Amendment to China’s Merger Control Rules: Implications on M&A Deals

At a Glance

• The People’s Republic of China’s State Administration for Market Regulation released the Provisions on the Review of Concentrations of Undertakings (the Provisions) to supplement the Anti-Monopoly Law. 
• The amendment to the Anti-Monopoly Law, together with the Provisions, has resulted in significant changes to China’s merger control rules.
• The Provisions came into effect on April 15, 2023.

Following the August 1, 2022, amendment of the People’s Republic of China’s (PRC) Anti-Monopoly Law, the State Administration for Market Regulation — the PRC’s antitrust authority (AMR) — released the Provisions on the Review of Concentrations of Undertakings (the Provisions) to supplement the Anti-Monopoly Law. The Provisions were issued on March 10, 2023, and came into effect on April 15, 2023. The amendment to the Anti-Monopoly Law, together with the Provisions, has resulted in significant changes to China’s merger control rules. This alert introduces the key changes to the rules and their ramifications on M&A activities. 

Deals Falling Below the Turnover Threshold May Be Notifiable 

Prior to issuance of the Provisions, if a deal did not meet the stipulated turnover threshold, a mandatory filing for PRC merger control review wouldn’t be triggered (i.e., that deal would not be notifiable). Now, the turnover threshold is no longer the sole criteria in determining whether a deal is notifiable. The Provisions stipulate that, for a deal falling below the turnover threshold that has or may have the effect of eliminating or restricting competition, the AMR has the power to require merging parties to:

• Make the merger control filing within 120 days and take other necessary actions to reduce the adverse impact on competition (if the deal has been implemented at the time of notice).
• Or stop implementation of the deal before obtaining clearance (if the deal has not been implemented at the time of the notice).

This new provision empowers the AMR to review deals below the turnover threshold, meaning the parties could face legal uncertainty for an indefinite period, prompting some to consider a voluntary filing to address this.

Provision of Guidance for Determining “Gun-Jumping” 

For the first time, the Provisions have shed light on the scope of “gun-jumping” activities in the PRC. “Gun-jumping” now includes completing registration for entity formation or share transfer, appointing senior management of the target, participating in the business decision-making and management functions of the target, exchanging sensitive information, substantively integrating the businesses of the target, and similar activities. Previously, AMR had only punished one type of “gun-jumping” activity: completion of entity formation or share transfer registration prior to merger control clearance. Due to the Provisions’ broader interpretation of “gun-jumping”, dealmakers, especially joint venture partners, now must be mindful of a host of other activities which must be reserved until merger approval has been granted.  

“Stop-the-Clock” Mechanism Brings Uncertainties to Notification Timeframe 

Prior to issuance of the Provisions, the AMR had a limit of 180 calendar to complete its merger control review. For complicated deals where the AMR needed more time, the parties would be asked to withdraw and resubmit their notification in order to reset the clock. To address that issue, the “Stop-the-Clock” mechanism has been introduced to enable the AMR to suspend the review period, if: i) the notifying parties fail to provide the requested information or materials within the specified time period; ii) new circumstances arise or new facts emerge during the review period that may impact the review and the review cannot proceed without verification; or iii) for deals in which the notifying parties propose remedies for anticompetition concerns, the notifying party requests suspension of the review period. The “Stop-the-Clock” mechanism is expected to relieve notifying parties of procedural burdens to withdraw and resubmit the filing where the review requires more than 180 days. 

More Severe Punishment for Violations 

The amendment to the Anti-Monopoly Law significantly increased the fines that could be imposed for violations of the merger control rules. Now, where the merging parties fail to file or if they engage in gun-jumping, the fine has been increased from RMB 500,000 to RMB 5 million (approximately USD $70,000 to $701,000) for deals that do not eliminate or restrict competition. For deals with anticompetition concerns, a fine of up to 10% of the merging parties’ turnover in the prior year may be imposed. It is yet to be defined by the AMR whether this penalty based on turnover refers to the parties’ global turnover or their turnover in the PRC. Notably, the Anti-Monopoly Law also allows the AMR to multiply the fines by two-to-five times in case the violation is “extremely severe” with “extremely bad” impacts and “extremely serious” consequences. These terms are not defined in the Anti-Monopoly Law or the Provisions, which grants the AMR broad discretion to interpret and apply these potential penalty multipliers.

These changes to the PRC merger control rules impose higher compliance requirements on companies conducting M&A activities in China. Non-PRC companies in particular should be aware of these new risks, and they should closely monitor their proposed PRC transactions to avoid potential non-compliance.