involved         Filing    Guideline,  the    2009    Filing
have subsidiaries or significant sales within   Documentation Guideline, and the 2007
the PRC. MOFCOM may raise questions for         Filing Guide 21 serve as the roadmap for
those parties which have evaded anti-           business operators to file a contemplated
monopoly review, even after completion of       transaction to MOFCOM, which set forth
the acquisition. In addition, according to      the following procedural requirements:
the Draft Provisional Measures regarding
Investigation on and Dealing with the
Concentration of Business Operators that        1.   Filing Authorities. Under the 2006
                                                     M&A Rules, MOFCOM and SAIC are
are not Reported According to the Law,
                                                     the key authorities responsible for
MOFCOM may launch an investigation of                reviewing anti-monopoly applications
any suspected concentrations based on                and for determining whether any
lawfully acquired information. Note that             reported acquisition would result in an
Article 48 of the Anti-Monopoly Law                  over-concentration in the domestic
provides that if business operators create a         market. However, only MOFCOM will
concentration in violation of the Anti-              continue to play a leading role in the
Monopoly      Law,      the     Enforcement          anti-monopoly review process, since
Authorities can order them to halt their             the Filing Thresholds Regulations have
implementation of the concentration,                 delegated such role to MOFCOM.

                                                                                               5
     MOFCOM has designated the newly            behind such definitions;
     established Anti-Monopoly Bureau in
     MOFCOM to take charge of the anti-         each party’s sales volume and market
     monopoly filings as well as the review     share in the previous two fiscal years,
     and examination of transactions
                                                including evidence and data source;
     involving concentration of business
     operators.
                                                identification of main competitors;
2.   Parties. According to the 2009 Filing
     Guideline, the filing should be made       basic   information   regarding   the
     by: 1) all parties to the transaction if   “relevant market(s)”, including scale
     it is a merger; or 2) the party that       of market, market concentration rate,
     would obtain control over, or exert        status of import and export of
     decisive    influence     on,    another   products, together with evidence and
     business       enterprise     if     the   data source;
     concentration is conducted by other
     means (such as equity acquisition).22
                                                description  of  market  structure,
                                                including upstream and downstream
3.   Timing. In accordance with Article
                                                entities;
     21    of   the   Anti-Monopoly    Law,
     business      operators   must      file
     beforehand         a     contemplated      analysis of market entry, including
     transaction with the Enforcement           entry     barriers,   significance  of
     Authorities if such transaction meets      economics of scale for relevant
     the filing threshold provided by the       products,, intellectual property entry
     State Council. According to the 2009       restrictions, and entries and exits in
     Filing Guideline, a business operator      the past several years;
     must file with the Anti-Monopoly
     Bureau of MOFCOM a contemplated            vertical and horizontal cooperation
     transaction when such operator is
                                                agreements in the relevant markets;
     able to submit the documents as
     required by Article 23 of the Anti-
     Monopoly Law according to the              each party’s market share and
     requirements under such article. 23        competitive ability in markets other
     Normally, the Anti-Monopoly Bureau         than the “relevant market(s)”;
     requires     a   concerned    business
     operator     to   submit   a   written     anticipation    of  impact   of   the
     application to the Anti-Monopoly           concentration on market structure,
     Bureau for arranging a consultation        industry development, competitors
     with the Anti-Monopoly Bureau before       and         customers,      economy
     a formal filing. For the formal filing,
                                                development and public interests;
     the Anti-Monopoly Bureau suggests
     that the filing party make an
     appointment with the bureau before         anticipation of efficiency that may be
     such filing.                               brought by the concentration, with
                                                documents supporting this;
4.   Documents.24 According to the 2009
     Filing Documentation Guideline, along      anticipation of impact on the business
     with certain documents such as             operators and the “relevant market” if
     certificates of incorporation, and basic   the concentration is prohibited;
     information about the parties and the
     nature of the transaction, the parties     Audited finance statements of each
     are required to provide additional
                                                party in the previous one fiscal years;
     information, including25:
     identification of all affiliates;          Information      regarding    industry
                                                associations in relevant markets;
     definition of the “relevant market(s)”
     affected by the proposed transaction,      Opinions   of   local   governments,
     including definitions of product and       competent authorities and the public
     geographic markets, and the rationale      on the concentration; and
                                                                                          6
     the acquisition agreement (translated       MOFCOM indicated that the review and
     into Chinese; a summary thereof is          examination of a waiver application may
     acceptable), and other reports or           be more complicated and may take longer
     documents helping to analyze and            than a standard merger-control anti-
     assess the concentration (e.g. the          monopoly filing.
