By Jinrong Liu｜Sophia Hu
Currently, China’s legal system of antitrust filing has been preliminarily built up and being a progress to be more equipped. According to the statistics recently released by the Ministry of Commerce of the People’s Republic of China (the “MOFCOM”), since the implementation of Anti-Monopoly Law of the People’s Republic of China (the “Anti-Monopoly Law”) on August 1, 2008, the MOFCOM has received, in total, 698 applications for antitrust filings by the end of March 2013, among which 627 have been accepted for antitrust investigations (the “Accepted Cases”) and among the Accepted Cases, 579 cases on which the antitrust investigations have been completed (the “Closed Cases”). Further, among the Closed Cases, 562 cases were approved unconditionally, accounting for 97.1% of the total Closed Cases, 16 cases was approved conditionally, and only 1 case was not approved (to implement the concentration of undertakings).
In the mean time, however, either from the law perspective or from the practice perspective, it is still not clear as to certain types of transactions on whether they are required to do the antitrust filings. And the establishment of joint venture (the “JV”) is just one of such types.
This article attempted to analyze and discuss certain legal issues regarding the antitrust filing of establishment of JV based on the relevant PRC laws and regulations, our own project experiences and the interpretations made by the Anti-monopoly Bureau of MOFCOM (the “Anti-monopoly Bureau”).
I. Common Misunderstandings
In practice, to determine whether an antitrust filing with the MOFCOM will be required for a proposed transaction, we have to do the following two tests: (i) determine whether the proposed transaction constitutes a “concentration” under the Anti-monopoly Law (the “Concentration Test”) and (ii) assess whether the turnover threshold for antitrust filing is triggered (the “Turnover Test”).
According to our project experiences, the common misunderstandings on the antitrust filing of establishment of JV are as follows:
Misunderstanding 1: There is no need to do the antitrust filing because the establishment of JV does not constitute a “concentration” under the Anti-monopoly Law.
Misunderstanding 2: There is no need to do the antitrust filing because no relevant market can be defined on the ground that there is no overlap of relevant markets between the relevant parties (e.g., a new JV established by a real estate company and a private equity investment company).
Misunderstanding 3: There is no need to do the antitrust filing because the surviving period of the JV is so short that it won’t have any influence on the relevant market.
Misunderstanding 4: There is no need to do the antitrust filing because the turnover threshold will not be triggered on the ground that the turnover of the JV is nil at the time of its establishment.
II. Concentration Test
A. Relevant Rules
According to Article 20 of the Anti-monopoly Law, each of the following circumstances will constitute the concentration of undertakings:
(a) merger or consolidation of undertakings;
(b) the undertakings obtain the control over other undertakings by acquiring their shares or assets; and
(c) the undertakings obtain the control over other undertakings or is capable of exercising decisive influence on other undertakings by contracts or other means.
As can be seen from the above Article 20, it is not explicitly indicated whether the establishment of JV constitutes a “concentration” under the Anti-monopoly Law.
B. Our understanding and the MOFCOM’s Point of View
Though, the Anti-monopoly Law dose not specifically provide that the establishment of JV constitutes a “concentration”, we understand that if the JV is an enterprise jointly established and controlled by two or more entities[Endnote 1], then the establishment of which shall fall into the scenario of “the undertaking obtains the control over other undertakings by acquiring their shares or assets” in Article 20 of the Anti-monopoly Law and thus constitute a “concentration” under the Anti-monopoly Law. Needs to be addressed here that, according to the MOFCOM’s interpretations, the JV for which the antitrust filing may be required only refers to such JOINTLY CONTROLLED by two or more entities.
Obviously, the joint control is one of the key points to determine whether the establishment of JV will constitute the concentration of undertakings (the “Joint Control Test”).
C. Joint Control Test
It appears that the joint control is easily to be identified, but as there is no definition under the Anti-monopoly Law, in practice, it will still need to do multi-angle analysis to determine the joint control.
In light of our multiple project experiences, currently, the legal basis for determining the “controlling position” is No.33 of the Accounting Standards for Enterprises—Consolidated Financial Statements.
In addition, Mr. Zhicheng CUI, an official of the MOFCOM, interprets the “controlling position” in respect of concentration of undertakings as follows[Endnote 2]:
“Controlling position” refers to the power that can determine the strategic business activities of an undertaking, or to exercise strong and decisive influence on an undertaking’s major decisions. The scope of an actual controller is wider than that of a controlling shareholder, and the actual controller and the controlling shareholder can be different persons. “The power to exercise strong and decisive influence” includes the power to veto the strategic business activities of an undertaking. “Strategic business activities” include the appointment of investment or management officers, financial budget, business plans, major investments and other special market rights.
Generally, the following factors will be taken into consideration when defining a “controlling position”:
(a) The ownership structure of the controlled undertakings;
(b) The composition of shareholders’ meetings and board of directors, matters subject to votes of shareholders’ meetings and board of directors, and voting mechanism;
(c) The nomination and appointment of officers; and whether the shareholders constitute the “persons acting in concert”, etc. ;
(d) Veto right: Generally speaking, the minority shareholders will not be deemed to have control over a JV if such minority shareholders only have veto rights with respect to certain “protective matters”, such as any amendment of the JV’s articles of association, any increase or decrease of the JV’s capital, etc. However, if (i) the minority shareholders have veto rights to certain matters relating to the JV’s business policies and strategic decisions, and (ii) such veto rights go beyond that commonly entitled to the minority shareholders for them to protect their financial interests in the JVs, further (iii) such veto rights relate to each aspect of the JV’s manufacturing and operation and the minority shareholders can exercise decisive influences on the JV’s manufacturing, operation and management, then such minority shareholders shall be deemed to have control over the JV. In general, a veto right with respect to the following matters will result in a joint control: appointment of directors, adoption of business plans, making important investments, approval of budget, exercise of special market rights, etc.
