China's M&A Landscape: Regulatory Framework and Growth Opportunities

China's economic reforms and accession to the World Trade Organization have created a rapidly growing merger and acquisition (M&A) market, driven by foreign investment and increased market access. As the Chinese economy continues to expand, M&A transactions that offer immediate market access are becoming an attractive alternative to greenfield investments. However, the influence of consolidation by M&As on competitive markets has become a critical consideration for Chinese regulatory bodies, and existing regulations governing anti-monopoly review are being reviewed and enhanced.

Key Takeaways:

• The Tentative Provisions on the Acquisition of Domestic Enterprises by Foreign Investors, issued by the Ministry of Commerce in 2003, govern anti-monopoly review for M&A transactions.
• The provisions require a review of the transaction if the M&A transaction involves a foreign party with a turnover in China exceeding 1.5 billion yuan (US$187 million) or a China market share of 20 percent before the M&A transaction.
• MOFCOM and SAIC review M&A transactions when elements meet certain thresholds, including market share, turnover, and number of acquisitions in related industries.
• The anti-monopoly law, which will be discussed by the Standing Committee of National People's Congress, is expected to bring improvements to the existing regulations.
• Upon request or at their discretion, MOFCOM and SAIC may review an M&A transaction involving a foreign investor, considering factors such as market share, competition, and national security.
• The acquiring party must file a report with MOFCOM and SAIC within 90 days of receiving the acquiring party's report and supporting documents.
• The Anti-monopoly Authority has 30 working days to decide whether to take further review action, and the parties to the M&A transaction may not implement the transaction during this period.
• The draft includes enforcement measures that were absent in the provisions, including a 1 million yuan penalty for refusal to cooperate, and the authority may also impose fines of up to 10 percent of the parties' turnover in the relevant market for the preceding year.

Statistics:

• The total value of an M&A transaction is subject to review if the total value is more than 400 million yuan (US$50 million) and one party's China assets or turnover in the preceding year was above 1.5 billion yuan (US$187 million).
• Each party's China assets or turnover in the preceding year must be above 5 billion yuan (US$622 million) if the total value of the M&A transaction is unknown or less than the amount listed above.
• MOFCOM and SAIC will hold a hearing within 90 days of receiving the acquiring party's report and supporting documents, and will decide whether to allow the M&A transaction based on competition, consumers' interest, and other considerations.
• The Anti-monopoly Authority has 30 working days to decide whether to take further review action, and may extend the review process for up to 30 more working days.

Sources:

• Ministry of Commerce in 2003 - Tentative Provisions on the Acquisition of Domestic Enterprises by Foreign Investors
• Asia Pulse - China's economic reforms and accession to the World Trade Organization have created a rapidly growing M&A market
• (CNA) 10-04 1410 - Regulatory bodies, including MOFCOM and SAIC, review M&A transactions when elements meet certain thresholds.