     Feasibility Study Report and the Due
     Diligence Report).
                                                 2.   Tips for Definition of “Relevant
                                                      Market”
Although the above categories are quite
broad, our recommendation is to focus on         Based on our no-names inquiries with
PRC market information, and to provide           officials at MOFCOM, and officials on the
only summary information on sales and            drafting committee of the M&A Rules and
competition worldwide.                           Anti Monopoly Law, the term “Chinese
                                                 market” may refer to the “relevant market
                                                 in China”. However, the terms “Chinese
5.   Review Period.        According to the      market”,     “relevant    market”,      “related
     Anti-Monopoly Law, the initial review
                                                 industry” and certain other terms used in
     period is 30 days. However, if the
     enforcement entity decides to conduct       the M&A Rules, the 2007 Filing Guide, the
     further    examination,    the  review      2009 Filing Guideline, the 2009 Filing
     period may be extended another 90           Documentation        Guideline,     the    Anti-
     days (or even 150 days under certain        Monopoly Law and the Relevant Market
     circumstances), in addition to the 30-      Guideline have yet to be explicitly clarified
     day initial review.26                       by the relevant PRC government agencies.
                                                 According to the Anti-Monopoly Law and
6.   Consultation.      MOFCOM welcomes          the Relevant Market Guideline, the
     any parties to consult on filing issues,    “relevant market” refers to the scope of
     including whether filing is necessary       products and areas within which the
     and how to define the relevant
                                                 relevant parties compete against each
     markets, prior to the actual filing.
                                                 other during a certain period of time with
                                                 respect to the relevant commodities or
7.   Confidentiality.       The review by
     MOFCOM of the materials filed will be       services.    Officials from MOFCOM have
     made    on    a     confidential   basis.   indicated that the “Chinese market” is not
     However, the filing party must              necessarily limited to mainland China, and
     prepare and submit a non-confidential       may include, for example, markets in Hong
     version of the filing materials together    Kong and Macao. Please note that on July
     with the confidential version, if it        7, 2009, the Relevant Market Guideline
     wishes to keep the critical part of its     was promulgated by the Committee. We
     submission confidential.                    believe that the approach using tests for
                                                 product market definition, geographic
III. Practical Suggestions
                                                 market definition and the “hypothetical
                                                 monopolist” test in the Relevant Market
1.   Waiver Application
                                                 Guideline provide consistency with similar
     – Not Recommended
                                                 approaches       used      by      competition
According to Article 54 of the 2006 M&A          enforcement authorities in the other major
Rules, a filing party may apply for              antitrust jurisdictions, including Asia, North
exemption of examination on certain              America, South America, Europe and
grounds (e.g., competition in the market         Australia.     The Committee’s approach
will be improved, or employment will be          should     therefore    help     to    enhance
promoted), but such exemption is not             predictability and transparency in this era
found under the Anti-Monopoly Law.               of global economics and competition
Unless the parties involved in any               regulation. The product market definition
proposed acquisition are a sister-company        in the Relevant Market Guideline appears
or   parent-company, 27 we        do  not        to assess the relevant set of economic
recommend applying for an exemption,             factors. It is unclear, however, whether
since no company has successfully                the “Immediate Substitutability” test is
obtained a waiver of review. Officials at        more stringent than the “reasonable
                                                                                                    7
interchangeable use” tests applied in other           average area of a single store over XX
jurisdictions. We believe that even after             square meters, and the geographical
promulgation of the Relevant Market                   market to certain regions (e.g., north
Guideline, for each specific concentration            east China, or Zhejiang and Fujian
transaction, the definition of “relevant              provinces) or even certain cities. This
market” is still subject to discussion with           may still be the case even if the anti-
MOFCOM on a case-by-case basis.                       monopoly review authority in the
                                                      filing party’s home country accepts
Based on our experience, MOFCOM                       the definition of “supermarket retail
appears to be reluctant to accept a filing if         business.”
