China raises turnover standards for M&A anti-monopoly filing

The State Council published in full its revised Provisions on Thresholds for the Filing of Concentrations of Undertakings on 26 January 2024, and the standards came into force on the same day.

Under the revised turnover filing provisions, transactions that meet the following filing standards will trigger the anti-monopoly filing obligation in China:

1. 1. The combined worldwide turnover of all undertakings participating in the concentration exceeds RMB12 billion (USD1.7 billion ‒ RMB10 billion before the revision), or the combined turnover in China exceeds RMB4 billion (RMB2 billion before the revision); and
   2. At least two undertakings have turnover in China of more than RMB800 million (RMB400 million before the revision).

In addition to raising the turnover standard significantly, a draft of the provisions for comment, published by the State Administration for Market Regulation (SAMR) in June 2022, also proposed a new hybrid filing standard that could take into account both turnover and market value (or valuation) of the parties, so as to strengthen the supervision over startup acquisitions characterised by relatively high transaction amount but low turnover of the target company.

However, the provisions ultimately do not incorporate this hybrid filing standard, and continue to determine whether a transaction should be filed based on the worldwide and domestic turnover of the undertakings involved.

Key revisions

The anti-monopoly filing standards prior to the revision of the provisions dated back to 2008, and were designed to accurately identify and review M&A transactions of a certain size that may require analysis of market competition impact. While this regulatory purpose remains unchanged, the lower filing thresholds appear to have lagged behind nearly 16 years of economic development and do not accurately reflect the current state of market transactions.

Also of concern are the startup acquisitions that emerged in recent years in the pharmaceutical and internet industries, in which a larger company acquires an emerging company in order to stifle competitors and impede innovation.

Anti-monopoly enforcement agencies in many jurisdictions have expressed concerns about the potential anti-competitive effects of startup acquisitions, but are unable to take effective action as the acquired companies are startups with extremely limited turnover, and mostly fall below the existing anti-monopoly filing standards, and thus are exempted from filing.

This enforcement dilemma has also triggered reviews and revisions of anti-monopoly filing standards worldwide. Given that emerging companies are often recognised as having high valuations, leading to high transaction amounts, jurisdictions such as Germany and Austria have adopted new transaction amount-based filing standards to regulate startup acquisitions.

The SAMR has also expressed concern over this issue, and in the 2022 draft provisions for comment introduced the hybrid filing standard that takes into account the market value (or valuation) of the target company and the turnover of the parties, but this standard was deleted from the official text.

Part of the reason for this may be that there is some uncertainty in the calculation of market value, and the price adjustment mechanism that is prevalent in China’s transaction practice also complicates the assessment of the filing obligation. In practice, therefore, such a hybrid filing standard may increase the uncertainty for market participants in assessing their own filing obligations, while also reducing the certainty and predictability of enforcement.

Although the hybrid filing standard for startup acquisitions described above was not ultimately adopted, the provisions retain the changes in the draft for comment that significantly raise the turnover standard and are expected to ease the filing requirements faced by some M&A transactions.

While the number of transactions to be declared will be reduced, the potential impact of China’s anti-monopoly filings on the feasibility, structure and timetable of transactions should not be underestimated, nor should it be overlooked that transactions triggering China’s anti-monopoly filings will still require a filing strategy consistent with China’s review practices.

It is important to note that the SAMR has the authority to intervene in transactions that do not meet the filing standards but attract competition concerns, and in practice the SAMR has taken enforcement action against such transactions.

Transactions that are below the new turnover filing standards but above the old ones, and have not yet been closed as of 26 January, have reasonable grounds to argue that anti-monopoly approval is no longer required. In such cases, the parties may consider negotiating with the SAMR as soon as possible to avoid the risk of failing to file in accordance with the law, due to differences in the interpretation of the regulations.

In particular, in transactions where China’s anti-monopoly approval is one of the conditions precedent to closing, discussions with the SAMR are critical to a party’s decision to waive, renegotiate or retain such closing conditions, and related performance and risk assumption provisions.

International trends

China is continually optimising its anti-monopoly review process to promote the vitality of M&A transactions in the market, and raising filing standards is the latest example of this effort. In addition, the US has recently raised its anti-monopoly filing standards, whereby transactions that meet the following standards should be pre-filed in the US:

1. 1. Transactions between USD119.5 million and USD478 million where one party to the transaction has worldwide assets or net turnover exceeding USD239 million and the other party has worldwide assets or net turnover exceeding USD23.9 million; or
   2. Transactions exceeding USD478 million, without further consideration of the amount of assets or the turnover of the counterparty.

The adjusted US filing standards will apply to all transactions closed on or after the effective date, which will be 30 days after the publication of the above-mentioned filing standards in the Federal Register, i.e. no earlier than 26 February 2024.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice.
You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at howard.wu@bakermckenzie.com