Compliance on notification threshold for anti-monopoly filing

The State Council’s revised Provisions on the Notification Threshold for Concentration of Undertakings for merger and acquisition filings took effect on 26 January 2024, marking the first revision and significant increase in the notification threshold since 2008.

This article interprets the updated threshold, providing tips for enterprises to comply with this new standard.

Substantially raises revenue threshold, exempting small-scale transactions. The most significant change is increasing the notification threshold for merger filing.

The previous revenue threshold was: Either worldwide turnover of concentrating parties exceeding RMB10 billion (USD1.38 billion) and RMB400 million China-wide revenue for each of at least two undertakings in the last fiscal year; or RMB2 billion combined aggregate China-wide revenue of all undertakings, and turnover by at least two concentrating parties exceeding RMB400 million.

The adjusted threshold is: Either worldwide turnover exceeding RMB12 billion in the last fiscal year, with turnover by at least two concentrating parties in China exceeding RMB800 million; or China-wide revenue of concentrating parties exceeding RMB4 billion, with turnover exceeding RMB800 million by at least two China parties.

Under this new revenue threshold, projects previously subject to notification obligation under the original threshold may now be exempted from notification, and their transactions can proceed directly.

The adjustment in the notification threshold fully reflects enforcement agency desire to exempt a large number of small-scale concentrations from notification, to allocate more law enforcement resources towards reviewing large-scale concentrations.

Transaction amount threshold not adopted, but careful assessment of notification obligations still needed. The latest notification threshold has deleted the provision in article 4 of the Opinion Solicitation Draft that “turnover in China of one of the parties to the concentration exceeded RMB100 billion in the previous fiscal year and the market value (or valuation) of the other parties to the transaction is not less than RMB800 million”.

This deleted provision originally served as a supplement to the single revenue threshold standard, which could act as a preventative measure against so-called killer acquisitions.

“Killer acquisitions” are common in internet and platform economy sectors. For instance, many internet products are usually offered for free or low-priced, and some startups or new platforms may also offer subsidies to attract consumers.

Consequently, certain internet enterprises may have low or no revenue – or even be in the red – but have a large number of customers and relatively high market share in their segment.

If the single revenue threshold standard had been applied, killer acquisitions may evade notification requirements. However, this doesn’t imply that they benefit competition. Instead, such M&A tends to disrupt industry competition, impede innovation, and jeopardise consumer welfare.

Enterprises should note that, according to current Chinese laws, even if a concentration doesn’t meet the notification threshold, if evidence suggests it has (or may) have an effect of precluding or restricting competition, the State Council’s anti-monopoly enforcement agency may still demand notification.

Therefore, when acquiring a company with low revenue but high valuation – especially a unicorn company with a large number of users in the internet or platform sector – it is necessary to assess the possibility of being required to make a notification.

Voluntary notifications could also be considered. Even if the transaction doesn’t meet the notification threshold, if an enterprise voluntarily submits notification, the enforcement agency will still review and make a decision if deemed necessary.

In practice, there have been cases where enterprises voluntarily notified and decisions were made on review.

Using summary procedure to expedite notification and examination process. For enterprises reaching the revenue threshold and required to file notification, but wish to expedite the notification and examination process, it is crucial to assess whether a summary procedure can be applied.

From experience, regardless of whether a summary procedure or normal procedure applies, after submitting materials to the law enforcement agency, one or two rounds of supplementary materials may be required. The case will not be formally accepted until these supplementary materials have been completed.

After formal acceptance, the summary case will be publicised for 10 days, after which the case will be discussed and a decision over permitting the transaction to proceed without further examination can be made.

Generally speaking, the decision comes within about 15 days after the case is accepted. However, ordinary cases are subject to more complicated examination procedures.

After a case is formally accepted, it will not be publicised but the enforcement agency needs to seek opinions from various departments, industry associations and upstream and downstream enterprises. In some cases, an examination decision on not to prohibit the concentration of undertakings may be made in the second phase or extended examination period.

In general, an ordinary decision may take 60-90 days after formal acceptance.

In addition, the enforcement agency may decide to suspend the examination period based on specific circumstances. In contrast, if the summary procedure applies, the examination period will be significantly shorter.

Currently, the summary procedure is based on articles 19 and 20 of the Provisions on the Examination of Concentrations of Undertakings, which require enterprises to satisfy the following criteria: “In the same relevant market, the combined market shares of the undertakings involved in the concentration are less than 15%; in the upstream or downstream market, the market shares of the undertakings involved in the concentration are less than 25%; and undertakings involved in the concentration that neither operates in the same relevant market nor has an upstream or downstream relationship, have market shares of less than 25% in each market related to the transaction.”

For cases that just meet or exceed the aggregate market share standard in the same relevant market (meaning summary procedure cannot be applied), enterprises can speed up the review and examination process by referring to the Herfindahl-Hirschman (HHI) index increase triggered by the concentration, explaining that the impact of concentration on competition is not high. Therefore, it would not have a significant impact on competition.