the “relevant market” is defined very
broadly.     To define the geographical
                                                3.    Other Tips
market, MOFCOM prefers to narrow the
geographic scope to a province or even          (i)   Schedules for M & A Transactions
municipality.    They will consider the
geographic areas in which the subsidiaries      Both parties to acquisitions of PRC equity
of the relevant parties, the suppliers and      interests or assets, and parties to offshore
downstream entities, etc., are located. To      M & A transactions should factor in the
define a product/service market, MOFCOM         PRC anti-monopoly review when designing
prefers to narrow the definition to specific    the deal structure and formulating the
main products or specific services.             transaction schedule.

    Example 1: If an offshore acquisition       (ii) Pre-filing Consultation
    involves      two      fruit-processing
    companies     each    having    several     Pre-filing consultation with MOFCOM may
    subsidiaries in the southern region of      help in defining the relevant market.
    the PRC, MOFCOM may not accept the          However, a pre-filing consultation with
    “PRC fruit-processing market” as the        MOFCOM will not be deemed to be
    relevant market. It may prefer to           MOFCOM’s       formal     acceptance of
    define the main relevant market as          declaration and filing.
    “Pineapple juice manufacturing in
    Guangdong province” and “Canned             (iii) Bargaining Leverage
    yellow-peach       manufacturing      in
    Sichuan Province”, etc. if the sales        Defining the relevant market requires
    volume of pineapple juice and canned        negotiation. It is advisable for the filing
    yellow-peach      products    of    the     party to start with a broader definition to
    subsidiaries of the relevant parties        obtain a better bargaining position. In
    amounts to more than 50% of the             addition, if an offshore transaction is also
    total sales volume of the subsidiaries      reviewed      by     other      anti-monopoly
    and most of the manufacturing               authorities, decisions made by such
    subsidiaries and their suppliers are        authorities in favor of the filing party could
    located in Guangdong and Sichuan            be presented to MOFCOM as persuasive
    respectively.                               evidence (e.g., definition of the relevant
                                                product market).
    Example     2:    Assume    the  PRC
    subsidiaries of the parties to an           (iv) Collection    of     Chinese     Market
    offshore acquisition mainly engage in            Information
    the operation of supermarkets in a
                                                Data on the competition within the
    score of large cities in China. The
                                                relevant market (e.g., market shares,
    filing party may suggest that the
                                                competitors, etc.) in China is often difficult
    relevant product market is the
                                                to obtain from public sources like the
    supermarket retail business and the
                                                National Bureau of Statistics, so it may be
    geographic market is the PRC. It is
                                                necessary to engage a qualified PRC
    very likely that MOFCOM will want to
                                                market-research firm to collect such
    narrow the product market from retail
                                                information.
    business to supermarkets with the
                                                                                                 8
IV. Conclusion                                      community in the coming months and
                                                    years. Based on our experience dealing
The Anti-Monopoly Law and the new Filing
                                                    with officials at MOFCOM, thorough
Thresholds Regulations are a mile-stone
                                                    research on US and European experience
for PRC’s merger control regime by
                                                    was conducted by MOFCOM, which will try
regulating     domestic     mergers     and
                                                    to follow international practice in its
acquisitions.   To a certain extent, the
                                                    enforcement of the Anti-Monopoly Law and
thresholds for Business Consolidation
                                                    the new Filing Thresholds Regulations.
filings have been simplified. On the other
                                                    One unknown issue is whether the Anti-
hand, the PRC regulators still keep much
                                                    Monopoly Law will be used to protect
discretion, particularly in light of the
                                                    domestic companies and how important
ambiguity of certain key legal concepts.
                                                    protecting local strategic industries will be.
