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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Global | Publication | junio 2020
Earlier this year, the State Administration of Market Regulation (the “SAMR”, the antimonopoly enforcement authority in the People’s Republic in China) proposed revisions to the Antimonopoly Law for public consultation. Among the proposals, the SAMR is considering a very significant increase in fines for noncompliance with merger control rules, which could reach up to 10 per cent of an undertaking’s global turnover. In the current regime such fines cannot exceed RMB500,000 (around US$72,000).
In common with most modern merger control regimes, the Antimonopoly Law requires certain types of transactions (“concentrations”, defined as “mergers” or “acquisition of control”) to be subject to prior clearance where certain “threshold levels” are met. Failure to seek clearance prior to implementation of the transaction may lead to sanctions being imposed.
A particular feature of Chinese merger control enforcement is the comparatively large number of decisions – 51 had been published as of the date of this publication – sanctioning parties for noncompliance with mandatory clearance requirements, suggesting that a significant number of transactions went unnotified in breach of the Antimonopoly Law’s procedural requirements. A majority of these decisions were published in the last two years, suggesting a recent increase in the enforcement authorities’ vigilance and willingness to publicise their enforcement in this respect.
Despite the large number of decisions, there remains significant uncertainty on key aspects of the SAMR’s interpretation of the merger control requirements and of its fining methodology. The decisional practice since the SAMR took over antimonopoly law enforcement duties from the Ministry of Commerce (“MOFCOM”) in 2018 does not provide any further clarity.
In the context of a likely increase in fines and active enforcement, we take stock of the SAMR’s approach and of the uncertainties surrounding procedural breaches of merger control requirements in China.
As of the date of this publication, the authorities had published 52 decisions, sanctioning 75 parties for a total amount of RMB19,000,000 (around US$2,730,000). While the successive enforcement authorities (MOFCOM and the SAMR) have regularly sanctioned noncompliance with filing requirements, fines have so far remained modest, at an average of around RMB250,000 (US$36,000) per party, which represents half of the statutory maximum RMB500,000 (around US$72,000) under the current rules.
Most breaches were detected and sanctioned within one to two years of their occurrence, although the authorities would sometimes not hesitate to investigate and impose sanctions long after a transaction had closed, in some cases more than five years (and eight years in one case) after completion.1 Nineteen cases involved the establishment of joint ventures while the remaining decisions involved a change of control or change in the quality of control through share acquisitions. Foreign and domestic companies from various industrial sectors were equally targeted (20 cases involved purely domestic transactions while the remainder of cases involved foreign parties, including purely foreign-to-foreign transactions).
The wide range of transactions and company profiles demonstrate the authority’s willingness to address breaches of merger control rules assertively, irrespective of whether the companies involved are headquartered in or outside China. The Chinese competition authority also took steps to enhance the impact of their decisions sanctioning such “gun-jumping” in 2014, when they started releasing public announcements regarding these decisions, adopting an approach that is similar to the one used in the US and elsewhere. The new publicity has increased the potential reputational impact of gun-jumping decisions. More generally, in line with a global trend amongst competition authorities, the Chinese competition authority has recently taken a more assertive stance against parties who fail to notify their transactions, which has resulted in an increase in the average fine imposed on parties.
Under the Antimonopoly Law, the enforcement authority can also order the unwinding of the transaction, although as a matter of policy it would only do so where the transaction leads to the elimination or restriction of competition.2 Until now, there have been no published cases where a transaction led to a restriction of competition and accordingly, no cases where the transaction was ordered to be unwound.
