MOFCOM Tightens Sanctions on Unreported M&A Transactions

Many foreign companies are expanding into China by taking over a Chinese entity, others acquire foreign businesses that have wholly-owned or joint-venture subsidiaries in China.  What foreign investors often do not realize, is that this could have anti-monopoly implications in China. On 30 December 2011, the Ministry of Commerce (MOFCOM) issued detailed rules that broaden the sanctions that apply when foreign investors fail to correctly report their deals.  The Provisional Measures on the Investigation and Handling of Concentrations between Business Operators not Notified in Compliance with the Law came into force on 1 February 2012, and send out a clear signal to companies that the MOFCOM is determined to investigate illicit and unreported M&A and take enforcement actions against those who fail to comply accordingly.

Legal Basis in the Chinese Antitrust Law

Article 21 of the PRC Antitrust Law (ATL, 30 August 2007) states that any M&A reaching the concentration threshold stipulated by the State Council must be reported to the Anti-monopoly Bureau for review and confirmation.  This threshold is further specified in the Provisions of the State Council on the Declaration for Concentration of Business Operators (15 July 2009) as follows:

1. The worldwide business turnover of all companies involved in the concentration exceeded RMB10 billion in the last fiscal year, and the business turnover in China of at least two of the companies exceeded RMB400 million in the last fiscal year;

OR

2. The China-based business turnover of all companies involved in the concentration exceeded RMB 2 billion in the last fiscal year, and the China-based business turnover of at least two of the companies exceeded RMB 400 million in the last fiscal year.

Companies that fail to comply with the legal requirements may find their transaction revoked by the MOFCOM and ordered to restore the market situation to that existing before the concentration.  Furthermore, they may be subject to a fine of up to RMB 500,000 (Article 48 ATL). It should be noted that even when the transaction is not implemented in China and the concerned parties are situated in another jurisdiction, companies that generate turnover in the Chinese market may still be obligated to file for notification with the MOFCOM, as the threshold is also calculated on a global level. In 2010, the two Japanese electronics giants Panasonic Corp. and SANYO Electric Co., Ltd. agreed that Panasonic (that by then had already become the main stockholder of SANYO) would acquire the remaining shares from SANYO.  The MOFCOM proved its confidence to enforce the ATL even in those cases when a transaction occurs offshore but involves companies with sales on the Chinese market. In the given case and contrary to other international monopoly control authorities, the MOFCOM ruled that it would only approve on the acquisition under the condition that Panasonic reduced its ownership in certain key areas.

What the Provisional Measures mean for M&A control

The Provisional Measures establish that the MOFCOM will initiate an investigation of a transaction if it acquires information about a case suspected of violating the aforementioned Chinese antitrust regulations.  The MOFCOM accepts information provided by any natural person or legal entity as well as information received through other channels. The Provisional Measures provide for secrecy on the origins of the inculpatory evidence, therefore it is conceivable that companies intentionally denunciate competitors’ deals.  Upon verification of the preliminary evidence, the MOFCOM then informs the parties under investigation and will request for the submission of related transactional documentation. Within 30 days upon receipt of the request, the parties are obligated to provide relevant information to clarify whether the transaction constitutes a concentration which has reached the notification thresholds (and thus is subject to initial reporting to the MOFCOM), and whether the transaction has been implemented before it has been reported.

If the MOFCOM finds that the transaction should have been reported, it will within 60 days order the parties to suspend the transaction and initiate further investigations.  The parties involved are required to formally report the transaction, and the MOFCOM will then evaluate if the transaction itself leads to an anti-competitive situation in the relevant markets. After receiving a written plea from the concerned parties, the MOFCOM will come to a final conclusion.

Altogether, the process of reviewing the notification may postpone the transaction for up to 180 days, an additional delay to the investigations that should be considered.  The Provisional Measures establish various sanctions that could bring the whole transaction to a halt. Besides the imposition of a fine of up to RMB 500,000 as stipulated in the ATL, the MOFCOM may – depending on the extensiveness of the violation – employ necessary measures that aim at unwinding the transaction and order the parties to cease the implementation and restore the original market situation.  These decisions may be publicized, which exposes the corporate image to the risk of severe public scrutiny.

Conclusion

The Provisional Measures aim to deter violators and emphasize the existing rules on M&A notifications.   Non-compliance with the law may have extreme consequences for the companies involved. Even transactions that take place outside of China may fall under the reach of the ATL and the Provisional Measures, and incautious proceedings may have undesirable consequences. Hence it is strongly advisable to consult legal experts in advance to work out a safe strategy for any M&A operations that may affect the company’s position in the Chinese market.