From a substantive law perspective, probably the biggest impact of the AML revision is felt in the merger control area. On the upside, the key improvements in this area are, first, that the notification thresholds are proposed to be increased considerably and, second, that the concept of a “controlling right” is finally defined. On the downside, a new “stop-the-clock” mechanism is introduced, which may lead to more uncertainty in deal planning.
New notification thresholds
The draft State Council Regulation on the Notification Thresholds for Concentrations between Business Operators (“Thresholds Regulation”) proposes to have two alternative prongs of thresholds, instead of only one as under the current regime. The first prong of thresholds is identical to the existing thresholds (except for the amounts). The most important feature of the current thresholds is arguably to require that “at least two parties to the concentration” had sales revenues in Mainland China above RMB 400 million (around US$60 million) in the last financial year. Now the big change is that the amount of this threshold is proposed to be doubled to RMB 800 million (around US$120 million).
The second prongs of thresholds is new. It contains three benchmarks:
one party to the concentration had sales revenues in Mainland China above RMB 100 billion (around US$15 billion)
the market capitalization (or estimate) of the other party to the concentration is at least RMB 800 million
the other party generated at least 1/3 of its global revenues in Mainland China.
At this point, it is not clear whether the new thresholds will lead to an overall decrease of the number of merger filings in China. While the change to the first prong will likely lead to a noticeable decrease of filings, the addition of the second prong may compensate – or even exceed – that decrease.
Essentially, the new thresholds will bring about a change in the type of filings. Fewer foreign-to-foreign transactions, which over the past 14 years under the current thresholds have likely made up the majority of filings, will be required. The reason is that there will be fewer transactions where “at least two” foreign companies had sales revenues above RMB 800 million.
In turn, few foreign companies will have sales revenues above RMB 100 billion in Mainland China, so the second prong is unlikely to apply to many foreign companies. Except for certain industries (for example, semiconductors), few foreign-based multinationals generate over 1/3 of revenues from Mainland China, hence they are unlikely to meet the last threshold for “the other party” (1/3 of revenues in Mainland China) either. Therefore, fewer filings are the expected net outcome for foreign companies.
In contrast, the number of filings are likely to increase for large Chinese companies (whose Mainland China revenues are above RMB 100 billion), as the market capitalization benchmark is not particularly high (RMB 800 million) and the requirement of having 1/3 revenues in Mainland China will be easily met if the target is based in China. For these large companies, the new prong of thresholds is aimed to prevent “killer acquisitions” (i.e., purchases to “kill” the threat of emerging competition by promising start-ups).
However, while increasing filing thresholds is in principle a positive outcome, the addition of a second prong of thresholds – and the use of “market capitalization (or estimate)” as a parameter less objective than revenue – create some uncertainty.
Transactions below the thresholds
The revised AML enshrines the possibility for SAMR to investigate concentrations below the thresholds. This possibility was already foreseen in a regulation until now, but lacked explicit basis in the AML. As a result, in the 14 years of existence of the AML’s merger control regime, there are no public decisions where SAMR or its predecessor have actually made use of this possibility. With the AML now as explicit legal basis, we can expect SAMR to bring cases going forward.
The draft Regulation on the Review of Concentration between Business Operators (“Merger Review Regulation”) fleshes out the details of the below-the-threshold procedure. As a key feature, SAMR can require the merging parties to notify (within 180 days, presumably from the moment of closing) if it believes the transaction is likely to negatively impact competition, and can impose a standstill obligation – i.e., ordering the parties not to close the transaction or to “suspend the implementation the concentration or adopt other necessary measures” if closing already took place.
What’s a reportable transaction – definition of a “controlling right”
Another key improvement brought about in the merger control area is that the Merger Review Regulation more directly defines what a “controlling right” means.
The acquisition of a controlling right is the key criterion for finding a “concentration between business operators” – which is the concept rendering a transaction notifiable (if the thresholds are met).
Over the past 14 years of merger control enforcement, there has been a constant debate within Chinese antitrust circles about how to define this concept. Nonetheless, SAMR and its predecessor have refrained from defining a “controlling right” in the prior AML implementing rules and case practice. The result of that unsatisfactory state of affairs was that many lawyers – and by extension many of their clients – took a very conservative approach. Many veto rights which did not amount to control in the EU or other jurisdictions were deemed as controlling rights in China, and filings were deemed advisable.
