Alongside China’s new Anti-Monopoly Law (the New AML, see our client briefing on the New AML here), which enters into force on 1 August 2022, the State Administration for Market Regulation (SAMR) has published five draft implementing regulations that shed more light on what companies can expect in the future. The draft implementing regulations – open for public comment until 27 July 2022 – clarify SAMR’s proposed positions on several issues related to merger control, anticompetitive conduct and abusive behaviour.
The first of this two-part blog focuses on merger control.
The merger control proposals are reflected in the Draft Amended Merger Filing Thresholds and the Draft Provisions on the Examination of Concentration of Undertakings (together, Draft Merger Rules) and include:
- increasing the current turnover thresholds;
- a new threshold for so-called “mega-corporations” acquiring a target with low turnover;
- clarification of SAMR’s power to call-in unreportable transactions and applicable procedures;
- guidance on the “stop-the-clock” mechanism;
- guidance on gun-jumping for China merger control purposes; and
- proposed additional sector-specific rules.
A substantial increase in the turnover thresholds for merger control filings
The current turnover thresholds were adopted in 2008 and have not changed for over a decade. The low filing thresholds led to a rapid increase in the number of notifications reviewed during this time by a resource-constrained antitrust agency. The Draft Merger Rules propose to increase the turnover thresholds significantly – especially turnover in China – for merger control filings, as set out below:
- The combined global turnover of the undertakings concerned in the preceding financial year is >RMB 12bn (c. US$ 1.8bn, increased from RMB 10bn or c. US$ 1.5bn), or
- The combined China turnover of the undertakings concerned in the preceding financial year is >RMB 4bn (c. US$ 600m, increased from RMB 2bn or c. US$ 300m), and
- The China turnover of each of at least two of the undertakings concerned in the preceding financial year is >RMB 800m (c. US$ 120m, increased from RMB 400m or c. US$ 60m).
Additional filing threshold to address “killer acquisitions”
An alternative filing threshold is proposed for transactions involving so-called “mega corporates”. A filing would be triggered if:
- at least one of the transaction parties (eg the acquirer) has turnover in China of >RMB 100bn (c. US$ 15bn) in the preceding financial year;
- target has a market capitalisation (or valuation) of >RMB 800m (c. US$D 120m); and
- target generated more than one-third of its global turnover in China in the preceding financial year.
SAMR has yet to provide guidance on how parties should calculate “market capitalisation” or “valuation”. This could differ from transaction value or consideration which some jurisdictions such as the U.S., Germany, Austria or South Korea utililise, and may be of particular interest to minority investors assessing whether their investments trip the new filing threshold.
If adopted, major Chinese SOEs, Chinese digital companies, other large Chinese strategic players and multi-nationals with substantial presence in China are likely to be impacted given their significant local turnover. The proposal is likely to be relevant for transformational transactions in strategic and sensitive sectors involving largely dynamic markets. The life sciences sector is an example: pharmaceutical companies’ pipeline products in late R&D or clinic trial phases are commonly regarded as valuable assets with significant market potential before launch. The digital economy sector is another example given the global trend of scrutinising digital markets.
Clarification of SAMR’s call-in power
The New AML codifies SAMR’s power to “call in” a transaction that falls below the filing thresholds if likely to eliminate or restrict competition. The Draft Merger Rules explain that both ongoing and closed transactions can be called in by SAMR but propose no deadlines within which SAMR may call in a transaction. This implies that SAMR has broad discretion, and parties could face legal uncertainly for an indefinite period prompting some to consider a voluntary filing to address this.
The Draft Merger Rules also provide that a transaction is subject to the standstill obligation if called in before closing. In other cases, SAMR can require parties to take any necessary measures including suspending the transaction’s implementation. Parties are not subject to the harsher penalties for failure to file under the New AML if they notify their transaction promptly once called in.
The codification of SAMR’s power to investigate non-reportable transactions suggests that SAMR will not hesitate to do so in appropriate cases. Going-forward, it will be prudent to assess the notifiability of high-profile, transformative global transactions that do not trip the filing thresholds and to conduct a robust substantive antitrust analysis and call-in risk assessment.
Guidance on the “stop-the-clock” mechanism
The New AML introduces a “stop-the-clock” mechanism that enables SAMR to suspend the statutory review period of 180 calendar days if (i) parties do not submit required information or documents on a timely basis; (ii) new facts emerge which materially impact the review process; or (iii) parties apply to suspend the review process to allow sufficient time for remedy discussions.
The Draft Merger Rules provide further guidance on the procedures that SAMR would follow. This is expected to prevent excessive use of the mechanism. It is expected that SAMR will apply the mechanism in complicated transactions only if necessary and is unlikely to resort to the mechanism in simple cases or during Phase 1 review. Other jurisdictions have also adopted similar “stop-the-clock” mechanisms. For instance, in practice, the European Commission frequently suspends the review period if parties fail to provide required documents or information, or extra time is needed for remedy negotiations.
Guidance on gun-jumping for China merger control purposes
Failure to file remains an enforcement priority for SAMR. In China as in major jurisdictions, early or premature implementation of a transaction, or so-called “gun-jumping”, is an infringement. However, the kind of pre-closing steps parties can take before clearance without infringing the AML’s standstill obligation is unclear. The Draft Merger Rules provide an inexhaustive list of gun-jumping examples such as registration of changes in shareholding, designating senior management, material business integration and exchanging competitively sensitive information. The guidance is welcome given the harsher fines for gun-jumping under the New AML.
Sector-specific rules on the way
The Draft Merger Rules note that SAMR may introduce sector-specific merger control rules for transactions involving important sectors of the nation’s economy or those that affect peoples’ livelihood. The likely target sectors could include finance, media, technology including start-ups, emerging industries or labour-intensive industries highlighted in national policies. Sector-specific guidelines (such as the guidelines for the auto industry and API industry) may also be adopted to address the relevant sector’s unique features.