On July 11, 2008, attorney Julia Zhu met with Professor Zhi Yi He, Ashley Lan, Ling Yun, and Jinzi at Beijing University to discuss the USA-China Law Group’s potential involvement in the 2nd Annual International CEO Roundtable of Chinese and Foreign Multinational Companies on November 15th & 16th 2008 in Beijing.  The theme of this roundtable is to strengthen international cooperation and promote sustainable business development.

This event is approved by the Ministry of Commerce of People’s Republic of China and includes an impressive list of attendees including 15 Chinese Ministers, 20 Chinese and foreign mayors, and18 global CEO’s from Fortune 500 companies to name a few.  The USA-China Law Group is also now recognized as a preferred law firm in the Shanghai & Changzhou Municipal People’s Government attorney referral networking list, accessed by US companies looking to do business in China.

The title of the measures may cause some confusion. The China Securities Regulatory Commission (CSRC), Measures for the Administration of Financial Consultancy Services for Mergers, Acquisitions and Reorganisations of Listed Companies are actually more to do with the administration of financial consultancy services, with a focus on the approval and licensing process, than they are to do with rules relating to mergers and acquisitions.

The measures are the latest reform the Chinese government has issued as it continues to bring its regulations in line with the international community. As with a number of laws issued this year, for example the PRC Anti-monopoly Law and the PRC Employment Contract Law, lawyers have applauded the government’s objective, but many question its interpretation and lack of clarity.

While the CSRC still acts as the regulator for M&A activities and reorganisation of listed companies, the measures have weakened its position. The measures outline the roles and responsibilities of financial advisers and provide details on the issuing of licences which will allow financial advisers to provide consultancy services and opinions on the transactions. These licences, Financial Consultancy Services Licences, are to be issued by the CSRC.

The result is a change in the CSRC’s role from a complete authority to a supervisory role. The CSRC has the power to override any decisions or opinions passed on by advisers, while advisers are required to cooperate with the Commission throughout the entire review and approval process. In other words, the buck still stops with the CSRC.

This brings China more in line with other jurisdictions with regards to the regulation of the securities market, where self-regulation strengthens the positions of intermediary bodies (eg auditors, accounting firms, securities companies) empowering them to provide independent and objective professional services and guidance.

Article 2 of the measures outlines the scope of what the financial consultancy services (advisers) role entails.

The term “financial consultancy services for mergers, acquisitions and reorganisations of listed companies” means the provision of professional services such as transaction valuation, proposal design and issuance of professional opinions for merger, acquisition and reorganisation activities, such as takeovers, material asset reorganisations, mergers, divisions and share buybacks of listed companies, that have a material effect on the equity structure, assets and liabilities, revenue and profit, etc. of the listed companies.

The result for lawyers in China is they need only concentrate on the legal aspect of any advice dispensed and not burden themselves with the financial side of transactions.

“In the past the liability between a lawyer and a financial consultant has not been clear, previously when a client wanted him to sign a legal opinion the lawyer might sign it even if he was not sure about the financial feasibility of the project, with these measures, the lawyer just needs to worry about the legal aspect of the project,” says Grandall’s Zhan Hao.

Good in principle but questions remain

There are certain requirements that need to be met in order for a financial consultancy services licence to be issued. Articles 6 – 17 of the measures clearly define the qualification requirements needed to apply for licences. In particular, Article 8 determines:

An asset appraisal firm, accounting firm, law firm or relevant personnel wishing to engage in financial consultancy shall establish a separate dedicated firm.

As local law firms are permitted to apply for a licence to provide financial consultancy services, the issue of a conflict of interest has been raised, despite some strict and clearly defined guidelines.

“The introduction of the measures on the one hand guarantees the standard and the quality of service of financial consultancy bodies, but on the other hand it virtually reinforces the monopoly of certain types of institutions which will not be conducive to fair market competition,” says JSM’s Yanni Song.