How the Committee and MOFCOM exercise
this discretion will be closely observed by
the merger and acquisition and investment


                                                    (promulgated by the Anti-Monopoly Bureau of
1
 Anti-Monopoly Law of the People's Republic of      MOFCOM, January 7, 2009) the official website
China (promulgated by the Standing Comm.            of     the     Anti-Monopoly     Bureau     of
Nat'l People's Cong., Aug. 30, 2007, effective      MOFCOM,http://fldj.mofcom.gov.cn/aarticle/xgx
Aug. 1, 2008) LawInfoChina (last visited Oct. 16,   z/200901/20090105993824.html?310518552=5
2008) (P.R.C.) [hereinafter “Anti-Monopoly          0119984 (last visited January 15, 2009)
Law”].                                              [hereinafter “2009 Filing Guideline”].
2
  Regulations of the Ministry of Foreign Trade      7
                                                      Guideline regarding the Filing Documentation
and Economic Cooperation and the State              related to the Concentration of Business
Administration for Industry and Commerce on         Operators (promulgated by the Anti-Monopoly
Merging and        Splitting  of Foreign-funded     Bureau of MOFCOM, January 7, 2009) the
Enterprises (promulgated by the Ministry of         official website of the Anti-Monopoly Bureau of
Foreign Trade and Economic Cooperation, which       MOFCOM,
has been reorganized as the Ministry of             http://fldj.mofcom.gov.cn/aarticle/xgxz/200901
Commerce (“MOFCOM”), and the State                  /20090105993824.html?310518552=50119984
Administration for Industry and Commerce            (last visited January 15, 2009) [hereinafter
(“SAIC”), Sept. 23, 1999, amended by the            “2009 Filing Documentation Guideline”].
same authorities Nov. 22, 2001) LawInfoChina        8
(last visited Oct. 17, 2008) (P.R.C.)                  Guideline for Defining the Relevant Market
                                                    (promulgated by the Anti-Monopoly Committee
3
   Provisions on the Takeover of Domestic           of the State Council, July 7, 2009) the official
Enterprises by Foreign Investors (promulgated       website of the Anti-Monopoly Bureau of
by     MOFCOM,       the    State-Owned  Assets     MOFCOM,
Supervision and Administration Commission of        http://fldj.mofcom.gov.cn/aarticle/j/200907/20
the     State     Council     (“SASAC”),  State     090706384131.html?4165895963=50119984
Administration of Taxation (“SAT”), SAIC, the       (last visited November 5, 2009) [hereinafter
China     Securities     Regulatory  Commission     “Relevant Market Guideline”].
(“CSRC”) and the State Administration of            9
Foreign Exchange (“SAFE”), Aug. 8, 2006,              In addition to the Draft Provisional Measures
effective Sept. 8, 2006) LawInfoChina (last         regarding Investigation of and Dealing with the
visited Oct. 16, 2008) (P.R.C.) [hereinafter        Concentration of Business Operators that are
“2006 M & A Rules”].                                not Reported According to the Law, MOFCOM
                                                    also published the following additional drafts: (i)
4
  Guide for the Anti-Monopoly Declaration by a      Draft Provisional Measures regarding the
Foreign Investor in the Merger or Acquisition of    Evidence      Collection    on      Concentration
a    Domestic   Enterprise  (promulgated     by     Transactions that do not meet the Filing
MOFCOM, March 8, 2007) LawInfoChina (last           Thresholds but are Suspected to Constitute a
visited Oct. 16, 2008) (P.R.C.) [hereinafter        Monopoly; (ii) Draft Provisional Measures
“2007 Filing Guide”].                               regarding the Filing of Concentration of Business
5                                                   Operators;     (iii) Draft Provisional Measures
  Provisions of the State Council on the Standard
                                                    regarding the Review and Examination of
for the Declaration of Concentration of Business
                                                    Concentration of Business Operators; and (iv)
Operators (promulgated by the State Council,
                                                    Draft Provisional Measures on the Handling and
Aug. 3, 2008, effective Aug. 3, 2008)
                                                    Examination of Concentration Transactions that
LawInfoChina (last visited Oct. 16, 2008)
                                                    do not meet the Filing Thresholds but are
(P.R.C.)    [hereinafter   “Filing    Thresholds
                                                    Suspected to Constitute a -Monopoly. All such
Regulations”].
