The amended Anti-Monopoly Law (AML), which came into force on 1 August 2022, has drastically increased the penalties for illegal cases of business operator concentrations. With the normalisation of harsh regulation on operator concentration transactions in China, whether the transaction will trigger the obligation of filing to the authorities, the business operator concentration has become a primary consideration for the parties to the transaction. This article introduces the misconceptions and compliance issues of business operator concentration for enterprises’ reference.
Q: How do you determine whether a particular transaction constitutes a business operator concentration under the amended AML? If the parties to a transaction do not carry on the same business, does it constitute a concentration?
A: The key criteria for determining business operator concentration is whether the operator has in some way acquired the control, or been able to exercise decisive influence over, other operators in the transaction. These two methods are collectively referred to as acquisition of control.
The specific circumstances of the business operator concentration include: (1) a merger of operators; (2) an operator acquires the control of other operators through the acquisition of equity or assets; (3) an operator acquires the control of other operators through contractual means. A newly established joint venture constitutes a concentration when two or more operators jointly control it. Therefore, the existence of the same business, or upstream and downstream relationships between the parties to a transaction, is not directly relevant to determination of a concentration unless the operator has somehow acquired control over the other operators.
Q: If the percentage of equity interests to be acquired by the transaction party is less than 50%, and the target company is not the transaction party’s financial consolidated subsidiaries, may this transaction constitute a business operator concentration?
A: An operator can acquire the control that constitutes an operator concentration in various ways. A comprehensive determination is required based on factors such as the shareholding structure, voting rights of the shareholders’ meeting, the composition of the company’s board of directors, and the right to appoint and dismiss senior managers etc., rather than solely on the basis of unilateral factors – such as the low percentage of equity interests acquired, or the control based on different dimensions such as company law, securities law, and financial statements – to determine that a transaction does not constitute an operator concentration.
In China’s enforcement practice, there are many cases in which the anti-monopoly enforcement authorities have determined that a transaction constitutes a concentration despite a low percentage of the equity subscription (e.g. less than 10% of the equity shares subscribed). Therefore, even for transactions with a low percentage of equity to be acquired, a comprehensive assessment of factors related to the control structure of the company is still required.
Q: How can one determine whether a transaction involving a business operator concentration has met the filing criteria, and whether the transaction should be filed when the parties concerned are not actually engaged in business, or have a very low turnover?
A: According to the Measures of the State Council on the Criteria for the Filing of Business Operator Concentrations currently in force, should a concentration be filed, the preceding financial year’s turnover of the operators concerned shall be the criterion for determining: (1) if the nationwide turnover within China of each of at least two of the operators concerned in the preceding financial year is more than RMB400 million (USD56 million); and (2) if the combined worldwide turnover of all the operators concerned in the preceding financial year is more than RMB10 billion, or the combined nationwide turnover within China of all the operators concerned in the preceding financial year is more than RMB2 billion.
The filing criteria for the turnover of an individual operator of a concentration are not only based on the operator’s own turnover, but also on the combined turnover of all related entities with a control relationship in accordance with the relevant regulations. Therefore, even in cases where the parties to the transaction have a very low turnover of their own, or are not actually engaged in the business, if the number of associated companies within their group is large and/or their turnover is high, they may still meet the filing criteria for the concentration after the turnover has been consolidated.
On 27 June 2022, the State Administration for Market Regulation (SAMR) issued a revised draft of the above-mentioned measures, which made adjustments to the filing criteria for business operator concentration, but the draft has not yet been formally adopted and the relevant content may be further adjusted subsequently, and enterprises should pay close attention to follow up.
Q: Do financial investments such as fund-type transactions, the main purpose of which is to obtain income rather than to compete in the market, fall within the scope of business operator concentration filings?
A: Many investors believe that, different from transactions such as mergers and acquisitions between companies and the establishment of joint ventures, the setting up and investment of funds are for the purpose of obtaining financial investment returns, rather than participating in market competition, and are thus outside the scope of regulation by antitrust enforcement authorities.
In fact, the setting up, investment or exit of a fund constitutes a concentration if the operator has somehow gained the control over other operators. In particular, for the setting up of a fund, the general partner will normally be deemed to have control as such position usually holds the ultimate decision-making power on operational matters, while whether the limited partners have control needs to be analysed specifically in the context of a particular transaction.
For example, in the case of the newly established joint fund venture by Xinyi (Shanghai) Equity Investment Fund Partnership and HOPU Ronghao (Tianjin) Investment Management and other operators, announced on 15 February 2022, the parties to the transaction, as limited partners and general partners, had joint control over the newly established fund partnership.
Misconceptions, compliance for business operator concentrations (Part II)
By Zhan Hao and Zhu Libo, AnJie Broad Law Firm
Zhan Hao is a partner and Zhu Libo is an associate at the AnJie Broad Law Firm
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