“There have been accounting firms or evaluation institutions which have long acted as auditors or valuers for a certain listed company, but have also acted as financial advisers in the event of some merger or reorganisation activities of the same listed company. This creates a potential conflict of interest, and affects the independence and objectiveness of its opinions, the case of Arthur Andersen and Enron is a typical example,” she adds.

However counter-balancing this are the business rules set out in the measures which detail the duties required by advisers and include establishing internal reporting systems, conducting due diligence and maintaining an independent approach.

“The role of a financial adviser is that of an expert, who needs to negotiate a number of laws and regulations, you are establishing yourself as an expert in the field and are liable to being sued by the public should the information or opinion you provide prove not be correct, as there are shareholder issues at stake,” says Basil Hwang from Dechert.

Despite the government’s best efforts in establishing a transparent approval process there are still questions relating to how successful the measures will be in reality. The very nature of the M&A business and the procedures related to the reorganisation of listed companies means there is no way of guaranteeing an effective and watertight process, particularly in the context of insider trading and personal relationships in the market.

“In that sense, the “qualification” of financial advisors can be (seen as) a necessary step for more mature securities markets, but (the measures) will never replace the need of a true culture of independency and transparency,” says Gide Loyrette Nouel’s Hubert Bazin.

Less government intervention means less regulation

As China’s M&A market is set to grow, the CSRC’s measures are timely. Establishing a market governed by self-regulation and decreasing the number of administrative approvals is long overdue. However the added responsibility of providing opinions on market activity will also come with a possible rise in costs for those seeking approvals.

“As the CSRC-approved financial advisers shall have duty of care not only to their clients, but also to the CSRC, the stock exchange, and public investors, they will spend more time and make more efforts on looking into the business of listed companies,” says Xudong Ta from Jun He Law Offices.

However many feel the impact of possible cost increases will have a minimum impact in the overall scheme of market activity.

At the end of the day investors want clarity and a seamless process in order for their business activities to be measured and monitored. One criticism of the law is there is no safety net to ensure the licencees will be able to undertake their roles in a fair and proper manner.

“The promulgation of the measures is only one of the attempts that the CSRC is making to reduce administrative approvals and to increase the functions of professionals in market regulation and supervision. However, whether this attempt can succeed depends finally on whether the financial advisers are able to properly discharge their responsibilities as frontline watchdogs in a fair competition market, and whether the CSRC will in practice shift more power to the financial advisers,” says Gide’s Bazin.

A point not lost on Hwang.

“The rules do not provide detail as to what international companies such as the big four accounting firms or the foreign law firms can play a role, they need sufficient domestic knowledge and to be able to advise on domestic issues and foreign law firms by their very nature and not allowed to practice local law.”

Therefore the door is also open for large investment banks and auditing firms (see box ‘A possible role for the big-four?’) to apply for financial consultancy services licences, a prospect that is not clearly spelt out in the measures.

“Increasingly you are going to see some big players wanting to do everything themselves and not seek the services of an external adviser, so clearly to what extent this will be possible is a bit of a grey area,” says Clifford Chance’s Terence Foo.

The investment banks do not see themselves being able to take on the work of advisors and see little change in the status quo.

“Perhaps, some foreign firms might prefer setting up joint ventures with local practitioners; I don’t think any of the foreign practitioners are allowed to offer the full range of M&A services to PRC listed companies on a wholly foreign owned basis, because most of these transactions will involve domestically listed securities,” says Tammy Wan, Executive Director, Mergers & Acquisitions, Royal Bank of Scotland Group.

Wan suggests that the Chinese market needs experienced and knowledgeable service providers on the ground in operational roles, and this is where the investment banks will be able to add value.

“As practitioners may be exposed to potential liabilities (particularly with respect to the post transaction compliance requirements), I think practitioners, who opt to set up their M&A practice on a JV basis, may want to carefully consider the balance of the overall managerial and operational control to ensure strict compliance with the applicable laws. It is obviously important to the CSRC and the market that service providers perform on par with international standards. I can see that a lot of on-the-job training may be required.”

