By Susan Ning and Huang Jing

On June 6, 2012, the Ministry of Commerce (“MOFCOM“) promulgates the new merger filing form (the “New Form“).  Filings submitted after July 7, 2012 should use this New Form.  The New Form is more than just a formal change.  MOFCOM has condensed its three and a half years of experience since the first filing form of January 2009 into the new form.  It contains requests for additional information and guidelines on some substantive issues of merger filling.

 The definition of “operator to the concentration”

Before the promulgation of the New Form, the definition of an “operator to the concentration” is one of the major unsolved issues related to merger control review in China. 

Article 3 of the Provisions of the State Council on Notification Thresholds of Concentrations of Undertakings (the “Turnover Provisions“) requires that “operators to the concentration” file a notification if their turnover meets the stipulated thresholds.  However, “operator to the concentration” is neither defined in the Turnover Provisions nor in any other documents.   It is thus unclear whose turnover should be counted in to apply the thresholds.

The New Form sheds light on this issue by clearly defining “operator to the concentration” in different types of concentrations, which is summarized in the below chart:

Type of Concentration “Operator to the Concentration” Concerned
  • All parties involved in the merger
Acquisition of sole control
  • The acquirer;
  • The target(s)
Acquisition of joint control (by establishing a new joint venture)
  • The new joint venture’s parent companies which obtain control over the new joint venture
Acquisition of joint control (by obtaining control over an existing joint venture)
  • The existing joint venture;
  • The parent company(ies) which take control over the existing joint venture after the transaction
Acquisition of joint control (by obtaining control over a company solely controlled by one parent company, and the original parent company maintains control after the transaction)
  • The original parent company;
  • The new parent company(ies) who obtain control after the transaction
Acquisition of joint control (by obtaining control over a company solely controlled by its parent company, and the original parent company loses control after the transaction)
  • The company to be jointly controlled;
  • The new parent company(ies) who obtain control after the transaction
  • Submission without executed transaction agreement

According to the Guidance of Merger Filing Information issued by MOFCOM in January 2009, the parties were required to submit a copy of the executed transaction agreement for the filing.  MOFCOM’s general attitude was that the transaction may not be definite if the transaction document is not signed, and reviewing indefinite transactions could be a waste of administrative resources.  As such, MOFCOM usually requests that a copy of the executed transaction agreement be included in the submission. 

However, the request for the executed transaction agreement may cause problems in practice.  In some cases, the parties are requested by law to close the transaction within a given period shortly after the execution of the agreement.  If the parties submit the filing after the execution of the agreement, they could very likely fall into a dilemma where they must close the deal before obtaining MOFCOM’s merger control clearance.  In some other transaction, the parties do not intend to sign any written agreement at all. 

The New Form provides a solution for the above difficult situation.  If the parties can provide sufficient evidence to prove that the executed transaction agreements cannot be submitted due to special transactional arrangements, mandatory legal requirements of China or other jurisdictions or any other legitimate reasons, or that clearance from MOFCOM could not possibly be obtained within the reviewing timelines stipulated by AML if the notification is made after the execution,  the parties can file relevant memorandums, framework agreement, draft agreements or tender offer, accompanied by the main terms and conditions of the transaction.  After the submission, the parties concerned are obliged to supplement a copy of the official agreement of the transaction once it is executed.  They should also report to MOFCOM about any major changes, and revise the relevant sections of the filing or re-file the case, where appropriate.

  • Conversion of turnover into RMB

The turnover thresholds provided in the Turnover Provisions are denominated in RMB.  As such, turnover figures in a foreign currency must be converted into RMB in order to determine whether the thresholds are met.  Before the issuance of the New Form, there was no guidance as to what exchange rate should be used.  It was common to see companies using the average exchange rate of the previous fiscal year, the exchange rate of the first day or last day of the previous year, or the exchange rate of the execution date of the transaction agreement. 

Most of the times, the exchange rate is a minor issue in the filing process.  However, in case that the parties’ turnover is very close to the thresholds, using different exchange rate could lead to different result in terms of notifiability of a transaction.  In such circumstances, consultation with MOFCOM may become necessary for companies to decide what course to follow. 

The New Form makes it clear that the exchange rate to be used should normally be the arithmetic average of central parity rate of the fiscal year concerned published by the People’s Bank of China. 

  • Newly requested information

Compared with the original filing form, the New Form includes some new items of information to be provided for MOFCOM’s review.  Some of these items are constantly requested by MOFCOM in the pervious reviewing practice, such as the compliance status of the parties to the concentration; and the non-compete arrangements among JV partners. 

Others may not be so frequently seen, such as information about concentrations conducted by the operators in the past three years in the relevant market. The new items are mainly related to the past compliance activities of the parties.  It is reasonable to expect that previous non-compliance could be a factor affecting the review timeline, or even review decision of current transactions.  Companies should pay attention to the newly requested information at the filing preparation stage.