Put originally published on September 8, 2011

Keywords: China, Evaluates, M&A, Anti-Competitive, interim provisions.

China's Ministry of Commerce ("Mofcom") has published new guidance regarding how it evaluates M&A transactions notified to it under the Anti-Monopoly Law ("AML") merger review system. The Interim Provisions on Evaluation of Impact of Concentrations of Business Operators on Competition ("Interim Provisions") took effect on 5 September 2011.

Background context

Under Chapter IV of the AML, M&A transactions considered to result in a change in control over a business operator (which may include certain mergers, acquisitions and joint ventures) must be notified to Mofcom for pre-approval if relevant parties involved in the transaction meet particular global and/or China turnover thresholds. The requirement applies regardless of the location of the transaction, and mandatory notification can arise even where all parties involved are located outside of China.

According to the AML, Mofcom has the power to block, or impose conditions, on a notified transaction if it: (a) considers the deal has or is likely to have the effect of eliminating or restricting competition in a relevant market in China, and (b) is not satisfied that relevant beneficial elements of the deal outweigh identified detriment to competition. To date, Mofcom has used this power to block one deal and impose conditions on seven others.

The AML includes some brief provisions relating to the factors Mofcom will take into account when evaluating the impact of a notified transaction, and its decision statements in relation to the eight transactions in respect of which adverse decisions have been made also shed some light on Mofcom's assessment process. However, until now, Mofcom has not published any comprehensive guidance in this area (other than a draft version of the Interim Provisions for consultation purposes). Accordingly, business operators weighing up their prospects of gaining Mofcom approval for planned transactions have to some extent just had to assume the Chinese regulator would adopt broadly the same analytical and evaluation techniques as are utilised by competition regulators in mature competition law jurisdictions such as the E.U. and U.S., whilst also being mindful that Mofcom has developed its own unique approach to certain issues.

In this context, Mofcom's adoption of the Interim Provisions will be welcomed by many in the international business and legal community, as it confirms some degree of alignment between Mofcom and international best practice in this field. However, as explained below, the true extent of that alignment remains unclear given the high-level nature and limited content of the Interim Provisions, and the paucity of decision statements published to date.

Key content of the Interim Provisions

The Interim Provisions are quite brief (approximately 1300 words when translated into English), and several parts simply replicate information already set out in Chapter IV of the AML. For example, the Interim Provisions essentially restate a list from Article 27 of the AML of factors Mofcom will take into account when conducting merger review, which include (a) the market share of the business operators involved in the relevant market and the controlling power those business operators have in the market; (b) the degree of market concentration in the relevant market; (c) the influence of the notified transaction on market access and technological progress; (d) the influence of the relevant transaction on consumers and other business operators; and (e) the influence of the relevant transaction on "national economic development". None of this is very surprising or enlightening, although references to the last-mentioned factor have been read by some commentators as indicating an explicit role for industrial policy considerations in China's merger review process.

More usefully, the Interim Provisions also include the following 'new' (or at least newly documented) information about Mofcom's approach to merger evaluation process:

a. The Interim Provisions reference three key issues a. Mofcom will have regard to when determining if a notified transaction may adversely effect competition, each of which broadly aligns with one or more internationally-recognised—though not all universally supported—"theories of harm" (as they are often called in competition law parlance), being:

  1. The theory of "unilateral effects", which in the i. Interim Provisions is effectively explained as where a notified transaction "enhances the ability, motive and possibility" of a specific business operator being able to eliminate or restrict competition on its own.
  2. The theory of "coordinated effects", which in ii. the Interim Provisions is effectively explained as relevant to situations where a transaction impacts a market controlled by a small number of business operators, in which case Mofcom should analyse whether the transaction will "enhance the ability, motive and possibility" of those business operators to act jointly to eliminate or restrict competition.
  3. The theories of "vertical or conglomerate iii. effects", which in the Interim Provisions is effectively explained as relevant to situations where parties to a notified transaction are neither existing nor potential competitors, but the combination of their product portfolios as a result of the transaction may lead to the ability of a business operator to eliminate or restrict competition in an upstream, downstream or related market to one or more of the relevant products in the combined portfolio. This may be seen as applicable to instances where the transaction parties are vertically related (such as an input supplier and a downstream manufacturer that relies on that input), or alternatively have product portfolios that are not vertically related but which nonetheless may have some linkage in terms of how they are distributed to the market or other aspects such as commonality of buyers served.