Other banks are taking a wait and see approach to determine how the measures will affect the market activity and mood.

However, one senior manager from an international investment bank claims the CSRC’s measures are ineffective and fall well short of the mark for improving the M&A process in China.

“In terms of doing full-blown M&A advisory work, there really aren’t that many experienced and qualified bankers in China and ironically the people who are most experienced are those who are engaged in international transactions, and the regulations are not clear as to whether this experience qualifies. In terms of the domestic market, you might think that local bankers who engage in extensive corporate restructuring work in connection with IPOs ought to be capable of delivering professional M&A advice, but it is not clear whether this experience qualifies either.”

What is clear is that the aim of the measures is to promote accountability in the market. In places such as Hong Kong and the US, self-regulation is a tried and trusted approach. However, for China to create a market similar to that of Hong Kong’s or the US, the CSRC needs to release further details and clarity in relation to the measures before issuing the first licences. Put simply, the market needs the support from high-quality capital markets service providers, and it is the law’s role to establish this landscape. Only then will there be an increase in China’s M&A market, and more importantly an improvement as well.

Coca-cola’s US$2.5 billion offer to buy fruit juice company Huiyuan is touted as the biggest takeover transaction by a foreign company in China. However market restrictions remain a key issue in the case according to Kirstie Nicholson, Of Counsel at Lovells Shanghai.

Although Huiyuan has a significant market share in the pure juice market, it has been reported that the company’s share is considerably lower in China’s overall juice market. Therefore defining Huiyuan’s market position is the issue. Nicholson said that parties are likely to advocate a wide market definition, while those who oppose the case will go for a narrow definition.

The Ministry of Commerce (MOFCOM) will need to carry out an investigation and makes its own conclusions based on the available evidence, she said.

Nicholson added that Article 7 of the AML contains ambiguities as it fails to define clearly what companies can be granted exemption except for the state-owned enterprises.

“It will be very interesting to see to what extent MOFCOM will use the provisions in the AML in its investigation and analysis of the proposed transaction, she said.

If successful, Coca-cola’s offer will be the largest of the cases to be reviewed by MOFCOM under the merger filing provisions in the AML.

Source: China Law & Practice
Article’s Link

The government has tightened the rules by increasing the number of layers needed for approval for foreign investment in the real estate sector, with the Ministry of Commerce issuing the Circular on Properly Handling the Record Filing for Foreign Investment in the Real Property Industry.

According to Philip Zhang, senior partner at Boss & Young, there will be more government agencies directly or indirectly involved in the supervision.

The new law provides provincial governments with the responsibility for ensuring the implementation of law and regulations within their jurisdiction, while at the same time, they also are also in charge of reviewing and verifying foreign investments in the real estate sector.

It remains to be seen whether the General Office will require the consents of other government agencies before they agree to approve the filing forms. Should this be the case, the supervision and control will be further strengthened as a matter of law enforcement, Zhang said.

Though more government authorities will be involved, Zhang said the filing procedures will not have any direct impact on foreign investors. However, the local government authorities may introduce their own issue policies or implementation rules.

There are also possibilities that the government will further tighten the rules.

The Notice became effective on July 1 2008.

Source: China Law & Practice
Article’s Link

Guangdong is the first province to have issued a guiding opinion on the labour laws. The opinion attempts to clarify some of the ambiguities in the PRC Employment Contract Law, which took effect in January this year. But the issuance of the rules has caused considerable controversy, with some arguing the Guangdong authorities do not have the right to issue guiding opinions and that some its contents are, as a result, against the national law.

2008 has so far been a busy year for the Labour Arbitration Commission. Courts in China’s provinces have been handling a huge increase in labour litigation disputes due to the Employment Contract Law1 which took effect early this year. The ambiguities in the legislation have made it difficult for employers to comply with, causing numerous employment issues and is reported to have resulted in some businesses going bankrupt . As a result, the numbers of labour dispute cases has risen significantly, loading pressure on to the arbitration panels and litigation courts.