While no case raised any substantive issues, the number of decisions sanctioning noncompliance with procedural requirements has significantly increased over the years. MOFCOM’s first published decision imposing a fine for implementing a transaction before clearance in violation of the standstill obligation under Article 21 of the Antimonopoly Law was issued more than six years after the Antimonopoly Law entered into force.3 Since then, the number of cases has increased from four to six cases a year between 2015 and 2017 to 33 cases over the past two years (15 in 2018 and 18 in 2019). The increase in the number of cases could also be the result of the SAMR’s increased willingness to tackle breaches of merger control requirements. Only two of the 52 published decisions mention that the investigation was triggered by a complaint4 and ten by the parties themselves self-reporting the transaction.5 In particular, it is interesting to note that since the SAMR took responsibility for enforcement, none of the decisions mentioned third-party complaints or self-reporting as the reason for investigating except in two cases.6 While it would seem premature to draw any firm conclusion from the SAMR’s published decisions, notably because the decisions tend to contain fewer relevant details, the level of fines has clearly increased under the SAMR’s leadership. In all but one cases, the SAMR consistently imposed a fine of at least RMB300,000 on each party, even where the parties came forward and self-reported their failure to notify. In that regard, the SAMR departs from the past practice of MOFCOM of imposing a fine of RMB150,000 when parties self-reported and cooperated with the investigation. The past year has also seen the SAMR imposing higher fines, with three decisions imposing fines of RMB400,000 and four decisions imposing fines of RMB350,000.7
This increase in the number of cases and in the amount of fines, combined with the SAMR’s recent proposals to increase maximum fine amounts, are clear signals that companies need to carefully consider their merger control requirements. In that respect, China is following through on the recent global crackdown against companies implementing transactions before obtaining required merger clearances.
Competition authorities worldwide have increased enforcement and fines against companies found to have implemented notifiable transactions prior to receiving clearance (or “jumping the gun”), including where such transactions have been notified but not yet cleared. Recently, the European Commission imposed a record fine of €124.5 million (around US$140 million) on telecoms company SFR and its parent Altice for implementing two transactions before receiving competition clearance.8 It is the highest fine ever imposed for gun jumping. It exceeds the previous record of €80 million (around US$90 million) imposed by the French Competition Authority in November 2016, also on Altice (albeit in relation to a different transaction).9 In the US, the Department of Justice (the “DOJ”) filed a proposed final judgment against Canon and Toshiba in June 2019, imposing a US$2.5 million civil penalty against each party alleging that the parties strategically structured the sale of a Toshiba subsidiary to Canon to circumvent merger filing requirements under the Hart-Scott-Rodino Act (“HSR Act”).10 The transaction also attracted fines in China, as detailed below. Even in a voluntary and non-suspensory merger control regime such as the UK, the Competition and Markets Authority (“CMA”) recently imposed its highest-ever fine of £250,000 (around US$320,000) in September 2019 on PayPal for implementing its acquisition of iZettle in breach of an interim enforcement order which prohibited the integration of the parties’ businesses pending the CMA’s merger review.11 In Singapore, the Grab-Uber merger became the first transaction subject to a probe into an infringement of Section 54 of the country’s antitrust law, which bans mergers that substantially lessen competition. Pending the results of the investigation, the Competition and Consumer Commission of Singapore, or CCCS, issued interim directions — also for the first time — forbidding the parties from integrating their businesses or sharing confidential information. The investigation ultimately led to the CCCS issuing its proposed infringement decision including remedies and total proposed fines of US$9.5 million.12 The deal also faced merger scrutiny in Indonesia, Vietnam and the Philippines.
While the merger control regime in China largely operates according to international standards, under the current rules, parties can face fines of up to RMB500,000 (around US$72,000) for implementing a transaction in breach of the law, which is comparatively much lower than other major competition regimes where fine amounts can reach 10 per cent of the relevant companies’ aggregate annual turnover, such as is the case in the European Union. In this context, it is not surprising that the SAMR is similarly proposing to significantly increase the maximum fine to 10 per cent of a party’s global turnover in the previous year, which would allow a drastic increase in penalties. If the SAMR’s proposed revisions are adopted, companies should brace themselves for an active and increased enforcement with higher penalties. However, the SAMR’s proposals do not address existing uncertainties under the current regime, which may make it harder for companies to properly comply.
The statutory definition in Article 20 of the Antimonopoly Law leaves a lot of room for interpretation in respect of the notion of “control” over another undertaking – which is key to determine whether or not a transaction must be notified for clearance. The successive enforcement authorities have provided some guidance in this respect, most recently in the SAMR’s Guiding opinion on the Notification of concentration of undertakings of September 29, 2018, according to which “control” refers to a situation whereby an undertaking has the legal right or the actual power to exercise a decisive influence over another undertaking’s business. The SAMR now proposes to incorporate some of its guidance in the statutory text, which should help improve legal certainty (see Article 23 of the proposed amended law and our recent publication SAMR proposes to amend China’s Antimonopoly Law: Proposals would increase liability under the law available here). Even if adopted, the proposed revisions would still leave a lot of discretion to the enforcement authority in relation to the assessment of permissible steps pending the acquisition of control and possible acquisition of control through minority shareholding stakes, situations which have led to the imposition of sanctions by the SAMR for early implementation where parties had chosen to take some initial steps (e.g. the transfer of a partial stake).
