The Ministry of Commerce of China recently issued two new regulations, the Methods for Reporting of Concentration of Business Operators (the “Reporting Methods”) and the Methods for Review of Concentration of Business Operators (the “Review Methods”). Both of these relate to anti-trust filings involving business operators concentrations and will take effect on January 1, 2010. The two regulations further supplement Chapter 4 (Concentration of Business Operators; a total of 12 articles) of the Anti-trust Law of China, effective on August 1, 2008, and the Provisions of the State Council on Reporting Thresholds for Concentration of Business Operators, effective on August 3, 2008 (the “Reporting Threshold Provisions”).

Reporting Methods

The Reporting Methods provide clearer guidelines to a filing party in terms of preparation of filing documents. The most significant part of the Reporting Methods clarifies the vague wording in the Reporting Threshold Provisions. These Provisions state that a concentration of business operators must be reported in advance if either of the following conditions is met: "....the business turnover within China of each of at least two of those business operators [in a concentration] exceeded RMB 400 million during the previous fiscal year". Before the Reporting Methods were issued, filing parties and their counsels were perplexed by questions like “what exactly constitutes the business turnover within China?” and “who should be included in a business operator for calculating the turnover?” so as to trigger the pre-filing. The Reporting Methods provide fairly clear answers to the above questions.

The Reporting Methods state that the “business turnover” of a relevant business operator is “the revenue generated from sales of products and provision of services less related taxes and surcharges”, “within China” means “the domicile of a buyer to whom the business operator provides products and services is in China”, and in calculation of the business turnover “a single relevant business operator” should include its group companies, i.e., the business operator participating in the concentration and any other operator that directly or indirectly controls or is controlled by or is under common control with such business operator involved in the concentration. However, the Reporting Methods fail to further detail what constitutes “control”. The Reporting Methods also make it clear that the revenue generated from transactions among the group companies should be excluded in the calculation.

When a business concentration only involves acquisition of part of one or more business operators, the Reporting Methods also (i) clarify the way of calculating the business turnover and (ii) try to prevent the relevant concentrating parties from avoiding the pre-filing process. They provide that under the circumstances (i) in calculating the business turnover of the relevant seller “only the business turnover relative to the concentration shall be computed”, and (ii) a series of concentrations carried out by the same business operators within two years (defined in the Reporting Methods) that do not meet the filing thresholds in the Reporting Threshold Provisions shall be “deemed as one concentration transaction” and the business turnover shall be calculated accordingly.

Review Methods

The Review Methods offer a glance at how the Anti-trust Bureau (the “Bureau”) of the Ministry of Commerce conducts its review procedurally. In addition to review of the documents provided by a filing party, it may seek opinions from governmental agencies, industry associations, business operators and consumers. It can also hold hearings including competitors, suppliers, distributors, experts, representatives from industry associations, governmental agencies and consumers.

If the Bureau finds that a concentration would limit or eliminate competition, it would most likely impose certain restrictive conditions on a transaction. The business operators would be required to come up with restrictive conditions satisfactory to the Bureau. The Review Methods list acceptable types of structural and behavioral restrictive conditions, such as selling certain assets or businesses, making certain key technologies available or ending certain exclusive agreements. So far, the Bureau has given most of the merger and acquisition transactions it has reviewed an anti-trust filing clearance without attaching any restrictive conditions. However, it has given a conditional clearance to a few high profile acquisition transactions including Pfizer’s acquisition of Wyeth and Panasonic’s acquisition of Sanyo. Only one transaction has so far failed to pass the Bureau’s clearance. That is the highly publicized acquisition of Huiyuan by Coca Cola. In that case, the Bureau concluded that the proposed concentration would limit or eliminate competition in the relevant field and Coca-Cola failed to provide satisfactory and feasible restrictive conditions.

It is worth mentioning that the Directories for Defining Relevant Markets were issued on May 24, 2009 (the “Directories”). The Directories provide fairly detailed guidelines as to what the Bureau looks for in defining a relevant product market and a relevant geographic market in order to determine the concentration degree, market share and impact on the competition as a result of a concentration of business operators.

With the above five regulations in place and some other piecemeal regulations of the Bureau, China has formed a legal framework for worldwide merger and acquisition transactions that have an impact on its domestic market.

The anti-trust filing and reviewing process is time consuming. It is highly recommended that transaction parties plan ahead to avoid prolonging the deal closing.

If you would like to know more about any of the above regulations, please feel free to contact us via Steve Nelson at nelson.steve@dorsey.com, Jay Yan at yan.jay@dorsey.com or myself at chao.xia@dorsey.com.