                                                    drafts are expected to be issued in 2009.
6
  Guideline Regarding the Filing of the             10
                                                      Provisional Rules on the Takeover of Domestic
Concentration  of    Business   Operators
                                                    Enterprises by Foreign Investors
                                                                                                          9
11
   Under the AML, where a concentration is             budget, operations and sales, pricing, major
approved, MOFCOM may impose restrictive                investment and other important management
conditions on such concentration to reduce the         and operation policies of another business
adverse effect of such concentration on                operator, etc. The joint establishment of a new
competition.     Also, MOFCOM is obligated to          enterprise by two or more business operators,
publish the decisions it renders which prohibit        according to the explanation of officials at
or attach restrictive conditions to concentrations     MOFCOM, and which explanations are also
of business operators. In practice, MOFCOM             reflected in the Draft Provisional Measures
does not publish its decisions on the M& A             regarding the Filing of Concentration of Business
transactions which have been filed with and            Operators, would be regarded as “concentration
unconditionally approved by it. According to an        of business of operators by way of contract”.
announcement published by the Anti-Monopoly            Pursuant to the explanation of one of the
Bureau      of    MOFCOM       on    its    website    drafting officials of the Filing Thresholds
(http://fldj.mofcom.gov.cn/aarticle/zcfb/200907        Regulations, “exerting decisive influence upon
/20090706409831.html?474515227=50119984                other business operators” means to exert
) on July 21, 2009 (“July 21 Announcement”),           decisive influence over production or operational
MOFCOM accepted anti-monopoly filings for 58           decisions of other operators.
M & A transactions from August, 2008 through           16
                                                          Pursuant to the explanation of one of the
the end of June 2009. Most of these cases were         drafting officials of the Filing Thresholds
unconditionally approved by MOFCOM except              Regulations, “exerting decisive influence upon
one (i.e., the Coca-Cola-Huiyuan deal), and two        other business operators” means to exert
were approved with restrictive conditions              decisive influence over production or operational
attached (i.e., the INBEV N.V./S.A.’s acquisition      decisions of other operators.
of    Anheuser-Busch     Companies       Inc.   and
                                                       17
Mitsubishi Rayon’s acquisition of             Lucite      It is provided in Filing Thresholds Regulations
International.) However, following the July 21         that the calculation of business volume should
Announcement , MOFCOM published another                factor in the specific circumstances of special
three anti-monopoly review decisions          where    industries like banking, insurance, securities and
restrictive conditions were imposed. (i.e.,            futures in accordance with special rules to be
General Motor’s acquisition of Delphi, Pfizer's        promulgated by the State Council. See Filing
acquisition of Wyeth, and the Panasonic-Sanyo          Thresholds Regulations, supra note 5, at art. 7.
deal)                                                  18
                                                          According to the Draft Provisional Measures
12
    China Huiyuan Juice Group Limited is a             regarding the Filing of Concentration of Business
company incorporated in Cayman Islands and             Operators, the business volume of the party
listed on the Hong Kong Stock Exchange.                participating in the concentration shall be the
13
                                                       sum of the business volume of the following: (i)
   It was reported that the Committee was              the single business operator which is the party
established by the State Council on August 1,          in the transaction; (ii) other business operators
2008.     However, the composition of the              which directly or indirectly controlled by the
Committee remains unknown. See the official            business operator listed in item (i); (iii) other
website of Central People’s Government of              business operators which directly or indirectly
People’s       Republic       of       China,          control the business operator listed in item (i);
http://www.gov.cn/jrzg/2008-                           (iv) other business operators directly or
08/01/content_1062161.htm                              indirectly controlled by the business operators
14
   Before the promulgation of the Anti-Monopoly        listed in item (iii); and     (v) other business
Law, MOFCOM (together with SAIC, but                   operators directly or indirectly controlled by two
MOFCOM was generally viewed as the key                 or more business operators listed in items (i) to
player) only oversaw acquisition of domestic           (iv).
