Article 22 of the Anti-Monopoly Law (AML) provides two circumstances of notification exception (i.e., notification exemption) of concentration of undertakings. “In any of the following circumstances, undertakings may dispense with notification to the authority for enforcement of the AML under the State Council: (1) one of the undertakings involved in the concentration owns 50% or more of the voting shares or assets of each of the other undertakings; and (2) one and the same undertaking not involved in the concentration owns 50% or more of the voting shares or assets of each of the undertakings involved in the concentration.”
01. Legislative defects
From the legislative intent and legal provisions, the reason why undertakings may dispense with notification in the above-mentioned two circumstances is that before concentration there is a control relationship between the undertakings involved in the concentration, or the undertakings involved in the concentration have been under common control of a certain undertaking not involved in the concentration. Concentration in these two circumstances does not increase new control or influence, and will not create or strengthen market dominance in relevant markets, form a monopoly, and damage market competition.
However, the notification exception based on “existing control” in the AML only covers control with a proportion of more than 50%, and does not consider other circumstances. Therefore, in the process of merger and reorganisation of listed companies, when the shareholding ratio of major shareholders is less than 50%, listed companies often feel confused in judging whether it is necessary to notify the concentration of undertakings. On the condition that the turnover standard is met, if based on equity or assets, notification shall be made, while if based on the actually existing control, notification may be dispensed with.
Listed companies should carefully deal with the notification of undertaking concentration in mergers and reorganisations. If their judgment is inaccurate, their failure to make notification that should have been made will directly lead to invalid results of concentration of undertakings, causing heavy losses to all parties involved in the concentration, and may result in missing a good opportunity for concentration. The unnecessary notification made will increase the workload, and may prolong the period of merger and reorganisation, and cause unnecessary expenses.
02. Pre-notification negotiation
Article 9 of the Guiding Opinions for the Notification of Concentration of Undertakings has established a negotiation mechanism for notification of concentration of undertakings in China. Pre-notification negotiation is an important link in the pre-notification examination procedure of the concentration of undertakings, which is of great benefit to the rational allocation of law enforcement resources, the improvement of law enforcement efficiency, and the enhancement of undertakings’ involvement.
Judging whether an undertaking has control over other undertakings, or whether an undertaking is controlled by another undertaking not involved in concentration, depends on a large number of legal and factual elements, which makes a decision difficult. From this perspective, it is reasonable for the notification exception in the AML to provide only on the control of more than 50%, because it is more in line with the original intent of anti-monopoly legislation to entrust, through the notification procedure, the professional authority for enforcement of the AML to examine whether the notification exception is applicable, than to leave it to the judgment of undertakings.
However, the application standard of notification exception is too strict, which causes a large number of unnecessary cases to enter the notification procedure, wasting law enforcement resources and reducing the efficiency of concentration. The pre-notification negotiation mechanism eases the rigidity of notification standards, adding flexibility and effectively resolving contradictions in enforcement of the AML.
Therefore, making full and effective use of the pre-notification negotiation mechanism is a rational choice for the notification of concentration of undertakings in the merger and reorganization of listed companies. In accordance with Chinese laws and regulations, the control over a listed company includes not only the actual control over more than 30% of the voting shares of the listed company, but also the right to determine the appointment of more than half of the board of directors of the company, as well as other situations that have a significant impact on the resolution of the shareholders’ meeting of the company.
When a listed company negotiates with an authority for enforcement of the AML, it should fully demonstrate that it has substantial control over the reorganisation target before concentration, or prove that the listed company and the reorganisation target are under control of any undertaking not involved in concentration, so as to avoid notification.
03. Some suggestions
According to Ministry of Commerce data, more than 98% of the cases of notification of concentration of undertakings have been dispensed with. The notification standard set by China’s anti-monopoly legal system is too low, leading to the fact that most undertakings’ concentration actions need to be notified in accordance with the notification procedure. This wastes law enforcement resources, increases the workload of enterprises, and reduces the efficiency of market concentration.
In order to make effective use of the negotiation mechanism and solve the problems of excessive principles and low application rate of notification exception, it is necessary to supplement and improve the notification exception. Specifically, the legislature may consider adding general provisions of notification exception, in addition to the two circumstances provided in article 22 of the AML.
Such circumstances as “the test of 50% of the voting shares or assets is not reached, but one undertaking involved in the concentration has control over each of the other undertakings, or each undertaking involved in the concentration is controlled by one and the same undertaking not involved in the concentration, and both cases are approved by the authority for enforcement of the AML” can be used as the general circumstance of notification exception.
The general provisions of the notification exception not only clarify the standard of “control” applicable to the notification exception, but also endow the authority for enforcement of the AML with discretionary power within a certain range, which makes it convenient for the authority to properly handle various complicated situations of the notification exception by using the negotiation mechanism, and can improve the efficiency of the concentration of undertakings while standardising the concentration of undertakings.
(Original source: CBLJ Issue 10, 2020.)