Now, the Merger Review Regulation puts forward a definition of a controlling right which comes very close to the EU definition – i.e., a company acquires a controlling right if it can impact the business strategy and management of the target such as the appointment and dismissal of top management, the financial budget, and the business plan.
The fact alone that there is a definition of this key concept will reduce uncertainty, and thus benefit companies. Companies which took conservative positions in the past may see fewer filings being required going forward (irrespective of the threshold change) due to this clarification.
The Merger Review Regulation provides further helpful clarifications – for example, the benchmarks for “gun-jumping” violations are registration of shareholder or rights changes; dispatch of top managers; participation in the business strategy and management; exchange of sensitive information; and substantial business integration.
The moment to calculate the “last financial year” and the concept of “parties to the concentration” are also defined in the Merger Review Regulation.
New “stop-the-clock” mechanism
Yet the AML and the Merger Review Regulation also inject more uncertainty into the review procedure, as a new “stop-the-clock” mechanism is created.
Under the current AML, the duration of the review procedure is fixed: 30 days for phase 1; 90 days for phase 2; and 60 days for phase 3 (which is – technically speaking – just an extension of phase 2).
The “stop-the-clock” option now allows SAMR to suspend the fixed timeline in three circumstances: (1) the parties do not reply to a SAMR request for information (“RFI”) within the deadline; (2) new circumstances and new facts with a significant impact on the review emerge; and (3) the parties apply for a suspension in order to have more time to negotiate remedies with SAMR.
Many commentators note that other antitrust regulators such as the European Commission also have a “stop-the-clock” mechanism, and praise its introduction in China. The benefit is – so the argument goes – that the mechanism will remove the need to withdraw and refile a notification if SAMR and the parties have not reached an agreement on remedies at the end of phase 3. Indeed, there have been a number of cases where withdrawal and re-filing had to be done.
However, while withdrawal and re-filing happened in more than half of the remedies cases – 30 out of 55 – this is just a very small percentage of overall notifications made to SAMR and its predecessor (over 4,300 from August 2008 until now).
Yet the situations where SAMR can suspend the normal timeline are not limited to remedies cases. SAMR will be able to stop the clock every time that the RFI response is beyond the deadline set by SAMR, or is not satisfactory content-wise in SAMR’s eyes. Likewise, it will be SAMR’s judgment call to decide whether there are “new circumstances” or “new facts” justifying the suspension of the timeline. In other words, the “stop-the-clock” mechanism provides a further tool for SAMR to be in full control of the procedure, and the parties’ role will be further diminished accordingly. The open-ended nature of the suspension possibility also injects uncertainty as to overall timing until clearance, which may make deal planning more difficult.
New obligations on lawyers
There are two additional provisions in the Merger Review Regulation which may raise eyebrows, if looked at from a more international perspective. First, the agents of companies notifying a transaction to SAMR (essentially, their external lawyers) are responsible for ensuring the accuracy of the information and materials submitted in the notification.
Second, under the Merger Review Regulation, SAMR gains the power to sanction agents for concealing information or providing false information (by way of fines or refusal to accept future merger filings from them).
This is one further way how SAMR’s position in merger proceedings relative to companies is significantly strengthened.
Conclusion & to-do’s
As a general conclusion, many of the amendments in the AML and in the draft AML implementing regulations go in the right direction, and represent a step forward – in terms of reducing obligations and compliance burdens of companies or simply clarifying their obligations.
At the same time, however, few of the amendments can be considered as an unconditional breakthrough. Most of the time, there is still some sort of string attached to a liberalizing move – in the merger control area, for example, the notification thresholds are higher, likely leading to fewer filings in China (at least for a number of foreign companies), but there is added uncertainty because SAMR is empowered to examine transactions below the thresholds. If a filing is made, the “stop-the-clock” mechanism may be a further challenge for the parties.
In terms of merger control specifically, there are a number of to-do items for businesses.
check if their group’s annual revenues exceed the two key thresholds, RMB 800 million (around US$120 million) and RMB 100 billion (around US$15 billion)
assess the impact of the revenue check above on their M&A strategy and communicate the conclusions to the investment, corporate strategy and/or M&A teams
for actual transactions, do preparations to keep control of timing (e.g., appoint employees to stand-by for potential RFIs by SAMR, to avoid losing time)
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Authored by Adrian Emch, Qing Lyu, and Jingwen Hou.