Streamlining the Chinese merger control process - further implementing rules issued
21 April 2014
As previously noted, the Ministry of Commerce in China ("MOFCOM") has been drafting rules implementing the recently issued Interim Regulation on the Standards Applicable to Simple Cases of Concentrations between Business Operators ("Simple Cases Regulation"). This regulation which sets out the types of transactions that qualify as "simple cases" has been effective since 12 February 2014.
Last week, on 18 April, MOFCOM issued a set of implementing rules for the Simple Cases Regulation: the Guiding Opinions on the Notification of Simple Cases of Concentrations between Business Operators (Trial) ("Guiding Opinions") and its two annexes, the simplified notification form and the 'public notice' template (collectively, the "Implementing Rules"). The new rules took effect from the date of publication.
The Simple Cases Regulation was the first step in implementing a simplified merger control procedure in China.
The simplified notification form will allow merging parties to provide fewer documents and less information when filing a merger control notification. Several sections which appear in the standard notification form were deleted in the simplified notification form.
The Implementing Rules also provide for a shorter timeline: as in other jurisdictions, the Chinese simplified merger system appears to be aimed at reducing the merger review processing period. In particular, the new system provides for a period of public consultation by way of 'public notice,' whereby MOFCOM issues the basic details of the transaction filed on its website and invites all interested parties to comment. The Guiding Opinions stipulate that the public notice will be uploaded after 'case acceptance,' and third parties will have 10 days to comment. In principle, the issuance of the public notice and comment opportunity should allow MOFCOM to short-circuit the (sometimes lengthy) one-on-one consultations with individual stakeholders on a typical standard filing.
However in terms of hard law, there are no specific, shorter timelines in place as a result of the Implementing Rules. In addition, there is no obligation on MOFCOM to issue the public notice within a specific deadline after case acceptance. Hence, a "simple case" may still enter into "phase 2" of the merger control procedure. Furthermore, the phase between filing the (simplified) notification and case acceptance may still be relatively lengthy, mainly as a result of the shortage of manpower within MOFCOM for dealing with this part of the procedure. In short, it may be too early to qualify the new Implementing Rules as a proper "fast-track" procedure. Only future MOFCOM practice will confirm whether "simple cases" will indeed consistently be cleared earlier on in the process as compared to a standard filing.
"Simple case" application rejected, or revocation – back to square one
The principle on which the Implementing Rules are based is that the merging parties need to assess whether their transaction qualifies as a "simple case" and will assume the consequences of that assessment.
The Guiding Opinions state that the parties themselves must apply for "simple case" status. The Simple Cases Regulation stipulates that the following types of transaction can be treated as 'simple cases':
- in a horizontal merger, if the combined market share of all parties involved is below 15%;
- in a vertical merger, if the parties' market share in the upstream or downstream is below 25%;
- in a conglomerate merger, if the parties' market share in any market is below 25%;
- in the establishment of an off-shore joint venture, if the joint venture does not engage in any business in China;
- in the acquisition of equity or assets of off-shore entities, if the target does not engage in any business in China; and
- where an exit is made from a joint venture by one or more of its shareholders, and the number of controlling shareholders of the joint venture is reduced.
However, the Simple Cases Regulation and the Guiding Opinions also provide the basis for MOFCOM to reject the application for "simple case" status, or to revoke this status. One reason that would cause MOFCOM to do this is a grounded complaint by a third party within the 10-day period for comment after the public notice.
If that scenario materializes, the merging parties do not only lose "simple case" status, but are also obliged to re-file the notification. Unless MOFCOM ends up doing things differently in practice, this may raise the possibility of the merging parties having to start the process from scratch and go through the relatively lengthy pre-acceptance phase again. In other words, there remains a risk that, if the "simple case" application is not accepted or the status is subsequently revoked, the entire merger process could take longer than a standard process.
In general, MOFCOM's recourse to the public notice process will increase the transparency of merger control procedures in China. Up to now, MOFCOM's consultations with third parties have tended to focus more on domestic stakeholders, since MOFCOM reached out primarily to other Chinese governmental bodies and industry associations which tend to be dominated by local market players. Henceforth, the public notice system will make information on notifications submitted to MOFCOM accessible to all, in real time.
The Implementing Rules are an important building block in establishing a simplified regime for so-called "simple cases" in China. If implemented properly, there will be savings of time and efficiencies in providing fewer documents as compared to a standard merger control notification. The public notice process will replace the one-on-one consultations, but it is not clear whether many parties will be willing to assume the risk of applying for "simple case" status. The worst-case scenario would be obtaining and then losing "simple case" status, which might lead to a second pre-acceptance phase.
It is encouraging to see MOFCOM bringing this new level of sophistication to the five-year old merger control regime. However, only time will tell whether MOFCOM will allocate the resources and develop the internal expertise to turn the simplified regime into a true 'fast-track' process: one that genuinely cuts red tape and reduces the high administrative burden for businesses filing merger notifications in China.