The new SAMR merger compliance guidelines

Introduction

On 11 September 2023, the State Administration for Market Regulation of China (the “SAMR”) officially issued the Antimonopoly Compliance Guidelines for Concentrations of Undertakings (the “Guidelines”). According to the SAMR’s official interpretation, the Guidelines are designed to guide and assist companies in establishing a compliance management system for merger and acquisition activities, with the aim of promoting the healthy development of businesses. Although issued by SAMR, the Guidelines serve as non-binding instructions for businesses, providing guidance without imposing regulatory obligations or penalties for non-compliance.

For companies operating in the People's Republic of China (the “PRC”), the Guidelines offer general guidance from a business compliance perspective on identifying internal compliance risks, managing and responding to compliance risks, and the establishing and implementing compliance systems. In addition, the Guidelines consolidated related content from the Antimonopoly Law of the People’s Republic of China (the “Antimonopoly Law”), the State Council’s Regulation on Notification thresholds for concentrations of undertakings (the “Notification Thresholds Regulation”), and the newly issued Regulations on the Review of concentrations of undertakings (the “Regulation on Merger Review”), and can therefore serve as a comprehensive reference for businesses navigating merger control-related risks.

This briefing highlights a few key considerations in compliance with the Antimonopoly Law merger control regime, in light of the useful guidance the Guidelines introduce through practical examples.

1. Key factors conferring control

Whether a party has acquired control over the target through a transaction is one of the key factors to the analysis whether such transaction will trigger filing requirements in any jurisdiction. Article 4 of the Guidelines restates the definition of “control” under Article 25 of the Antimonopoly Law, i.e. the right to control other parties or the ability to exert a decisive influence on other parties by merger, by acquisition of shares or assets, or by contract or other means. Article 5 of the Regulation on Merger Review outlines factors to consider during the control analysis under the Antimonopoly Law, which include:

1. the transaction’s purpose and future plans;
2. the shareholding structure of the target entity and its changes due to the transaction;
3. decision-making processes and historical patterns at the target entity’s shareholders’ meetings and other power organs;
4. composition, decision-making processes, and historical patterns of the target entity’s board of directors or other managing organs;
5. the appointment and removal of senior management;
6. the relationship among the target entities’ shareholders and directors, including any voting proxies or concerted actions;
7. existing material commercial relationships or cooperative agreements between parties; and
8. other relevant factors to consider.

Article 11 of the Guidelines offers valuable additional guidance on such control analysis for a minority shareholder. The first example under the Article clarifies that veto rights over the appointment and removal of senior management, financial budgets and annual business plans are key factors conferring control, and that a 20 per cent minority shareholding enjoying such veto rights will very likely be viewed as having (joint) control over the entity. Compared to the public consultation version of the Guidelines, the official version notably clarified that such veto rights are not decisive but rather strong indicators of control. Therefore, even when these veto rights are present, parties should still proceed to analyse the governance rights on the whole, following the guidance in Article 5 of the Regulation on Merger Review.

Indeed, veto rights over these important management matters are recognized as key factors conferring control in many foreign merger regimes, including that of the European Union. The SAMR has previously endeavoured to incorporate similar guidance into various draft versions of regulations and guidelines, notably within the 2022 draft of the Regulation on Merger Review. However, such guidance has consistently been omitted from the final official versions. Reflecting the significance of such veto rights in the official Guidelines provides enhanced legal assurance that the notion of control or ability to exercise a decisive influence within the meaning of Article 25 of the Antimonopoly Law should be interpreted in alignment with these international merger regimes. This alignment will provide increased legal certainty and convergence in international transactions.

2. When to seek merger control in complex transactions

A question that often arises for parties on complex transactions is when to apply for clearance and what actions are allowed pending clearance. Given the varied requirements across different merger regimes, parties engaged in international transactions frequently need to devise a thorough strategy well in advance to coordinate filings across multiple jurisdictions. In particular, the timing of notification question often arises in the context of greenfield joint venture projects, where the parties seek to incorporate a joint venture and prepare for future activities sometimes several years before the joint venture starts operations. While parties may wish to get started with early preparations – such as engaging with potential investors, securing suppliers for equipment, and exploring various financing options – they ideally prefer to seek merger control clearance only upon finalising all future business plans. However, several preparatory steps might be seen as already implementing the project, an action that is prohibited under the Antimonopoly Law merger control regime.

Article 8 of the Regulation on Merger Review enumerates factors to determine whether a transaction has been implemented, including but not limited to the completion of business registration, appointment of senior management, active participation in business decision-making and management, exchange of sensitive information, and substantial business integration. This is exemplified in Article 13 of the Guidelines, which illustrates that parties completing business registration for a newly established joint venture before obtaining clearance could be deemed in violation of their legal obligations.

Moreover, the example introduced under Article 12 of the Guidelines further clarified that for transactions structured in different phases, different steps that are connected and mutually dependent could be considered part of a single operation. In addition, notification will be required before the implementation of the initial step, rather than at a stage where control is subsequently acquired. It is worth noting that the position under the Antimonopoly Law is slightly different from that under foreign merger regimes in this respect. Parties to international transactions should carefully consider when to seek clearance, potentially applying different timelines across several jurisdictions.

3. Other considerations

Additional examples and recommendations within the Guidelines also serve to assist businesses in navigating the merger filing process in the PRC. For instance, the second example under Article 11 usefully illustrated that the turnover threshold should be calculated based on the turnover of the party, as well as all companies that directly or indirectly control by, or controlling, the party, thus incorporating the turnover of the entire group company.

Overall, the Guidelines offer valuable insight into various aspects of the Antimonopoly Law merger control regime, and provide practical advice to businesses, aiming to enhance compliance awareness and facilitate the construction of Antimonopoly Law compliance mechanisms.