Guangdong is a case in point. In the first six months of this year, the courts in Guangdong, a province which serves as the hub of China’s manufacturing industry, had the highest number of litigation cases in the entire country. According to Jiang Junlu, partner at King & Wood, the number of litigation disputes handled by the courts in Guangdong between January and June of this year, was three times that of the province’s entire caseloads of last year.

The reason for the surge in cases is twofold. The Guangdong litigation systems have not been functioning efficiently with the absence of convergence, mutual agreement, and standardise rulings between the arbitration panels and litigation courts. The result has been cases often taking more than two years to settle. Add to this the increase in labour disputes and the delays in hearing them.

“There was no mutual agreement between the panels and the courts. It’s a waste of administrative resources,” says Zhao Liren, partner at Grandall Legal Group Shenzhen office. “The measures between the two departments are different. Employees are forced to wait a year or two before they can get their money back.”

Guangdong cannot wait

Without waiting for the State Council to pass the Implementing Draft on the Employment Contract Law (Implementing Draft), Guangdong issued its own opinion to take the pressure off of the arbitration panels and litigation courts. In June, the Guangdong Provincial Higher People’s Court and the Guangdong Employment Arbitration Commission have jointly issued the Guiding Opinion on Law on the Mediation and Arbitration of Employment Disputes and the Employment Contract Law (Guiding Opinion).

Guangdong’s guiding opinion aims to make the province’s litigation and arbitration system more efficient. According to Jiang, the opinion’s Joint Judicial and Arbitral Announcement and Joint Judicial and Arbitral Standards are groundbreaking. Both seek to bring together the arbitration panels and litigation courts, eliminating any inconsistencies between the two departments. Jiang says that the improved litigation systems in Guangdong not only ease the pressure on the two departments, but also bring a reduction in the time it takes to settle cases, therefore allowing lawyers to anticipate the timings of rulings.

Parallel objective and social effect

The overriding significance of the guiding opinion is that it provides clarification and details on some issues that were ambiguous in the implementing draft and the Arbitration of Labour Disputes Law.

“There are still many issues in the implementing draft, and it has created much debate,” says Jay Chen, associate at Fangda Partners. “The clarification in the Guangdong opinion makes lawyers’ lives much easier.”

One key clarification is stated in Article 1, in which it defines the objective of the legislation must be inline with the social effect that the law creates.

In handling employment disputes, people’s courts and employment arbitration commissions shall abide by principles such as the equal protection of the lawful rights and interests of workers and employers, full utilization of employment arbitration resources and rational allocation of trial resources, lawfulness, impartiality, timeliness, non-retroactivity of laws, and the unity of legal effect and social effect.

Article 1 in fact addresses just what the Employment Contract Law failed to. On the one hand, the Employment Contract Law’s initial aim was to protect both employer and employee benefits; however the consequence of the law was the shutting down of factories. Requirements such as offering employees open term contracts are difficult for employers to comply with. While employees cannot be terminated without specific cause, it is reported that such a requirement significantly increases employers’ burden as well as their operational expenses. Employers who cannot afford the sudden increase of expenses face bankruptcy, leaving employees out of work. The intention of the law and the social effect were therefore at opposite ends of the spectrum.

“After the Labour Law took effect in January, we have only been advising on litigation cases but did not consider the social consequences,” Chen says. “[Guangdong’s guiding opionion] has brought up a very important point of reminding us as lawyers that we need to take social impacts and values into consideration. This is one of the things that make this guiding opinion special,” Chen says.

Standardized overtime payment

Many lawyers also agree the guiding opinion has provided a clearer definition in overtime payment compared to the Employment Contract Law. Overtime payment has always been an issue in China as there is no standardized calculation, and employees have no guarantees they will receive their overtime benefits under the Employment Contract Law. Amounts of overtime payment depend on individual regions or enterprises. While the Employment Contract Law fails to clarify how such payments should be calculated, the guiding opinion provides a standardised method. Accordingly, overtime payments can be calculated on base salary rather than based on regular monthly remuneration as stated in the Employment Contract Law.

