Tentative Provisions and Measures for Strengthening Oversight of Business Operator Concentration

Tentative Provisions on Assessment of the Effects of Concentrations of Business Operators on Competition (Draft for Comment)
Issuing Body: Ministry of Commerce
Issuing Date: June 3, 2011 

Tentative Measures on the Investigation and Handling of Business Operators that Fail to Provide Notice of a Concentration (Draft for Comment)
Issuing Body: Ministry of Commerce
Issuing Date: June 13, 2011

Seeking to strengthen its oversight of concentrations of business operators and increase transparency of the merger review and control process, China's Ministry of Commerce (MOFCOM), the central agency responsible for merger control, has issued two sets of rules in draft format for public comment. The Tentative Provisions on Assessment of the Effects of Concentrations of Business Operators on Competition ("Draft Assessment Provisions") clarify how the merger-control regulator assesses the impact of concentrations on competition, while the Tentative Measures on the Investigation and Handling of Business Operators That Fail to Provide Notice of a Concentration ("Draft Notification Measures") crack down on concentrating businesses that reach notification thresholds but fail to notify regulators. The periods for public comment on the proposed rules ended in June.

Background

MOFCOM has been an active regulator since China's landmark Anti-Monopoly Law (AML) took effect in August 2008. The agency has issued a series of rules and guidelines governing the concentration of business operators, including the following:

• The Guiding Opinions on Merger Control Notification and Guiding Opinions on Application Materials for Merger Control Notification were both enacted in January 2009. The rules stipulate procedures and documentation requirements for the merger control notification filing process.
• The Measures on the Notification of Concentrations of Business Operators and the Measures on the Review of Concentrations of Business Operators, which became effective January 1, 2010, clarify when companies must notify the merger-control regulator of a proposed concentration and how the agency will proceed in evaluating such proposals.
• The Provisional Regulations on the Implementation of Divestiture of Assets or Businesses for Concentrations of Business Operators, which were enacted in July 2010, supplement the above two sets of rules and clarify the requirements and procedures for the divestiture of assets or businesses by companies participating in a proposed concentration.

Draft Assessment Provisions

Supplementing MOFCOM's previously issued rules governing merger control, the Draft Assessment Provisions further clarify how the merger-control regulator assesses the competitive impact of a proposed concentration of business operators.

The Draft Assessment Provisions reiterate the following factors that should be taken into consideration for merger control review:

• Market share and market control in relevant markets of the business operators participating in a concentration;
• Market concentration within the relevant market;
• Effect of the concentration on market access and technological development;      • Effect of the concentration on customers and other related business operators;     • Effect of the concentration on national economic development; and
• Other factors affecting competition.

In addition, the Draft Assessment Provisions also include broad conceptual terms such as the "public interest" and "economic efficiency" within the scope of factors to be considered, which may bring some uncertainty to MOFCOM's assessment of proposed concentrations.

The Draft Assessment Provisions adopt internationally accepted standards of evaluation, such as the Herfindahl-Hirschman Index and Concentration Ratio, to evaluate proposed concentrations.

When assessing possible adverse effects of a concentration, the draft version of the new rules clarify that the first thing to be considered is whether the concentration creates or strengthens a single business operator's ability to exclusively eliminate or restrict competition.

If the relevant market involved in the concentration is under the joint control of two business operators, MOFCOM will consider and take into account whether the concentration creates or strengthens the business operators' joint ability to eliminate or restrict competition.

If the business operators participating in the concentration are not actual or potential competitors in the same relevant market, MOFCOM's review should focus on the adverse competitive effects—if any—in the upstream or downstream markets or in related markets.

The Draft Assessment Provisions also broadly describe a number of the potential areas—both positive and negative—that a concentration might affect, such as market access, economic efficiency, technological development, customers, and national economic development. The provisions make it clear that these factors, too, should be considered by MOFCOM in assessing a proposed concentration.

Draft Notification Measures

Acting just ten days after releasing the Draft Assessment Provisions, MOFCOM issued the Draft Notification Measures, which are designed to discourage and penalize  operators whose planned business concentration reaches notification thresholds but who fail to declare the proposed merger to regulators, as required by the Anti-Monopoly Law.

Pursuant to the AML, if a proposed concentration reaches notification thresholds stipulated by the State Council, business operators must notify MOFCOM of the deal before it is closed. The Regulations on Notification Thresholds of a Concentration of Business Operators, promulgated by the State Council in August 2008, make merger control notification mandatory if:

• The total combined global turnover of all participants in the concentration exceeded RMB10 billion in the preceding fiscal year, and the Chinese domestic turnover of at least two participants each exceeded RMB400 million; or
• The total combined Chinese domestic turnover of all participants in the proposed concentration exceeded RMB2 billion in the previous fiscal year, and the domestic turnover of at least two participants each exceeded RMB400 million.

