Mergers and Acquisitions: China's New Anti- Monopoly Law Edward Lehman Managing Director – Lehman, Lee & Xu [email protected] Gerson Lehrman Group.

Mergers and Mergers and Acquisitions: Acquisitions:

China's New Anti-China's New Anti-Monopoly LawMonopoly Law

Edward LehmanEdward LehmanManaging Director – Lehman, Lee Managing Director – Lehman, Lee

& Xu& Xu

[email protected]@lehmanlaw.com

Gerson Lehrman Group Gerson Lehrman Group Education SeminarEducation Seminar

November 8, 2007November 8, 2007

Introduction to M & A in Introduction to M & A in ChinaChina

China one of the hottest markets for FDIChina one of the hottest markets for FDI Previous preferred entry through green Previous preferred entry through green

field investment, M & A increasingly field investment, M & A increasingly popularpopular

In 2006 (11 months):In 2006 (11 months):o Domestic M&A: US$56 billionDomestic M&A: US$56 billiono Foreign M&A: US$30 billionForeign M&A: US$30 billion

In first half of 2007:In first half of 2007:o M&A increase of 20%M&A increase of 20%

M & A Models M & A Models (simplified)(simplified)

Foreign Investor 2

SPV/Foreign Investor 1

Domestic Co. Domestic Co.

Offshore

Onshore

China offshore/onshore

Share Purchase/Subscription Agreement

SPV/Foreign Investor

WFOE

Share Purchase/Subscrip

tion Agreement

Share Purchase/Subscription Agreement

Anti-Monopoly Law - Anti-Monopoly Law - GeneralGeneral

Anti-Monopoly Law of the People’s Anti-Monopoly Law of the People’s Republic of China Republic of China o Promulgated: August 30, 2007Promulgated: August 30, 2007o Effective: August 1, 2008Effective: August 1, 2008

13 Years to Draft13 Years to Draft Previous laws which governed (non-Previous laws which governed (non-

comprehensive framework):comprehensive framework):o Unfair Competition Law (1993)Unfair Competition Law (1993)o Price Law (1997)Price Law (1997)o Provisions on the Acquisition of Domestic Provisions on the Acquisition of Domestic

Enterprises by Foreign Investors (2006)Enterprises by Foreign Investors (2006)

Anti-Monopoly Law – Anti-Monopoly Law – Purpose and ScopePurpose and Scope

Purpose: Purpose: o guarding against and curbing monopolistic conduct, guarding against and curbing monopolistic conduct,

protecting fair market competition, enhancing economic protecting fair market competition, enhancing economic efficiency, maintaining consumer interests and public efficiency, maintaining consumer interests and public interests, and promoting the healthy development of a interests, and promoting the healthy development of a socialist market economy. socialist market economy.

Scope: Scope: o Within China. Within China. o AND outside the territory of China AND outside the territory of China

where eliminates or restricts competition on the domestic where eliminates or restricts competition on the domestic market. market.

o Includes use and abuse of intellectual property rights.Includes use and abuse of intellectual property rights. Exception:Exception:

o concerted actions of concerted actions of agricultural producersagricultural producers and and rural rural economic organizationseconomic organizations in the economic activities such as in the economic activities such as production, processing, sales, transportation and storage of production, processing, sales, transportation and storage of agricultural products. agricultural products.

Anti-Monopoly Law - Anti-Monopoly Law - AdministrationAdministration

State Council to establish: State Council to establish: o Anti-monopoly Committee which is Anti-monopoly Committee which is

responsible for overall development of anti-responsible for overall development of anti-monopoly regulationsmonopoly regulations

o Anti-monopoly Enforcement Agency (AMEA)Anti-monopoly Enforcement Agency (AMEA)• Enforcement/operations authorityEnforcement/operations authority• May delegate authority to provincial, autonomous May delegate authority to provincial, autonomous

region, or municipality under central government region, or municipality under central government levellevel

• Has been suggested that the AMEA will be a Has been suggested that the AMEA will be a combined effort between NDRC (monopoly combined effort between NDRC (monopoly agreements/price fixing), SAIC (abuse of dominant agreements/price fixing), SAIC (abuse of dominant market position) and MOFCOM (merger review)market position) and MOFCOM (merger review)

Anti-Monopoly Law - Anti-Monopoly Law - DefinitionsDefinitions

Monopolistic conduct includes:Monopolistic conduct includes:1.1. Monopoly agreementsMonopoly agreements reached reached

between Business Operators;between Business Operators;

2.2. Abuse of dominant market statusAbuse of dominant market status by by Business Operators; andBusiness Operators; and

3.3. Concentration of Business OperatorsConcentration of Business Operators that may have the effect of eliminating that may have the effect of eliminating or restricting competition. or restricting competition.

