China Increases the Threshold for Merger Control Filing

It requires that if the turnover in the previous fiscal year of the merging firms reached the following amount, the contemplated transaction shall be filed with the Anti-monopoly Bureau under State Administration for Market Regulation (SAMR) for merger review before closing:

1. The combined global turnover of all merging firms participating in the concentration exceeds RMB 12 billion (previously 10 billion), and among which at least two firms each had a turnover within China exceeding RMB 800 million (previously 400 million); or
2. The combined turnover within China of all merging firms participating in the concentration exceeds RMB 4 billion (previously 2 billion), and among which at least two firms each had a turnover within China exceeding RMB 800 million (previously 400 million).

It has been 16 years since the previous turnover threshold was implemented in 2008. The revision has long been anticipated and is thus made subsequent to the promulgation of the new China anti-monopoly law (AML) to adjust the law enforcement for ever-changing market. It intends to strike a balance between regulating those transactions that might substantially lessen the competition in the current economic climate and freeing the corporations from onerous compliance burden.

Meanwhile, it is also worth to notice that the State Council under the new threshold policy has reiterated the power of SAMR granted under new AML to order a filing for the below-threshold transaction with anti-competitive impact. For instance, the turnover of some merging firms particularly in the tech sector may fall below the threshold due to strategic losses in exchange of dominant market share, then the SAMR will need expressly provided administrative power to call in anti-competitive deals such as so-called “killer acquisitions”. Under the rules back then, the authority in such case would only be able to investigate the anti-competitive effect and prohibit any abuse of dominant position instead of preventing the below-threshold merger before it creates the dominant position. With the reiterated discretion to call in a filing granted by AML, SAMR can be in the driving seat to capture and block those unqualifying but impactful deals in time.

While the increased thresholds may place less merger deals above pre-transaction scrutiny redline, the post-transaction punishment for not filing a qualifying deal in due course has also been made significantly heavier under the new anti-monopoly law, increased from the previous RMB 0.5 million to the current RMB 5 million. Particularly for the transactions with anti-competitive effect, the penalty triggered by the violation will be 1-10% of the turnover of previous fiscal year.

Given the discretion in assessing the anti-competitive effect, we suggest companies with 15% or above market share to constantly conduct an economic analysis on its sales and expansion strategies, as the 15% market share are presumed to have a competitive advantage in several implementation measures including the safe-harbour exemption yet to be finalized. Such consciousness regarding the dominant position in the relevant market can avoid triggering any anti-monopoly obligation or penalty.