Chen says that such a clarification is still not thorough. “More information is still needed. I think it needs time for the authorities to amend and revise, but at least it clarifies some ambiguities in the Employment Contract Law and the Arbitration of Labour Disputes Law.”

Debates on open term contract

The definition of an open term contract (Article 22) in the guiding opinion has also clarified some ambiguities in the Employment Contract Law. The Article addresses prohibited actions that some employers have been attempting to use in order to prevent offering employees an open term contract2. Under the Employment Contract Law, employers can only give a maximum of two fixed term contracts to employees. Thereafter, employers must give employees an open term contract. Such an obligation makes it difficult for employers to terminate workers. As a result, many employers prefer to terminate workers whose fixed-term contracts are coming to an end. In November 2007, local company Huawei Technologies set up a voluntary resignation scheme, which encouraged 7,000 employees to resign and then rehired them almost immediately. The guiding opinion now attempts to prevent a similar situation happening in the province.

“Article 22 is written with Huawei in mind,” Chen says. “The guiding opinion emphasies that such action is strictly prohibited. This article again brings up the point that both the legislative objective and social consequence have to be parallel.”

However, Baker & McKenzie’s Andreas Lauffs has a different point of view: “It is difficult to harmonise the provisions with the clear requirements under the Employment Contract Law,” he says.

According to the guiding opinion, company rules issued before January 1 2008 are still valid even if they were not adopted in accordance with the Employment Contract Law’s employee consultation procedure, provided that the rules do not violate applicable law and have been publicized to employees.

Lauffs says that the guiding opinion has relaxed requirements on employers to complete employee consultation procedures in connection with the issuance of company rules. He says it appears to conflict with recent court decisions that employee consultation procedures were required for company rules issued prior to January 1 2008.

“The Guangdong opinion interprets the Employment Contract Law quite loosely. It remains to be seen how the long-awaited Implementing Rules to the Employment Contract Law will address the issues covered by the Guangdong Opinion, and whether the Guangdong opinion will be revised accordingly. For the time being at least, the net effect of the Guangdong opinion is that the law is applied differently in Guangdong from many other locations in China,” Lauffs says.

Potential reference for draft

As controversial as it is, the opinion does provide a clearer picture on the Labour Law, says Zhang. And as Guangdong is the first province to issue such a guideline, Zhang suggests the rest of the country, including the State Council, and all other local governments and labour authorities will have been paying close attention to its impact.

“Guangdong has been in a leading position in terms of implementing labour regulations and issuing the labour provisions,” Chen says.

“It’s more practical,” says Grandall Legal Group’s Zhao. “As the guiding opinion has further explained the law, it allows us to immediately understand the details and know how to advise clients in different situations.”

But some argue that the Guangdong Provincial Higher People’s Court and the Guangdong Employment Arbitration Commission have no right to issue the rules. The guiding opinion is not a regulation and thus does not have enforcement power. According to Chen, the Guangdong higher people’s court does have the right to draft and implement local judicial interpretations in Guangdong. However, the force effect of such Guangdong Instructional Advice is different from the Implementation Draft as a national rule.

“The guiding opinion is just for reference,” says Chen Yan, labour consultant and labour arbitrator at Wang Jing & Co. Law Firm. “Cities in Guangdong can continue to follow their own rules.”

Yet Zhang Qingwei from Jingtian & Gongcheng says that the opinion does contain a certain level of authority. While it is not compulsory, both the arbitration panels and litigation courts in Guangdong province will comply with it in practice.

“They are influential to all the parties of the labour relationship,” he says. “We need to study them and follow them. The impact is not only on in-house counsel, but also to private lawyers, human resources managers, and employees.”