Anti-Monopoly Law – Anti-Monopoly Law – Definitions (cont’d)Definitions (cont’d)

““Business Operator”Business Operator”o Natural person Natural person o Legal person, or Legal person, or o Any other organization Any other organization

that engages in the production or business of that engages in the production or business of commodities or provides services.commodities or provides services.

““Relevant market”Relevant market”o The commodity scope or territorial scope The commodity scope or territorial scope

within which the business operators compete within which the business operators compete against each other during a certain period of against each other during a certain period of time for specific commodities or services. time for specific commodities or services.

Anti-Monopoly Law – Anti-Monopoly Law – Monopoly AgreementMonopoly Agreement

Definition Definition o The term “monopoly agreements” as mentioned The term “monopoly agreements” as mentioned

in this Law refers to agreements, decisions or in this Law refers to agreements, decisions or other concerted behaviours that eliminate or other concerted behaviours that eliminate or restrict competition. restrict competition.

For example:For example:o Fixing or changing the price of commodities;Fixing or changing the price of commodities;o Restricting the production quantity or sales Restricting the production quantity or sales

volume of commodities;volume of commodities;o Dividing the sales market or the raw material Dividing the sales market or the raw material

procurement market;procurement market;o Restricting the purchase of new technology or Restricting the purchase of new technology or

new facilities or the development of new new facilities or the development of new technology or new products;technology or new products;

Anti-Monopoly Law – Abuse Anti-Monopoly Law – Abuse of Dominant Positionof Dominant Position

DefinitionDefinitiono The term “dominant market status” as mentioned in this Law The term “dominant market status” as mentioned in this Law

refers to a market status held by business operators that can refers to a market status held by business operators that can control the price or quantity of commodities or other trading control the price or quantity of commodities or other trading conditions in the relevant market or can block or affect the conditions in the relevant market or can block or affect the entry of other business operators into the relevant market. entry of other business operators into the relevant market.

For exampleFor exampleo Selling products at unfairly high prices or buying products at Selling products at unfairly high prices or buying products at

unfairly low pricesunfairly low priceso Selling products at prices below cost without any justifiable Selling products at prices below cost without any justifiable

causecauseo Refusing to trade with a trading party without any justifiable Refusing to trade with a trading party without any justifiable

causecauseo Restricting their trading party so that it may conduct deals Restricting their trading party so that it may conduct deals

exclusively with themselves or with the designated business exclusively with themselves or with the designated business operators without any justifiable causeoperators without any justifiable cause

Anti-Monopoly Law – Anti-Monopoly Law – ConcentrationConcentration

““Concentration of Business Operators” Concentration of Business Operators” refers to:refers to:

1.1. Merger of Business Operators;Merger of Business Operators;

2.2. Acquiring control over other Business Acquiring control over other Business Operators by acquiring equity or assets; orOperators by acquiring equity or assets; or

3.3. Business Operator acquires control over Business Operator acquires control over other Business Operator(s) or is able to other Business Operator(s) or is able to exert a decisive influence on other Business exert a decisive influence on other Business Operator(s) by contractual or any other Operator(s) by contractual or any other means. means.

Concentration - Concentration - Requirements for Requirements for

DeclarationDeclaration Prior declarationPrior declaration

o When threshold met, Business When threshold met, Business Operators must make prior Operators must make prior declaration to AMEAdeclaration to AMEA

o Threshold NOT yet determined Threshold NOT yet determined (to be (to be prescribed by the State Council)prescribed by the State Council)

Suggested to be based on:Suggested to be based on:o Sales turnoverSales turnovero Market shareMarket shareo Total assets Total assets

Concentration - Concentration - Requirements for Requirements for

Declaration (cont’d)Declaration (cont’d) Related Parties ExemptionRelated Parties Exemption

o Business Operators exempt from Business Operators exempt from declaration when:declaration when:

1.1. Among Business Operators involved, one Among Business Operators involved, one Business Operator owns 50% or more of Business Operator owns 50% or more of the voting shares or assets of every other the voting shares or assets of every other Business Operator; orBusiness Operator; or

2.2. A Business Operator not involved in the A Business Operator not involved in the concentration owns 50% or more of the concentration owns 50% or more of the voting shares or assets of every other voting shares or assets of every other Business Operator involvedBusiness Operator involved

Concentration - Declaration Concentration - Declaration DocumentsDocuments

1.1. A declaration paper which contains:A declaration paper which contains:1.1. names of the business operators names of the business operators 2.2. their domiciles, their domiciles, 3.3. business scopes, business scopes, 4.4. date on which concentration is to be implemented, and date on which concentration is to be implemented, and 5.5. other matters prescribed by AMEAother matters prescribed by AMEA

2.2. Explanations on the effects of the concentration Explanations on the effects of the concentration on the relevant market competition situationson the relevant market competition situations

3.3. The concentration agreementThe concentration agreement4.4. The financial and accounting reports for the The financial and accounting reports for the

previous fiscal year of the business operators previous fiscal year of the business operators involved in the concentration, as audited by an involved in the concentration, as audited by an accounting firmaccounting firm