companies by foreign investors or offshore             19
                                                         The 2009 Filing Guideline does not provide a
mergers and acquisitions in accordance with            definition for “affiliate”.
the 2006 M&A Rules, since purely domestic
                                                       20
mergers or acquisitions were not subject to anti-         Article 31 of the Anti-Monopoly Law provides
monopoly review.                                       for a government review of national-security
15
                                                       concerns      raised   by    foreign    investors'
   According to informal explanations of officials     acquisitions in China, a process that is separate
at MOFCOM, which explanations are also                 from an antitrust probe. In an organizational
reflected in the Draft Provisional Measures            plan published by the State Council on August
regarding the Filing of Concentration of Business      23 2008, the PRC government will establish a
Operators, “acquiring control over other               "Joint Ministerial Meeting" system (which
business operator” includes the following              includes MOFCOM, NDRC and other ministries)
activities: (i) acquiring more than 50% voting         which will serve as a kind of committee for
shares or assets of other business operators;          investigating national security concerns arising
and (ii) being able -through acquisition of equity     from foreign companies' investments in China.
with voting rights or assets, and by contract or       However, the composition of the “Joint
other means- to decide the appointment of one          Ministerial Meeting” and the rules on how the
or more members of the board of directors of           national security review will operate remain
other business operators and key management,           unknown.
                                                                                                            10
21
   Based on our no-names inquiries with officials      shares with voting rights or assets of each of
at the Anti-Monopoly Bureau of MOFCOM, the             the participant Operators in the Consolidation.
2007 Filing Guide is still valid and applicable to     See Anti-Monopoly Law, supra note 4, at art. 22.
the filing of acquisition of domestic companies
by foreign investors. If some issues are covered
in the 2007 Filing Guide but are not covered by
the 2009 Filing Guideline, the 2007 Filing Guide
shall be applicable. However, if there are any
conflicts between the 2007 Filing Guide and the
2009 Filing Guideline, the provisions in 2009
Filing Guideline shall prevail.
22
    According to the 2009 Filing Guideline, the
filing could be made by the filing parties, either
in their own names, or through an authorized
attorney. See the 2009 Filing Guideline, supra
note 6, at art. 2 and art. 3.
23
    According to the Anti-Monopoly Law, the
submission should include the following: 1) an
application letter; 2) explanation of the impact
of the contemplated concentration on the
competition in the relevant market; 3) the
agreement for the contemplated concentration;
4) audited financial statements of all the parties
to the contemplated transaction for the last
fiscal year; and 5) other documents or data
required by the “anti-monopoly enforcement
entity of the State Council”. See Anti-Monopoly
Law, supra note 4, at art. 23.
24
   Article 23 of Anti-Monopoly Law provides a list
of documents to be submitted for the anti-
monopoly review. However, we were informed
by a high-ranking official from MOFCOM that the
2009 Filing Documentation Guideline would
continue to be effective in terms of the
documents required by MOFCOM in relation to
its anti-monopoly review. See Anti-Monopoly
Law, supra note 4, at art. 23 and 2009 Filing
Documentation Guideline, supra note 7.
25
   Please refer to the 2009 Filing Documentation
Guideline for a complete list of required
materials.     See 2009 Filing Documentation
Guideline, supra note 7.
26
   The Anti-Monopoly Law does not identify
whether the 30-day review and its extension
refer to calendar days or working days.
According to the 2007 Filing Guide, the initial
review period is 30 working days, but may be
extended to 90 working days. Based on our
experience, in practice, currently, the officials at
MOFCOM use calendar days to calculate their
review period. See 2007 Filing Guide, supra
note 3, at ch. 4.
27
   According to the Anti-Monopoly Law, business
operators may be exempted from filing with the
anti-monopoly enforcement entity of the State
Council if:
1) one participant Operator in the Consolidation
holds more than 50% of the shares with voting
rights or assets of each of the other participant
Operators in the Consolidation; or
2) one Operator not participating in the
Consolidation holds more than 50% of the

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