Dissecting merger filing under new AML

By Ryan Fang and Simon Shi, Jingtian & Gongcheng
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Amendments to the Anti-Monopoly Law (AML) by the Standing Committee of the National People’s Congress took effect on 1 August. The State Administration for Market Regulation (SAMR) also issued six draft anti-monopoly guidelines for comments on 27 June. Based on the amended AML and SAMR drafts, the authors offer compliance advice and analyse conditions triggering a merger filing, penalties for “gun jumping”, and other practical issues.

In most cases, a merger filing is necessary when a transaction constitutes a concentration of undertakings and the turnover standards are met.

CONCENTRATION OF UNDERTAKINGS

Under the existing AML, a concentration of undertakings occurs when:

    1. undertakings merge;
    2. undertaking acquires control over others by acquiring their equities or assets; and
    3. undertaking acquires control over others or is able to exert a decisive influence on them by contract or any other means.
Ryan Fang, Jingtian & Gongcheng
Ryan Fang
Partner
Jingtian & Gongcheng

It is worth noting that multiple parties having common control over a newly set up joint venture also constitutes a concentration of undertakings. Concentration of undertakings can result from equity investment, M&A, asset or business transfer, establishment of joint venture, variable interest entity (VIE) or other common transactions, as long as it is accompanied by a change of control, whether one party assumes sole control over another, or multiple parties share common control over others.

It should be noted that the AML defines “control” differently from the Company Law and Securities Law. Other than shareholding and voting rights, an undertaking’s decisive influence over another’s major operation and management needs to be taken into consideration. For example, an undertaking exerting decisive influence over another’s appointment and dismissal of senior management, financial budgets or business plans is generally considered to have gained control.

MEETING TURNOVER STANDARD

A transaction constituting a concentration of undertakings does not necessarily mean a merger filing needs to be made. Instead, filing becomes obligatory when either of the following standards are met:

    1. total turnover worldwide of all undertakings involved in the concentration exceeds RMB10 billion (USD1.4 billion) in the last accounting year, and turnover within China of at least two undertakings exceeds RMB400 million separately in the last accounting year; or
    2. turnover within China of all undertakings involved in the concentration exceeds RMB2 billion in the last accounting year, and turnover within China of at least two undertakings exceeds RMB400 million separately in the last accounting year.

As the threshold for merger filing is meant to reflect the level of social and economic development, turnover standards under the SAMR drafts have been raised.

Other than the noted common scenarios, the AML also provides that if the concentration does not meet the standards for merger filing set by the State Council, but there is evidence it has or may have the effect of eliminating or limiting competition, the anti-monopoly enforcement authority under the State Council may demand the undertaking to make a filing. Furthermore, for “killer acquisitions”, generally perceived to harm market competition and innovation, the SAMR has provided specific requirements that warrant long-term observation.

PENALISING ‘GUN JUMPING’

Simon Shi, Jingtian & Gongcheng
Simon Shi
Counsel
Jingtian & Gongcheng

Undertakings in China are required to make a merger filing ahead of the transaction. If the transaction is carried out without making a due filing, or the filing was not yet approved, it is deemed as illegal “gun jumping”.

Maximum penalties for gun jumping were significantly raised by the amended AML. For a transaction that does not have the effect of eliminating or limiting competition, the fine is up to RMB5 million. If it does have the effect of eliminating or limiting competition, the fine is up to 10% of the previous year’s turnover. In especially serious circumstances causing severe ramifications and consequences, fines may be elevated by two to five times, with such penalties recorded in the credit record and made publicly available.

The following actions are often considered gun jumping if conducted before the filing is approved: completing registration of changes in shareholders or rights; appointment of senior management; actual participation in decision-making and management; exchange of sensitive information with other undertakings; and substantial integration of businesses.

Although in principle the two-year limitation of prosecution under the Administrative Penalty Law applies for the penalty of gun jumping, as long as the concentration in violation of the filing obligation persists – e.g., continued existence of a joint venture without due declaration – the illegal act is deemed ongoing and the two-year limit does not apply.

COMPLIANCE ADVICE

Before exacting a proposed transaction, undertakings are advised to perform adequate assessments and analysis on necessity for merger filing. If such a filing is indeed triggered, it is necessary to make ample preparations to avoid delaying the transaction.

On the other hand, undertakings wishing to avoid filing altogether should, to the extent possible, leave out elements likely to trigger a concentration when drawing up a transaction plan, such as not obtaining control of the target company after investment.

Companies should further perform systematic review and evaluation of completed transactions to identify any missed filings. If found that a due filing was not lawfully made, the company should make a supplementary filing to the anti-monopoly authority as soon as possible, or alternatively relinquish control in the relevant transaction.

Ryan Fang is a partner and Simon Shi is a counsel at Jingtian & Gongcheng

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