5.5. Other documents and materials as required by Other documents and materials as required by AMEAAMEA

Concentration – Approval Concentration – Approval TimelinesTimelines

Concentration Declaration Documents to ALEA for Preliminary Investigation

Investigation Required

Decision

No Further Investigation

Required

30 days

90 days to 150 days (on extension)

Concentration – Question Concentration – Question and Factors Consideredand Factors Considered

Issue: Whether concentration ‘will or may Issue: Whether concentration ‘will or may eliminate or restrict market competition’eliminate or restrict market competition’

Factors:Factors:1.1. Relevant Business Operators’ Relevant Business Operators’ market sharemarket share in the in the

Relevant Market and their controlling power over that Relevant Market and their controlling power over that marketmarket

2.2. Degree of market concentrationDegree of market concentration in the Relevant Market in the Relevant Market3.3. Impact of the concentration on market accessImpact of the concentration on market access and and

technological progresstechnological progress4.4. ImpactImpact of concentration on of concentration on consumers consumers and and other other

Business OperatorsBusiness Operators5.5. ImpactImpact of concentration on of concentration on national economic national economic

developmentdevelopment6.6. Other factors that may affect market competition and Other factors that may affect market competition and

as determined by the AMEAas determined by the AMEA

Concentration - Concentration - DecisionsDecisions

Allow concentrationAllow concentration Prohibit concentrationProhibit concentration Allow concentration with conditionsAllow concentration with conditions All prohibition decisions will be publicized All prohibition decisions will be publicized

in a timely manner.in a timely manner. Regardless of concentration, if Business Regardless of concentration, if Business

Operators can prove either that: Operators can prove either that: o the favourable impact of concentration on the favourable impact of concentration on

competition obviously exceeds the adverse competition obviously exceeds the adverse impact, or impact, or

o the concentration is in harmony with public the concentration is in harmony with public interests interests

the concentration will be permitted.the concentration will be permitted.

Concentration - AppealConcentration - Appeal

If dissatisfied with the decision, a If dissatisfied with the decision, a Business Operator may: Business Operator may:

1.1. apply for an administrative apply for an administrative reconsiderationreconsideration

2.2. if dissatisfied with the reconsideration, if dissatisfied with the reconsideration, lodge an administrative lawsuit lodge an administrative lawsuit according to lawaccording to law

National SecurityNational Security

If foreign company merges with or If foreign company merges with or acquires domestic enterprise or by any acquires domestic enterprise or by any other means and national security is other means and national security is involvedinvolvedo Additional examination on national security Additional examination on national security

issues shall also be conducted according to issues shall also be conducted according to the relevant provisions of the State. the relevant provisions of the State.

o Previously included in M&A Provisions, Previously included in M&A Provisions, however, related to “national economic however, related to “national economic security”security”

Concentration – Legal Concentration – Legal LiabilitiesLiabilities

Concentration without approval:Concentration without approval:o AMEA shall orderAMEA shall order

• stop to concentration, stop to concentration, • disposal of shares or assets, disposal of shares or assets, • transfer of business or transfer of business or • adopt other necessary measures to restore adopt other necessary measures to restore

the market situation before the the market situation before the concentration within a time limit concentration within a time limit

o May be subject to a fine of less than May be subject to a fine of less than RMB 500,000RMB 500,000

Concentration – Some Concentration – Some Unresolved IssuesUnresolved Issues

1.1. Various definitions/requires further Various definitions/requires further regulations:regulations:

1.1. Triggering thresholds for DeclarationTriggering thresholds for Declaration2.2. ““national economic development”national economic development”3.3. ““national security” national security”

2.2. Objective and fair consideration of Objective and fair consideration of FactorsFactors

3.3. Coordination with M&A Provisions Coordination with M&A Provisions (2006) which require notification of (2006) which require notification of MOFCOM and SAIC (above certain MOFCOM and SAIC (above certain threshold)threshold)

Concentration – Some Concentration – Some Unresolved IssuesUnresolved Issues

4.4. Use of concentration review to Use of concentration review to protect national interestsprotect national interests

o Not likely because of several factors:Not likely because of several factors:• Length of time to draft law – careful Length of time to draft law – careful

consideration of international practiceconsideration of international practice• Length of time between promulgation and Length of time between promulgation and

effective date (11 months) allows for time effective date (11 months) allows for time to promulgate many necessary regulationsto promulgate many necessary regulations

• Includes foreign AND domestic companies Includes foreign AND domestic companies (in comparison to M & A Provisions)(in comparison to M & A Provisions)

• International attention/WTO pressureInternational attention/WTO pressure

Questions?Questions?

Edward LehmanLehman, Lee & Xu

Email: [email protected]

Phone: 86-10-8532-1919

Fax: 86-10-8532-1999