NEW COMPLICATIONS FOR CHINA MERGERS
Chinese firms have always faced many regulatory hurdles when undertaking merger and acquisition deals, but these barriers became even more challenging earlier this year. On June 6, China's Ministry of Commerce (MOFCOM) posted online a revised template for filing merger clearance applications. On July 7, the use of the new form became compulsory. As a result, companies applying for MOFCOM merger clearance now face ever more onerous information and document production obligations.
In China, an application for merger clearance needs to be made by filing a completed template form with MOFCOM together with the supporting documentation. Hence, understanding the filing form is key for merging parties to appraise the amount of information and documentation necessary to submit when seeking merger clearance.
Adding new layers of obligations…
In many respects, the revised filing form leads to an increase in the information and document production obligations of parties with M&A transactions that must be reported in China.
For example, the new form contains a section that requires the submission of research results, analyses and reports prepared by the board of directors and other senior management, but also those which have been prepared for them. Here, MOFCOM is targeting the disclosure of minutes of board meetings, internal company strategy papers and the like. A presentation made by an investment banker or external consultant to the company's board may fall under this section.
Clearly, this is a far-reaching demand because companies will face the prospect of these preparatory documents being used against them during the MOFCOM clearance process. In addition, as some of these documents involve confidential and sensitive information on the inner workings of a company, their disclosure may trigger legitimate concerns with respect to confidentiality.
The form also adds a section requesting the merging parties to describe their products and services and to organize them in line with the categories of China's National Bureau of Statistics. The main purpose of this new section is presumably to allow MOFCOM to capture any conglomerate relationship between the merging parties' products (say, one makes cola-flavored soft drinks and the other fruit juices) from the beginning of the procedure. But, in practice, this requirement will be an additional burden upon the parties, forcing them to plough through the entirety of their product portfolios and do the pre-sorting in the specific format required by MOFCOM.
…and some improvements
The new form should not, however, be seen in a purely negative light. Indeed, some of the explanations accompanying the revised form provide welcome clarifications on certain information and documentary requirements, and obligations of the merging parties. Providing a definition of the previously vague concept of a "business operator participating in the concentration" is one example of a helpful clarification. The fact that only the parties with control over the target fall under this definition (as opposed to non-controlling shareholders) may actually allow companies to exclude certain types of transactions from the ambit of MOFCOM's review.
Another important point that will likely alleviate the burden upon applicants is the clarification of the concept of "affiliates." Previously, MOFCOM's position appeared to be that if the merging parties held stakes in other companies, those companies would be categorized as "affiliates" and would be subject to extensive obligations to produce documents (including – for Chinese entities – copies of the business license, investment approval certificate, etc). The ministry has now clarified that this only applies to companies in which the merging parties hold controlling stakes.
A more balanced approach going forward?
In short, the revised form provides some welcome clarifications and explanations on the scope of the information and documentary requirements for the MOFCOM merger control procedure. However, overall, the new form is likely to increase the administrative burden upon merging parties, as it forces them to collect, analyze and submit vast amounts of detailed and – in many cases – confidential information and documents.
The Chinese merger control procedure under the Anti-Monopoly Law has now been in effect for more than four years and, by now, it has become clear that MOFCOM's documentary requirements are among the most onerous in the world. For many merging parties with experience in China, the impression seems to be one of "overkill," in particular for transactions with little or no impact on competition in the marketplace.
Against this background, the release of the new filing form may herald the issuance of another regulation – which MOFCOM was drafting as China Offshore Quarterly went to print – that would provide the basis for a "short form" procedure similar to the one used in the European Union and other jurisdictions. If so, the concerns about expansion of the obligations in the case of a standard filing – through the revised filing form – might be offset by the introduction of a comparatively simple filing form to be used in straightforward transactions.
Only time will tell whether this key measure to match disclosure obligations to market impact is wishful thinking or will actually materialize. In the meantime, the process will likely only get worse before getting better.