It is noted that Mofcom appears to have placed some focus on each of these theories of harm in some of its previous published decisions. For example:

  • In its April 2009 decision to impose conditions " on the merger of Mitsubishi Rayon and Lucite, Mofcom expressed concerns about both possible unilateral and vertical effects of the merger. Specifically, Mofcom noted that the merged entity's strong market power in relation to the market for supply of methyl methacrylate might allow it to engage in conduct that would eliminate or restrict competition in that market (applying "unilateral effects" theory)—although the decision statement did not elaborate on what specific conduct concerns Mofcom identified. Mofcom also expressed concern that the merged party could leverage its market power on to relevant downstream markets in which it also participated—such as by blocking supply of essential inputs to competitors in those markets and thereby foreclosing competition in them (applying "vertical effects" theory).
  • In its June 2011 decision to impose conditions " on the merger of Uralkali and Silvinit, Mofcom expressed concern that the transaction would reduce the level of competition in an already highly concentrated potassium chloride supply market, and thereby potentially increase the risk of co-ordination between the major global suppliers in that market (applying "coordinated effects" theory).
  • In its March 2009 decision to prohibit " Coca-Cola's proposed acquisition of China's Huiyuan Juice Group, Mofcom indicated that it had concerns about Coca-Cola being able to use its market power in relation to the supply of carbonate soft drinks in China to pressure the distributors and retailers who had some reliance on those products to prioritise purchasing, marketing and sales of the Huiyuan juice brands it would be acquiring over competing brands in the relevant juice market (applying "conglomerate effects" theory).

b. The Interim provisions reference several analytical tools that are commonly used by competition law regulators around the world to assess pre and post-transaction market concentration levels, being the so-called 'HHI' (Herfindal-Hirschman Index) and 'CRN' (being a formula for the sum of the market share of each of the top 'N' business operators in a relevant market). Notably, however, while the Interim Provisions references these tools as ways to measure market concentration, and each has been referenced in several of Mofcom's published decisions to date (albeit briefly) as having played a part in those decisions, there is to date no guidance from Mofcom on what levels of HHI or CRN it considers to indicate strong market concentration. This can be contrasted with the situation in many other jurisdictions, where competition regulators have specified particular levels of HHI and/or CRN as indicating the presence or absence of conditions that may attract competition-related scrutiny. For example, in Hong Kong, the Office of the Telecommunications Authority ("TA") has published guidance relating to the merger review regime applicable to certain M&A transactions affecting licensees in its telecommunications sector. That guidance specifies that any market with a post-merger HHI of less than 1,000 will be regarded as unconcentrated, and if the post-merger combined market share in the relevant market of the four (or fewer) largest firms (CR4) is less than 75%, and the merged firm has a market share of less than 40%, the TA will consider it unlikely that there will be a need to carry out a detailed investigation or to intervene in relation to that transaction.

c. The Interim Provisions outline types of beneficial elements that, if proven to arise from a notified transaction, and to outweigh any identified detriment to competition that may also arise or be likely to arise, may result in Mofcom clearing the transaction to proceed. This includes where the transaction:

i. will allow the concerned business operators to i. better integrate their resources and powers in relation to technical research and development;

ii. will facilitate technical progress to the benefit ii. of consumers;

iii.will increase competitive pressure on other iii. business operators in the relevant market(s) to improve the quality of their products, reduce their prices, or better protect the benefits of consumers; and

iv. will assist to facilitate expansion of iv. business scale and enhancement of market competitiveness, thereby increasing economic efficiency and promoting the development of China's national economy.

It is clear from other Mofcom guidance that the parties to the notified transaction bear the onus of demonstrating that these beneficial elements will arise from the transaction and outweigh any relevant detriment to competition.

As Mofcom does not publish decision statements in relation to transactions that it clears without conditions under the AML merger regime, issues such as what types of evidence of such beneficial elements Mofcom gives strong weight to, and in what time period Mofcom would expect such elements to become evident in order to merit strong consideration, remain unclear.

d. The Interim Provisions make reference to Mofcom being able to consider whether the business operators involved in the notified transaction are facing bankruptcy as part of its review process. This appears to be the first official indication from Mofcom that it may take a sympathetic approach to what is commonly called the 'failing firm' defence in notified transactions.

Additionally, the Interim Provisions note that such considerations as the effect of a notified transaction on "public interests" and "the sound development of relevant industries" will be taken into account. Hardwiring these types of considerations into the review process obviously provides Mofcom with very broad discretion and adds weight to the view that while Mofcom's review process may usually be anchored in an assessment of competitive effects, a much broader range of factors can influence its final decision making.


As mentioned, publication of the Interim Provisions will be welcomed by many in the international business and legal community, as the document assists to shed some light on Mofcom's approach to merger review. As the above summary indicates, the amount of instructive content in the Interim Provisions is relatively low, but as they are 'interim' in nature, they should be supplemented over time to reflect Mofcom's developing approaches. It is hoped that Mofcom will aim to develop guidance in this area as detailed and useful as the types of guidance available in such mature competition law jurisdictions as the E.U. and the U.S., where detailed guidance has been published by relevant regulators with key roles in merger review.

In the interim, business operators required to obtain Mofcom approval for specific proposed transactions should analyse whether any of the potentially 'adverse' review factors or "theories of harm" referenced in the Interim Provisions may be particularly relevant to those transactions. In such cases, the business operators should ensure they are obtaining expert assistance from a firm knowledgeable both on China's merger regime and the best approaches that have been adopted internationally to addressing and rebutting relevant theories of harm raised by competition regulators

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