Perhaps one of the most debated and vexing issues that remains to be clarified relates to the question of permissible steps pending the acquisition of control, which arises in the context of creeping share acquisitions where change of control is not necessarily the triggering filing event but also, more surprisingly, in straightforward transactions such as greenfield joint ventures.
When a transaction is structured in different phases, the decisions that have been published do not clearly establish whether the SAMR considers the different phases to be one single transaction requiring notification before implementation of the first step or whether the notification is triggered only where the transaction reaches a certain stage upon which control is acquired. In several cases, parties were sanctioned for early implementation where they had chosen to take some initial steps (e.g. the transfer of a partial stake) pending receipt of clearance, while waiting for clearance before effectively implementing a change of control.
In that respect, the decision in Canon / Toshiba Medical (2016) has been the subject of widespread comment and discussion upon its publication.13 The decision is noteworthy, not only as the authority’s first gun-jumping decision in relation to a purely foreign-to-foreign transaction, but most notably because the transaction was implemented in two stages, raising the question of what step constitutes implementation. The Canon / Toshiba Medical decision was only the second gun-jumping decision involving acquisitions in stages.14 The facts of the case, as described below, are highly relevant to MOFCOM’s decision:
MOFCOM considered that the two phases were closely connected and formed an indivisible part of Canon’s acquisition of Toshiba Medical, and consequently, concluded that with the closing of the first phase, parties had started implementing their transaction, in violation of the standstill obligation under Article 21 of the Antimonopoly Law.
Similarly, in an acquisition comprising three steps15, the decision indicates that the different steps are mutually dependent and serve the same purpose whereby one single undertaking would ultimately acquire control of the target, and thus constitutes a concentration of undertakings within the meaning of Article 20 of the Antimonopoly Law. Interestingly enough, MOFCOM in that decision considered that the merger control thresholds should be assessed in reference to the year preceding the implementation of the first step, at which time the buyer acquired a 16.5 per cent equity stake in the target (and thus not yet its control).
While these decisions state that the different steps are “mutually dependent” or “closely connected”, no further details are offered regarding such interdependence. Typically, these are matters that are also left open in other principles-based antitrust statutes (such as under EU law), but which would be addressed in detailed guidance issued by foreign enforcement authorities, which is not the case in China. It would however seem that the SAMR is following an approach similar to that of the EU, where different steps linked by conditionality constitute a single operation.16 Under EU guidance, such conditionality can usually be demonstrated if the agreements themselves are linked by mutual conditionality or if a de facto conditionality can be satisfactorily demonstrated, in particular when the different agreements or steps are concluded simultaneously.
More recently, in a 2018 decision, the parties entered into a Share Purchase Agreement which provided for the target’s equity in three stages.17 Upon completion of the second stage, the buyer had acquired approximately 49.41 per cent of the equity interest in the target, but did not submit any notification. Even though the last phase had not yet been implemented, the SAMR considered that the completion of the second stage occurred in violation of its filing obligation. The decision however does not specify whether the acquisition of 49.41 per cent amounted to a change in control or whether the three stages were considered as a single transaction. It is also unclear whether the three stages were interdependent in such a way that the first or second stage would not have been carried out without the third so that the three steps were considered part of the same transaction whose implementation should therefore have been suspended from the first step pending receipt of merger control clearance.
While added details on what constitutes a breach can be found in the SAMR’s proposed Antimonopoly Law revisions, the proposals do not provide any details on what constitutes implementation of the transaction. The law if amended would specifically allow for sanctions for (i) the implementation of a transaction without seeking clearance; (ii) the implementation of a transaction after seeking clearance but ahead of receipt of approval; (iii) noncompliance with conditions attached to a clearance decision; and (iv) the implementation of a transaction in violation of a prohibition decision.
