On December 30, 2011, China's Ministry of Commerce (“MOFCOM”), the government agency tasked with merger review, formally promulgated new rules providing MOFCOM with clear procedural rules (and powers) to investigate and deal with reportable transactions that were not notified. These Provisional Measures on the Investigation and Treatment of Failure to Report Concentration of Undertakings (“Provisional Measures”) went into effect on February 1, 2012.
What Deals Should Be Reported
In a 2008 Order, China's State Council required that a transaction that is a merger, acquisition or even a joint venture where one entity has the ability to exert decisive influence over another must be notified and cleared by MOFCOM if it meets certain threshold elements:
(i) the combined annual global turnover of all businesses exceeds RMB 10 billion and the annual domestic (China) turnover of at least two businesses involved each exceeds RMB 400 million; or
(ii) the combined annual domestic turnover of all businesses involved exceeds RMB 2 billion and the annual domestic turnover of at least two businesses involved each exceeds RMB 400 million.
Discovery of Unreported Deals
Once MOFCOM acquires information about a “suspicious transaction,” it will start an initial investigation. This information can be reported by any channel, whether from the public or from an entity, opening the door for whistleblowers to report information. MOFCOM is required to keep the identity of the whistleblower secret. In the case that the whistleblower provides a written complaint complete with facts and evidence, MOFCOM is obligated to initiate an investigation. However, allowing whistleblower action carries the potential for abuse among competitors.
Generally, once the decision is made to initiate an investigation based on preliminary facts indicating that the transaction should have been reported, MOFCOM will open a file and notify the parties. Then, the parties must report back within thirty days, submitting information establishing that (i) it is a concentration which (ii) meets the reporting thresholds and (iii) that the transaction has been implemented and has not been reported. MOFCOM then determines that either the transaction should have been notified and initiate an in-depth investigation, or decide not to further investigate. Once a determination is made that the transaction should have been reported, the parties under investigation must suspend the transaction. The in-depth investigation basically consists of the ordinary MOFCOM merger review procedures. Once the parties have submitted all required information, the clock begins to run and the investigation can last up to 180 days.
The penalties in the Provisional Measures mirror those stated in the Anti-Monopoly Law of the People's Republic of China (“AML”). The maximum fine that can be imposed for failing to file a reportable transaction is RMB 500,000 (around USD 80,000). Non-monetary penalties include an order to cease the transaction, divestiture of the shares or assets involved, transfer of the business, and any other measure necessary to restore parties back to their positions before the transaction. The Provisional Measures add that the level of sanctions will depend on the duration and extent of the violation, suggesting that a competitive effects assessment would factor into the investigation. However, it is unclear what level of violation would warrant a complete unwinding of the transaction. This (apparently intentional) lack of clarity is noteworthy because it provides a significant deterrence for businesses that used to get by without reporting deals. Importantly, MOFCOM also has the discretion to publish its findings at the close of an investigation, threatening a company's public image, another strong deterrence measure.
The Provisional Measures add potency to MOFCOM's enforcement of the AML which has been in force for over three years. They provide more clear and specific procedural rules for investigations. In contrast with the past where foreign investors and domestic companies considered not filing a reportable deal an acceptable risk, they now face a real danger of public embarrassment, fines, divestiture, or even unwinding.