Advisories

On Aug. 3, 2008, two days after implementation of the PRC Anti-Monopoly Law, China's State Council promulgated and effected the Provisions on the Reporting Threshold for Concentrations of Business Operators (the “Rules”). The Rules clarify uncertainty arising from the Anti-Monopoly Law (the “AML”) while neglecting other issues, such as undefined key terms used in the AML. (Please see our earlier Preview of China's New Anti-Monopoly Law.)

By replacing the AML's hollow notification provision with the threshold laid out under the Rules, business operators can now better comply with and anticipate China's anti-trust policy and regulatory schemes. In this advisory, we define the concentration notification threshold stipulated in the Rules and offer some guidance and foresight.

Meaning of “concentration” under the AML

The Rules re-state the transactions deemed by the AML to amount to a concentration of business operators, those being:

• Mergers;
  
  
• Equity or asset acquisitions (by which the acquirer obtains control over other business operators); and
  
  
• Contracts or other arrangements through which the acquirer obtains control of—or decisive influence over—other business operators.¹

This reiteration of the AML fails to define what constitutes “control” or “decisive influence.” The initial public draft (the “Draft”) of the Rules, however, defined control as:

• Owning more than 50 percent of assets or possessing a majority of the voting shares of another business;
  
  
• Actual control of the voting rights of another business operator; or
  
  
• Being in a position of decisiveness for appointment of half or more of the board members of another business operator.²

The Draft defined decisive influence as the ability to direct production and operation of another business operator.³

Such conveyances of meaning, although having been removed from the promulgated version of the Rules, may prove useful for unofficial reference until further clarifying guidelines are issued.

Concentration thresholds

Article 3 of the Rules stipulates that business operators must report their activities as a concentration if such activities meet one primary threshold (the “Primary Threshold”) and either of two ancillary thresholds:

• Primary Threshold: if the business turnover in China of each of at least two of the involved business operators exceeded RMB 400 million during the previous financial year; and
  
  
• Ancillary Thresholds:
  
  
  1. If the total of the global business turnover of all of the involved business operators exceeded RMB 10 billion during the previous financial year; or
     
     
  2. The total of the business turnover in China of all the involved business operators exceeded RMB 2 billion during the previous financial year.

Because at least two of the involved business operators' China turnover must exceed the RMB 400 million Primary Threshold, Article 3 allows, on one end, two businesses with small to medium operations in China to merge without reporting the concentration, and on the other end, for a business with a significant China operation and another with a small operation to concentrate without issuing notification.

The Rules promise further, industry-specific guidelines for the calculation of business turnover. Explicitly listed, the banking, futures markets, insurance and securities “special industries and sectors” will be subject to particularly formulated guidelines.⁴

MOFCOM's role

The final article contained in the Rules provides that even if a concentration of business operators would not reach the stipulated threshold, but “facts and evidence” demonstrate that the concentration may restrict or eliminate competition, the Ministry of Commerce (MOFCOM) still has the authority to investigate the concentration.⁵

This principle is evocative of a similar provision under the 2006 Measures Governing Foreign Acquisition of Domestic Enterprises.⁶

Conclusion

The effected AML Rules on the Reporting Threshold for Concentrations of Business Operators is substantially shorter than the Draft of the same, and the promulgated version's reporting threshold embodies a simplified standard thereof. The Rules prescribe a dual-pronged concentration notification threshold, but uncertainty lingers.

For example, what officially constitutes “control” and “decisive influence” can only be implied, and what conditions of a concentration not exceeding the threshold warrant investigation by MOFCOM are yet to be specifically established. Hopefully, the forthcoming measures pertaining to special industries and sectors will contain further clarification, at least for those industries.

FOOTNOTES

1 See Article 2 of the Provisions on the Reporting Threshold for Concentration of Business Operators.

2 See Article 2 of the Exposure Draft of the Provisions of the State Council on the Declaration of Concentration of Business Operators.

3 See Article 2 of the Exposure Draft.

4 See Article 3, paragraph four of the Provisions.

5 See Article 4 of the Provisions.

6 See Article 51 of the Measures Governing Foreign Acquisition of Domestic Enterprises.