Some uncertainty also remains in relation to the possible acquisition of control through minority shareholding stakes and in particular on the circumstances under which a minority stake can confer control – a situation which led to the imposition of sanctions by MOFCOM and more recently by the SAMR in three decisions. More clarity would be needed by way of administrative guidance, in light of the SAMR’s proposal for a very significant increase in the sanctions for failure to notify.
In a 2016 decision, the buyer acquired a 50 per cent equity interest in the target.18 The transaction was carried out in two steps involving the acquisition respectively of 19 per cent and 31 per cent of the target’s equity, with the transfer of the 19 per cent stake and the change in industrial and commercial registration completing in November 2011, while the transfer of the 31 per cent stake and the change in industrial and commercial registration completed in January 2015. MOFCOM considered that the buyer's acquisition of a 50 per cent equity interest in the target constituted a reportable concentration, based on the 2014 turnover figures of the parties, suggesting that the initial 19 per cent equity acquisition that had been completed in 2011 did not trigger a filing requirement. In another transaction,19 MOFCOM considered that the acquiring parties obtained the control over management and operation of the target upon the registration of transfer of a 49 per cent equity interest and a partial restructuration of the board, without providing further details on the board composition.
Other more recent decisions appear to have taken a different view as minority equity stakes of 20 to 30 per cent have been deemed to confer control in three cases, without the decisions providing further details about the control analysis.20 All three decisions however have in common the fact that the acquirers took minority stakes in publicly listed companies where the remaining shareholding is spread across many shareholders, which could explain that minority equity stakes were sufficient in themselves to confer control.
Parties to a concentration must obtain clearance from the SAMR if, “in the preceding financial year”, (i) their combined worldwide turnover exceeds RMB10 billion or their combined Chinese turnover exceeds RMB2 billion; and if (ii) the individual turnover achieved in China by at least two parties exceeds RMB400 million.21 MOFCOM, and afterwards the SAMR, have issued useful guidance on the calculation of these figures, contributing to legal certainty.22
One matter that has however given rise to some uncertainty over the years is the time at which the assessment of relevant turnover must be made. The State Council’s regulation refers to the parties’ turnover in the “previous financial year”.23 The regulation however does not specify whether this relates to the year that precedes the conclusion of a transaction (i.e. signing), the time of notification to MOFCOM or the SAMR or the implementation of a transaction (i.e. closing). While successive MOFCOM and SAMR officials have routinely conducted their assessment based on turnover figures relating to the year preceding signing, some uncertainty remains where different sales figures become available after signing. This uncertainty is compounded by the reference, in several decisions, to the financial year preceding the implementation of the transaction (with various events being referred to as constituting “implementation”), and not that preceding its conclusion. Recently, several decisions have added confusion to the matter.
A recent decision of December 9, 2019 is particularly interesting in this regard.24 The decision describes the transaction as involving two parallel share acquisitions, where the acquirer had no sales turnover in the financial year preceding the transaction. If the transactions had been considered separately, no merger clearance would have been required, as only one party exceeded the individual turnover threshold of RMB400 million in China in the year preceding the closing of the transaction. While information provided in the decision is very limited, the SAMR’s decision to consider the two share acquisitions as constituting one concentration, involving two parties whose sales exceeded the applicable thresholds, may possibly be based on the view that the two share acquisitions were interrelated steps leading to one merger within the meaning of Article 20(1) of the Antimonopoly Law. Second, whereas the share transfer agreements were signed on December 20, 2017, the SAMR conducted its assessment based on the parties’ sales during the “2017 financial year”. The decision does not explain whether the parties’ 2017 financial year had already ended by the time of signing of the agreements on December 20, 2017. An alternative explanation – which would signal a departure from the SAMR’s position in (at least some) previous cases – is that the authority based its jurisdictional assessment at the time of closing (i.e. on February 9, 2018 when the share transfers were registered). Such assessment could be in line with the many decisions mentioning the registration of the equity interest, obtaining the business license (for greenfield joint ventures) or other industrial and commercial registrations as the relevant implementation event of the transaction.