In conclusion, it needs to do a comprehensive evaluation to determine whether the various rights and contacts or other means, by which the minority shareholders could exercise strong and decisive influence on a JV’s major decisions, will enable the minority shareholders to be deemed to have a joint control over the JV.
To sum up, the Joint Control Test is a critical point because the antitrust filing will only be trigged if the JV is jointly controlled. If the JV is solely controlled by one business operator, this transaction does not need to do the antitrust filing, as in this scenario, the undertakings involved in this transaction are not so closely coordinated with each other that the influence of which on the relevant market will be extremely limited.
III. Turnover Test
According to the footnote of the Notification Form on Anti-monopoly Review of Undertakings Concentration (as revised), promulgated and implemented by the Anti-monopoly Bureau on June 6, 2012, when a JV is proposed to be established, the undertakings which will have joint control over the JV upon its establishment (the “Joint Controller”) shall be deemed to be the participators in this concentration while the JV itself is not a participator. Thus we only need to see if the turnover of Joint Controllers exceeds the notification threshold.
Particularly, the turnover of the participators shall be calculated in accordance with Article 5 of the Measures for Notification of Undertakings Concentration, which means the entire turnover of the whole group of undertakings shall be included. In practice, if some subsidiaries, sub-subsidiaries, grandson companies and SPV of large groups and multinational corporations are concentration participators, the Turnover Test shall be based on the consolidated turnover of the participators’ whole mother group, which means some minor behaviors of large undertakings may trigger antitrust filing.
Therefore, if the turnover of Joint Controllers exceeds the notification threshold, the MOFCOM shall be notified of the establishment of JV. So far, there have been 3 cases in which new establishment of JVs were approved with additional restrictive conditions by the MOFCOM.
IV. Legal liabilities of Failure to Notify the Establishment of JV
Based on the Anti-monopoly Law and relevant regulations, the legal liabilities of failure to notify the concentration of undertakings (including the establishment of JV) are as follows:
First, the undertakings shall not implement concentration before the antitrust filing has been accomplished in accordance with Article 25 of the Anti-monopoly Law. Otherwise, even if the concentration has been completed, which shall be deemed to have no legal effect. According to Article 48 of the Anti-monopoly Law, where the undertakings implement the concentration in violation of the Anti-monopoly Law, the competent authority shall instruct them to discontinue such concentration, and within a specified time period to dispose of their shares or assets, transfer the business and take other necessary measures to return to the state prior to the concentration, and it may impose on them a fine of not more than RMB500,000. Although there are no heavy fines here, the authority still has the power to force the participating undertakings to return to the state prior to the concentration and thus the parties’ interest of the transaction may face great uncertainties once the failure of antitrust filing.
Second, on December 30, 2011, the Interim Measures for the Investigation and Handling of the Failure to Notify Concentration of Undertakings in Accordance with the Law was promulgated and it stressed and reaffirmed the punishments for not notifying concentration of undertakings in compliance with the law. The specific measures are as follows: (i) the MOFCOM shall initiate a case investigation if it suspects that the undertakings fail to notify concentration in compliance with the law; and (ii) where the investigation finds that the undertakings under investigation have executed concentration without making a notification in accordance with the law, the MOFCOM may impose a fine of no more than RMB 500,000 on the undertakings under investigation, and may order the same to take the following measures to restore to the pre-concentration status: stop the execution of concentration; dispose of shares or assets by a specified deadline; transfer certain business operations by a specified deadline; and/or take other necessary measures.
Third, according to our experiences in several related projects, the MOFCOM paid special attention to (i) the notifying parties’ recent-year performance in relevant market and (ii) the legality of notifying parties’ presence in China. When the undertakings notify the MOFCOM of a proposed concentration other than an establishment of JV, the MOFCOM may ask the notifying parties to provide certain information regarding such JVs previously established in China by the notifying parties, including but not limited to the establishment time of the JVs, whether or not the notification has been made for the JVs in compliance with the law, etc. Thus, if the notifying parties did not make the antitrust filing for any specific deal in compliance with the relevant laws, there is a likelihood that the notifying parties may suffer punishments once the MOFCOM or its local counterparts dig out that in the future in the process of examining and approving the project of foreign investment and the project of undertakings concentration in connection with such notifying parties, and which case will have an adverse effect for the notifying parties’ on-going project, which needs to be approved by the MOFCOM or its local counterparts.
V. Conclusion
In conclusion, it is advisable for the concerned parties to be cautious in dealing with the antitrust filing for the establishment of JV.
In addition, from the above analysis, it can be concluded that the notification of establishment of JV shall be made only if it is jointly controlled and the turnover of Joint Controllers exceeds notification threshold. If the JV is solely controlled by one party, there will be no change of control as it only amounts to establishing a subsidiary with several other shareholders.
Mr. Jinrong Liu is the managing partner of Global Law Office and a member of Beijing Municipal Committee of Chinese People’s Political Consultative Conference. Mr. Liu specializes in capital markets, M&A, PE/VC and taxation. (E-mail: liu@glo.com.cn)
Endnote 1: As for the definition of JV, please refer to “the definition of full function JV based on merger European Commission Decision of merger control NO.4064/89”.
Endnote 2: Please refer to “Antitrust filing, case-opening and consultation written by Mr. Zhicheng Cui, official of MOFCOM published on EU competition law website.
