Recently, the State Administration for Market Regulation (SAMR) published 22 penalties against illegally implemented concentrations, being the third time this year that the regulator has published these kinds of cases in large volume. In the revised draft for public comment of the Anti-Monopoly Law (AML), it is proposed that the upper limit on the fine for the illegal implementation of concentration be significantly increased from “not more than RMB500,000 (USD$77,000)” to “not more than 10% of the previous year’s sales turnover”.
Careful determination of whether a transaction could constitute a concentration
The key to such a determination is whether there is a change in control after the transaction. Particular attention is required in following scenarios:
(1) Acquisition of a small equity percentage. “Control” in the context of a concentration includes unilateral control and joint control. Accordingly, if the equity structure of the target is relatively dispersed, an acquisition of a small percentage of its equity could be enough to give unilateral control over the company. Even if there are other shareholders with larger equity holdings, the acquirer could still secure joint control over the target with another shareholder through the appointment of directors, nomination of senior executives, etc., giving it extensive participation in the operation and management of the company, or the directors appointed by it having veto power over material operational matters, or having a co-operation arrangement with the target such as for the supply of key raw materials.
(2) Establishment of an investment fund or investment in third parties by such fund. When an investment fund is established, if it has multiple general partners, or certain of the limited partners can participate in the decision-making on the fund’s investment projects by appointing members to the investment decision committee, the issue of concentration could be involved. When an investment fund invests in third parties, even if the fund generally invests for financial investment purposes, it remains necessary to comprehensively determine whether control over the target can be secured based on the rights acquired in respect of the company’s operations and management.
(3) An offshore transaction. As China’s AML has extraterritorial effect, when acquiring equity in an offshore entity, establishing a joint venture offshore or erecting a transaction structure offshore, it is necessary to pay attention to the issue of whether a business operator concentration in mainland China is involved.
Accurately understanding and grasping the calculation of business turnover
If a relevant transaction constitutes a business operator concentration, a filing needs to be made if the business turnover of the relevant entity or entities reach the reporting threshold. When assessing its business turnover data, an enterprise needs to pay attention to the following points:
(1) In principle, the business turnover of the transferor is not relevant, and accordingly a “small transaction between large enterprises” will not necessarily reach the business turnover threshold, but a “large transaction between small enterprises” could reach the turnover threshold.
(2) With respect to the business turnover of the acquirer, generally it is necessary to examine its business turnover in entirety by tracing back to the ultimate controller, rather than just looking at the business turnover of the acquirer alone, or its turnover from business that overlaps or is connected with that of the target.
(3) In the transactions establishing a joint venture, the business turnover of each shareholder with control will generally be examined, and just because the joint venture being established has no business turnover itself, the requirement to make a business operator concentration filing is not necessarily obviated.
Reasonable planning of filing strategy
The authors recommend that a professional anti-monopoly lawyer take the lead in formulating the filing strategy based on the circumstances of the transaction, the business situation of the parties and the time requirements of the project, with particular emphasis placed on the following points:
(1) Revolving around the main business of the acquiree, or the newly established joint venture and its location in the industrial chain in which it finds itself, carefully identify and assess the horizontal, vertical and adjacent relationships among the businesses of the parties to the transaction and reasonably determine the relevant markets to which attention may need to be paid.
(2) Accurately define the relevant market relating to the transaction. Although defining the relevant market in a larger market can have the effect of diluting the share of such market, if there are insufficient supporting grounds, the review authority may challenge whether further segmentation of the market is necessary. If the market is required to be further segmented and the market share in such market fails to fulfill the criteria for applying the simplified procedure, the entire timetable could be affected. In contrast, if the relevant market is defined in a smaller market, the market share could be exaggerated, possibly precluding application of the simplified procedure and making it impossible to reflect the true market competition situation. Accordingly, the ideal is to have an anti-monopoly lawyer make the appropriate assessment.
(3) Start the filing preparation work as early as possible. If the parties have reached a co-operation framework or a memorandum of understanding on the transaction, the authors recommend to get started on the preparation work of the filing materials, so that parties would be able to submit the filing to the regulator once the transaction agreement is formally executed.
(4) Duly use the negotiation mechanism for complex issues. If there are complexities in the structure of the transaction, or in the grasp of the filing obligations, the authors recommend duly using the business operator concentration negotiation mechanism to negotiate and communicate with the regulator, so as to secure the most favourable guiding opinions for the case in question.
(5) Pay attention to guarding against the risk of “jumping the gun”. If, before the regulator gives its approval, the enterprise carries out such acts as carrying out amendment of business registration for the target, applying for a business licence for the joint venture, reorganising the board of directors of the target, etc., it could be suspected of “jumping the gun” and face the anti-monopoly risk of being penalised. Accordingly, in complex, multi-step transactions, the authors likewise recommend that a professional anti-monopoly lawyer intervene early to assist in comprehensively assessing and reducing the potential anti-monopoly risks arising from relevant acts.
Huang Wei is a managing partner at Tian Yuan Law Firm and deputy director of the Foreign Affairs Committee of the All China Lawyers Association. He can be contacted on +86 10 5776 3888 or by email at firstname.lastname@example.org