The Guangdong opinion will be a handy reference for lawyers and foreign enterprises, according to James Yao, legal counsel at Ping An of China. Yao says that the opinion can provide detailed information for foreigners who are interested in working in the province and that it can definitely strengthen employer and employee’s relationship.

“The guiding opinion can improve the management in companies,” he says.

Chen, who has had many discussions with Shanghai lawyers and labour law specialists on the guiding opinion, believes the Shanghai government and the State Council will use Guangdong as a reference to further implement the labour law, so to make it clearer.

“It’s a shame that the Guangdong opinion cannot be applied in Shanghai,” he says.

Endnotes

1. See Will the New Labour Contract Law of the PRC Increase Cost of Doing Business in China in CLP February 2008.

2. See Guangzhou City, Urgent Circular on Strengthening the Administration of Mass Layoffs by Employers in CLP February 2008.

Labour Contract Law 2007

• Written employment contracts must be put in place for all full-time employees within one month of employment. Penalties apply if employer fails to do this: double salary payable to employee and an open term contract is deemed to apply if still no contract in place within one year.

• Two fixed terms rule: employers must then give an open term contract to employee (unless the employee rejects contract on the same or better terms) – it is unclear whether the employer has the right not to renew at the end of the second fixed term.

• Consultation process for company handbooks, rules and policies: employers must consult with all employees (or an employee representative congress) and labour union on such rules and any revisions to these. The process for consultation is unclear but seems to fall short of obtaining consent of employees. Also not clear whether this applies to rules existing prior to effectives of the new law.

• Non-compete: employers must pay compensation on a monthly basis during non-compete period, but no further guidance on level of compensation. Non-compete obligations only applicable to senior management, senior technicians and other personnel with confidentiality obligations.

• Overtime: reiterates generally that employers must pay overtime but without further guidance on any exemptions or how to calculate payments.

• Staffing agencies: required to give minimum two year contracts to employees.

Draft Implementing Regulations 2008

• Written employment contracts: employer may terminate an employment contract with three days’ written notice but no severance payment if employee refuses to enter into employment contract within one month after employment. If employer is required to pay double salary for failing to put written contract in place, the double salary applies from the end of the one month (i.e. not retrospective).

• Two fixed terms rule: no further guidance or clarity on how the two fixed terms rule should be implemented.

• Consultation process for company handbooks, rules and policies: no further guidance or clarity on the required consultation process. Some helpful wording from a previous unpublished draft (providing that employers must consult but could then decide on implementation and future changes must be announced but no consultation required) does not appear in this draft.

• Non-compete: personnel to whom obligations can apply are managers, deputy managers, financial officers, board secretaries and other personnel covered in the Articles of Association.

• Staffing agencies: employers generally may only use agency workers for non-core and temporary positions – not clear whether representative offices excluded from this requirement.

Law on the Mediation and Arbitration of Labour
Disputes 2007

• Provides very broad scope for type of disputes that can be referred to labour arbitration commissions, basically covering all types of dispute that arise from an employment relationship.

• Sets out qualification criteria for arbitrators and specific timings for the composition of arbitration tribunals, convening of hearings and issue of arbitration awards.

• Statute of limitations: period of time for bringing a claim is extended from 60 days to one year from the time a dispute arises or party knows its rights have been infringed. No time limit on claims involving employee remuneration if employee still employed by relevant employer and then one year from date of termination of employment.

• Increased burden for employer to provide evidence relating to employment disputes. Failure to provide evidence will be “held against” employer.

• Employers only permitted to appeal awards regarding remuneration, severance pay, damages, working hours and leave and social insurance if able to show error in application of law, evidence fabricated or statutory procedure not correctly followed.

Guangdong Guiding Opinion

• Confirms that one year statute of limitation will apply to disputes accepted after 30 May 2008.

• Provides that certain time limits referred to in the Law on the Mediation and Arbitration of Labour Disputes are “working days”.