Similarly, on December 20, 2019, the SAMR sanctioned a private equity fund company for violation of the merger control rules under the Antimonopoly Law.25 In its decision, the SAMR explained that the private equity fund company entered into a share purchase agreement with various shareholders of a company on December 28, 2018 for the acquisition of a 23.53 per cent equity interest in that company. The transaction closed shortly afterwards, with the parties registering the share transfer on January 2, 2019. Interestingly enough, the decision refers to the parties’ “2018” sales figures to determine whether the sales thresholds were met. It does not explain whether the parties’ 2018 financial year had already completed by the time of the signing, or whether the SAMR made its jurisdictional assessment at the time of closing (i.e. January 2, 2019) based on figures for a financial year that had closed only a few days earlier (and for which final audited results likely did not become available until later).
Based solely on the two decisions mentioned just above, one may wonder whether the fact that signing occurred late in the calendar year, while closing occurred shortly after in the new year, prompted the SAMR to consider the year preceding closing as the relevant year. However this raises the question of the availability of such figures so early in the year and clarity is needed on the relevant financial year the parties can rely on to conduct their merger control assessment. In a recent decision however, the SAMR made its jurisdictional assessment based on the 2014 turnover of the parties whereas the signing, closing and the granting of the JV business licenses all took place at the very end of 2015 between November 25 and December 22, 2015.26
In addition, it appears that recent decisions issued in 2019 do not systematically specify the turnover figures based on which the threshold assessment has been made, therefore not providing further clarifications and potentially adding confusion to the matter.27 More generally, the SAMR’s decisions feature less guidance than those that had been adopted by MOFCOM.
The first decision for noncompliance with merger control rules adopted by the SAMR was issued on July 30, 2018.28 Gun-jumping decisions issued by the SAMR tend to be less detailed than those of its predecessor, MOFCOM. While the general decision framework remains similar, MOFCOM’s decisions would comparatively provide more insight into the authority’s decision making, providing more information on the setting of fines over the years. MOFCOM decisions would typically mention the aggravating or mitigating circumstances factored in the fines. Aggravating circumstances frequently put forward by MOFCOM included the fact that the parties were involved in prior notifications; the circumstance that they had already been previously sanctioned for failing to notify a transaction, and were therefore familiar with the notification requirements;29 as well as various circumstances showing that they had intentionally neglected to file (e.g. after the filing was deemed incomplete, parties only re-filed after completion of the share transfer,30 parties continued the implementation of the concentration even though they were aware of the legal requirement to obtain clearance31 or deliberately implemented the transaction in stages to wilfully circumvent and delay the filing).32 On the contrary, self-reporting a failure to notify and cooperating throughout the investigation was widely recognised by MOFCOM as a mitigating factor leading, in almost all cases, to a fine of RMB 150,000 (around US$22,000), at the low end of gun-jumping fines imposed by MOFCOM.33
In contrast with its predecessor, and even though the number of gun-jumping decisions issued by MOFCOM and the SAMR is almost on par (24 decisions issued by MOFCOM and 29 by the SAMR), the SAMR only gave insight into the setting of fines in two decisions where it was mentioned that self-reporting and proactive cooperation in the investigation had been taken into account when fixing the penalty.34 However, in both cases, the SAMR imposed a fine of RMB300,000, seemingly taking a harder stance than MOFCOM in that respect.
Danyi Xu, Associate, Tokyo, contributed to this article.
See the SAMR’s administrative penalty decision No 46 [2019] of 1 November 2019 in case Pierburg Pump Technology GmBH / Shanghai Xingfu Motorcycle Co., Ltd.
See Articles 8 and 13 of MOFCOM’s Interim measures on the Investigation of concentrations of undertakings not notified of January 5, 2012.
See MOFCOM’s administrative penalty decision No 788 [2014] of December 2, 2014 in case Tsinghua Unigroup Ltd. / RDA Microelectronics.
See MOFCOM’s administrative penalty decision No 668 [2015] of September 16, 2015 in case Fujian Electronics & Information / Shenzhen Chino-E Communication; and MOFCOM’s administrative penalty decision No 671 [2015] of September 16, 2015 in case BesTV New Media / Microsoft Corp.
European Commission decision of April 24, 2018 in Case M.7993 - Altice / PT Portugal.
French Competition Authority, Altice & SFR / OTL, Decision n° 16-D-24, November 8, 2016.
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