Author: Yang Yang. Ms. Yang is an Antitrust Partner at Fairsky Law Offices in Shangai. She is also a lecturer and researcher at China University of Political Science and Law. She authored a treatise on China Merger Control and is a member of the expert advisory team for Amendments to China Anti-Monopoly Law (with a total number of 8 members). Indeed, she leads the drafting of an expert report on suggested amendments to China Merger Control regime, Chapter 4 of Chinese Anti-Monopoly Law. She is also a frequent contributor to the Antitrust Report of LexisNexis and Competition Policy International (Asia Column and Asia Chronicle).
Merger Control in China
According to Article 20 of the Anti-Monopoly Law of the People’s Republic of China (“Chinese AML”)1, a transaction is subject to a mandatory notification obligation at the State Administration of Market Regulation (SAMR) before being consummated or implemented if the transaction constitutes a “concentration” of undertakings or business operators, which meets or exceeds the relevant thresholds set forth in the Provisions of the State Council on the Notification Thresholds of the Concentrations of Undertakings.2
According to the Turnover Threshold Regulation, the concentrations not meeting the turnover threshold are still subject to the investigation of SAMR regardless of whether they are closed if the SAMR has evidence indicating potential anticompetitive effects of such concentrations.
In Summary, according to all Chinese AML, Turnover Threshold Regulation and the departmental rule, the circumstances when a concentration would fall within the Chinese merger regime would be as follows:
- Mandatory Notification: Concentration and Turnover Thresholds. For failure to comply with this notification, SAMR has the power to reverse the consummated transaction and can impose a monetary penalty up to RMB 500,000 Yuan (approximately USD 70,000).
- Voluntary Notification by Parties.
- Where the turnover thresholds are not triggered, but evidence shows that there may be potential anti-competitive effects, SAMR has the power to initiate a review of the concentration.
Under the Chinese AML and the current rules, any of the following transactions may constitute a “concentration” of undertakings:
- a merger of business operators by absorption;3
- a merger of business operators by new establishment;4
- a business operator acquiring control of another business operator through an equity acquisition;5
- a business operator acquiring control of another business operator through an asset acquisition;6
- a business operator acquiring control of another business operator through contracts or other means;7 or
- a jointly-controlled company by two or more business operators also referred to as a joint venture.8
Turnover thresholds may be triggered when:
- in the preceding fiscal year, (i) the combined worldwide turnover of the parties participating in the concentration exceeds RMB10 billion (approximately US$1.6 billion) and (ii) at least two of the parties participating in the concentration each has a turnover within China exceeding RMB400 million (approximately US$60 million); or;
- in the preceding fiscal year, (i) the combined turnover within China of the parties participating in the concentration exceeds RMB2 billion (approximately US$315 million), and (ii) at least two of the parties participating in the concentration each has a turnover within China exceeding RMB400 million (approximately US$60 million).
Revenues will be calculated on a group basis for each party participating in the concentration. And, “turnover within China” shall include the business operator’s import of products or services into mainland China from countries or regions outside of China, and shall exclude the export of its products and/or services from mainland China to countries or regions outside of China.
According to Guiding Opinions of Notifications of Concentrations, the turnover includes all the revenue from sales of products and provision of services in the preceding year, exclusive of relevant taxes and surcharges.9
In practice, for the calculation of turnover, the revenue recorded in the business operator’s accounting statements, i.e., income statement and balance sheet, is usually recognized as the turnover for the fiscal year. Also, revenue recorded in the audited income statement of a group which is or solely controls the business operator directly participating in the concentration will be accepted as the turnover for this business operator for the purpose of the turnover threshold.
The turnover is calculated on the group basis for the business operators participating in a concentration for the relevant market and the substantive assessment of the competitive effects: the group includes the business operator directly participating in the transaction (Company A), and the subsidiaries which are solely or jointly controlled directly or indirectly by Company A , the business operators which are the sole controller or the joint controller of Company A (Parent Company), and business operators directly or indirectly controlled by the Parent Company.
With that said, the concept of control plays a determinative role not only in the assessment of a concentration but also in the calculation of the turnover on the group basis of the business operator participating in the concentration.
But there are still calls for clarifying certain issues relating to the notifiability of a transaction. For example, Chinese AML and relevant rules are silent on the exact definition of the preceding year for the calculation of the turnover. The lack of clear definition on this concept leads to three possible interpretations: (1) the year prior to the signing date; (2) the year prior to the closing date; and (3) the year prior to the filing date. In practice, the third possible approach calculating the year prior to filing is often used for filing the notification form.
The ambiguity on the preceding year may impact bidding industries. In the bidding industry, such as transportation, energy, construction industries, one contact will last for 5 to 10 years. The payment on the contract will be made according to the construction progress. Thus, during any year under the contact, the payment can be from zero to a significant amount. Accordingly, the exact dates that are relevant to calculate the turnover thresholds may ultimately determine the question of whether the parties must notify the government of their transaction.