According to the Draft Notification Measures, MOFCOM is responsible for investigating alleged failures to notify regulators of a concentration. MOFCOM may delegate its investigative power to provincial offices as needed.

The Draft Notification Measures provide that any entity or individual has the right to confidentially report to MOFCOM a concentration that reaches notification thresholds without proper notification to regulators. MOFCOM should conduct an investigation if the report is made in writing and provides basic information about the reporter and related facts and evidence of the concentration in question.

Investigative Procedures and Timelines

In order to provide accountability and assure transparency in the investigation process, the Draft Notification Measures specify procedures and timelines for MOFCOM's investigation. Details are summarized below.

Case Filing

MOFCOM should verify the facts and evidence provided by the reporter before officially opening a case. MOFCOM should officially open a case file if there is "significant suspicion" of a failure to notify the concentration in question, in which case the regulator should notify the business operators to be investigated in writing.

The term "business operators to be investigated" refers to parties obligated to notify MOFCOM of a proposed concentration in accordance with the Measures on the Notification of Concentrations of Business Operators:

• If a concentration is carried out via a merger, all parties to the merger are obliged to notify MOFCOM.
• If a concentration is effected by other means (such as an acquisition of shares or assets, or through contractual arrangements), the party that gains controlling power over the other, or that is able to exert a decisive impact on other operators, is obliged to file notice of the concentration, and the other businesses involved in the concentration are required to cooperate.

According to the Measures on the Notification of Concentrations of Business Operators, if the controlling party fails to properly notify MOFCOM of a proposed concentration, other participants may do so instead.

According to the Draft Notification Measures, the business operators under investigation have 15 days from the time they receive the case filing notice to submit to MOFCOM relevant documents and materials regarding such issues as whether the transaction in question qualifies as a concentration, whether notification thresholds have been reached, and whether the transaction was effected without notification.

The MOFCOM Investigation

MOFCOM should complete its initial investigation of whether the transaction under review falls under the scope of concentrations that should be notified within 60 days of receiving the documents and materials provided by the business operators being investigated. If MOFCOM's initial investigation shows that the agency should have been notified in advance of the transaction, MOFCOM should carry out further investigation, with the agency again being required to notify the business operators under investigation in writing. The business operators under investigation have 30 days from the time they receive that second notice to submit documents and materials required for merger control notification under the Measures on the Notification of Concentrations of Business Operators.

In the course of MOFCOM's investigation, the business operators under investigation as well as interested parties have the right to convey their opinions to the agency. The business operators under investigation, interested parties, and other related entities or individuals should cooperate with MOFCOM for its investigation, and may neither refuse nor impede the investigation.

At least two investigators must work on every MOFCOM investigation of an alleged failure to notify. Inquiries and investigations must be recorded in writing. Records must be signed by outside agencies and organizations that provided information to MOFCOM as well as those who were investigated. MOFCOM should verify all facts, evidence, and reasons provided during the investigation by business operators and interested parties.

Before making a final decision, MOFCOM should advise the business operators under investigation of the results of its investigation, as well as the facts and evidence on which the results were based. Business operators should submit written responses, including relevant facts and evidence, within the timeframe stipulated by MOFCOM. The agency should notify business operators of its decisions in writing. MOFCOM may publicly announce a decision that business operators failed to properly notify the agency of a proposed concentration.

MOFCOM's Decision-Making

In rendering its decisions, MOFCOM is to take into consideration the nature, degree, duration, and actual or potential elimination of competition or restrictive effect on competition of the failure to properly notify the agency of a concentration. If business operators carry out a concentration in violation of these rules, MOFCOM may rescind the transaction by ordering an end to the concentration, the disposal of the equity interest or assets, or the transfer of business, and take other measures as necessary. Penalties of as much as RMB500,000 may be imposed on business operators.

Conclusion

MOFCOM's Draft Assessment Provisions and Draft Notification Measures reflect the Chinese government's intention to further strengthen regulation of merger control. However, while the proposed new rules to some extent provide greater certainty and transparency, for example by stipulating investigation procedures, the use of broad conceptual terms like "public interest" and "economic efficiency" will likely still result in some uncertainty in the enforcement of merger control review. On the other hand, there is no doubt that concentrations will be under stricter regulation and oversight from the government.