• States that disputes in relation to housing fund contributions are not considered labour disputes – this seems to conflict with the Law on the Mediation and Arbitration of Labour Disputes.

• Implies that representative office can engage certain staff directly (such as part-time or domestic help staff) but that this will not be considered an employment relationship. No suggestion that the requirement to engage normal staff though a staffing agency is removed.

• Consultation process for company handbooks, rules and policies: provides that rules will not be invalid for failure to consult with employees if formulated prior to Labour Contract Law becoming effective and provided that they comply with other relevant laws and regulations and have been disclosed to employees. Rules will in principle be invalid if formulated after 1 January 2008 and without consultation.

• Written employment contracts: if employer is required to pay double salary as penalty for not entering into written contract, such double salary will not be applied for the purposes of calculating any severance payment applicable.

• Overtime: calculation of overtime payments can be based on base salary (excluding allowances, bonuses and subsidies) if this has been agreed with employee. In Beijing and Shanghai the labour bureau takes the view (in absence of clear regulations) that overtime should be based on all regular monthly remuneration. In addition, employer has an obligation to provide evidence that employee has not done / should not do overtime if it rejects an employee claim for overtime.

• Prevailing law: national laws and regulations should prevail over the Guiding Opinion if they cover the same issues.

Source: Matthew Durham, Simmons & Simmons

Source: China Law & Practice
Article Link:

The Anti-monopoly Law (AML), which came into force on August 1, 2008, introduces a new legal regime of merger control. Alexandre Vincent and Elaine Zhu from CMS argue the implementation of the notifiable concentrations should be suspended until clearance by MOFCOM.

According to Article 21 of the AML, any concentration between business operators meeting jurisdictional thresholds provided by the State Council is required to be notified to the competent Anti-monopoly Enforcement Agency for merger control, – the Ministry of Commerce (MOFCOM), for review.

It is compulsory to notify concentrations which trigger the jurisdictional thresholds. The notification is a pre-concentration procedure and has a suspension effect. Companies which put a concentration into effect (i) without filing a notification, (ii) despite an obligation to suspend such concentration until clearance has been given, (iii) despite a prohibition decision or (iv) in breach of an ancillary condition to a clearance decision, will face serious legal liabilities, including a fine of up to RMB500,000 (US$73,000).

The AML itself is silent on the jurisdictional thresholds but empowers the State Council to issue further implementing rules on this. Such a mechanism is more flexible for the government authorities to adjust the thresholds from time to time, according to market changes.

The State Council issued a draft of the Rules on the Notification for the Concentration of Business Operators on March 27, 2008 to collect public comments. In order to make it more practical for business operators to comply with the merger control rules of the AML, the draft rule attempted to clarify some substantive and procedural issues which are not addressed in the AML, including the jurisdictional thresholds.

On August 3, 2008, the State Council promulgated the final rule with a different name – the Rules on the Notification Thresholds for the Concentration of Business Operators (Threshold Rule), which became effective on the same date. It is disappointing that the long-awaited Threshold Rule only contains five articles, which only focuses on the jurisdictional thresholds. Other important issues addressed in the earlier draft, such as the definition of “control” and “decisive influence”, confidentiality and expedited preliminary review, were removed from the final rule.

Concentration

As stated in Article 2 of The Threshold Rule, transactions that constitute a concentration of business operators, include:

• mergers;

• equity or asset acquisitions, through which the acquirer obtains control over other business operators; or

• contracts or other arrangements, through which the acquirer obtains control of or decisive influence over other business operators.

The Threshold Rule merely repeats the same provision in the AML but does not provide any further clarification.

To consider whether an acquirer will have control of or decisive influence over other business operators, it is necessary to analyse all the rights (such as voting rights) that the acquirer is able to exercise as a result of the concentration. However, to what extent the acquirer is regarded as having control of or decisive influence over other business operator is not clearly defined in the AML. In the draft rule the definitions of “control” and “decisive influence” were given¹ which may still be useful for reference purposes although they were eventually removed from the Threshold Rule. Further implementing rules are expected to clarify this issue.

