The Provisions on the Takeover of Domestic Enterprises by Foreign Investors ("Old Rule") and the accompanying pre-merger filing system have been in effect for five years. According to available government statistics, there have been more than 500 pre-merger filings under that regime. The new Anti-Monopoly Law ("AML") became effective on August 1st, requiring new implementing regulations and thresholds. MOFCOM is at the end stage of preparing its new Rules on Notification of Concentration by Undertakings ("New Rule") to support the AML, and the new thresholds triggering required pre-merger filings will soon be announced.
Thresholds in Draft of New Rule
According to the Draft of New Rule disclosed by the central government, the thresholds are:
(1) The total global turnover in the previous accounting year of all the undertakings to the concentration transaction is more than RMB 9 billion, and not less than two of the participating undertakings to the transaction separately have a turnover of more than RMB 0.3 billion within the territory of China in the previous accounting year; or
(2) All the undertakings to the concentration transaction have a total turnover of more than RMB 1.7 billion within the territory of China in the previous accounting year, and not less than two of the participating undertakings to the transaction separately have a turnover of more than RMB 0.3 billion within the territory of China in the previous accounting year; or
(3) The concentration will lead one undertaking to the transaction to have a market share of not less than 25% of the relevant market within the territory of China.
Application to All Transactions Inbound and Outbound
Compared to the Old Rule, the New Rule will be applied to not only mergers and acquisitions by foreign investors, inbound or outbound, but also to transactions between domestic companies and overseas investment by domestic companies. The Old Rule provides different thresholds for foreign investors acquiring domestic companies and overseas transactions between foreign companies. Under the New Rule, a uniformed threshold system will be adopted and applied to all transactions conducted in China and globally.
Turnover, Rather Than Market Share
The Old Rule clearly adopted “market share” as equally an important threshold as “turnover” in both inbound and outbound transactions. However, the Draft of New Rule clearly emphasizes the “turnover” threshold rather than “market share" while it limits the “market share” thresholds to one item and increases the appearance of “turnover”. The major reason for such change is that it is very difficult to identify or assume the market share of a certain company in a review of filings, due to the flexibility of definition of “relevant market” and the variety of products in different industries of business entities. As a result, the “turnover” concept has been agreed to by most officers and legislators as the prior thresholds, which can be easily investigated by checking the financial data of certain company.
As disclosed by the officers, the Ministry of Commerce worked closely with the National Bureau of Statistics (“NBS”) on the size of all domestic registered companies, before reaching the conclusion. The investigation shows that only 3% of domestic companies may reach the 0.3 billion RMB turnover line, representing more than 14000 companies in China.
Compromise on Market Share?
On the other hand, the Draft of New Rule still compromises on the “market share” threshold which has caused arguments internally and externally. As occurred in our previous pre-merger filing cases, the definition of “relevant market” is the most difficult term to be investigated and determined in the filing process. Most developed companies, have launched products in various sectors or industries. Such multi-industry business increases the uncertainty in determining the exact market that should be calculated. For example, a company with less than 1% market share of the local textile market may be deemed as worth more than 60% in the labeling industry. Based on such analysis, we won’t be surprised if this Threshold (3) of market share is finally deleted in the issued New Rule.
Final Amount of Turnovers?
The government is confident that the final figures won’t be far from 9 billion, 1.7 billion and 0.3 billion. The final amount may fall in the following ranges:
Collective Global Turnover: 9-11 billion
Collective China Turnover: 1.5-2 billion
Individual Entity Turnover in China: 0.3-0.5 billion
The current figures disclosed in Draft of New Rule are mostly derived from the statistics obtained from NBS, and they are still deem to be too low by many multi-national companies and analysts in China. Since we anticipate that there is still space for adjustment of such thresholds, the final figures may be increased by 10-20%. The collective Global Turnover amount may be increased to 10 billion, and the collective China turnover amount may approach the maximum.
The new thresholds reflect the intention of MOFCOM that pre-merger filings shall rely on countable figures and business information. It is a clear signal that there will be no discrimination toward foreign companies in implementing the AML, although such an approach will increase the reviewing volume of MOFCOM. It will be important for MOFCOM to control the filing amounts at a reasonable level so that every case can be carefully reviewed and analyzed internally. Thus, we anticipate higher figures to be adopted eventually as the final thresholds. Not only multi-national companies, but also local medium companies, shall start to value themselves before commencing any M&A transactions.