Jurisdictional Thresholds

The Threshold Rule provides that a concentration must be notified if it meets Threshold 1 and either one of the two parts of Threshold 2²:

Threshold 1: The turnover in China of at least two parties to the concentration exceeds RMB400 million each in the last fiscal year;

AND

Threshold 2: The total worldwide turnover of all parties to the concentration exceeds RMB10 billion in the preceding fiscal year;

OR

The total turnover in China of all parties to the concentration exceeds RMB2 billion in the preceding fiscal year.

The Chinese authorities, in line with international practice, choose the turnover thresholds applicable to all sectors. Not only the worldwide turnover but also the China-wide turnover of the parties is taken into consideration. Turnover is an important factor to objectively reflect a business operator’s market power and is easier and more definite for business operators to obtain and analyze.

The new turnover thresholds require that the China-wide turnover of at least two parties to a concentration should exceed RMB400 million each (Threshold 1). Therefore, a transaction between two companies, one with a large presence in China but the other with a small scale business in China, which probably raises less competition concerns, may not be subject to notification. This is seen as an improvement to the previous jurisdictional thresholds under foreign merger and acquisition rules, which only referred to one party’s business in China.

A third threshold of market share in the earlier draft rule³, has also been removed from the final Threshold Rule. The authorities received a high number of complaints about this threshold who complained it caused legal uncertainty. The impracticalities for a business operator to measure their market share correctly triggers another difficult issue, that being the precise method of defining a relevant market, which has not yet been clarified in law.

Calculation of Turnover

To make the turnover thresholds more practical for business operators to follow, further guidelines on the method of calculating turnover are still expected to be issued. Although this issue has not yet been clarified by law, the turnover of the whole corporate group of a transaction party is calculated according to the existing practice of MOFCOM.

In principle, the jurisdictional thresholds apply to all business sectors. Article 4 of the Threshold Rule sets out that due to the special characteristics of financial industries, such as banking, insurance, securities and futures, the calculation of turnover for these industries will follow further implementing rules to be issued by MOFCOM.

MOFCOM’s Discretionary Powers

It should be noted that even a concentration which does not meet the jurisdictional thresholds may still be subject to review by MOFCOM if it finds that the concentration has or is possible to have the effect of eliminating or restricting competition on the basis of duly obtained evidence⁴.

Criticisms include the discretionary powers of MOFCOM that will cause uncertainty. It is unclear in the the Threshold Rule what extent the evidence is considered “sufficient” in order to prove that a concentration below the thresholds has or is possible to have the effect of eliminating or restricting competition. The procedures, methods and time limit of collecting evidence by MOFCOM are not addressed. Such uncertainties could therefore make business operators act overly cautious.

Conclusion

The Threshold Rule is the first supportive rule issued for the implementation of the AML. Although it still leaves important issues open, it makes progress in the overall legislation process. Further relevant guidelines or rules are expected to be formulated and promulgated to give a clearer picture for business operators to follow.

The above article reflects the competition law legal framework as of 20 August 2008.

About the Authors

Alexandre Vincent, a Senior Associate at CMS Shanghai office, is a member of the firm’s Commercial Group. Elaine Zhu, an Associate, is a member of the firm’s Commercial Group in the Shanghai office.

Endnotes

1. An acquirer is regarded as having control of another business operator if it:

(1) owns more than 50% or majority voting shares or assets of another business operator;

(2) is in actual control of a majority of the voting rights of another business operator; or

(3) is decisive to the appointment of no less than half of the board members of another business operator.

2. If an acquirer is able to decide the production and operation of another business operator, it is deemed as having a decisive influence over another business operator.

3. Article 3 of the Threshold Rule.

4. The market share in China of the parties to a concentration exceeds 25% as a result of the concentration.

Article 4 of the Threshold Rule.