MOFCOM probes and punishment for unfiled business concentrations

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In September 2015, the Ministry of Commerce (MOFCOM) announced its punishments against four transactions of concentration of business operators for which no filing has been made. Pursuant to relevant laws and drawing from past experiences, this article aims to analyze, collate and summarize MOFCOM’s practices in this regard.

Launching investigation. It can be seen from the four cases that MOFCOM has several methods for obtaining leads on unfiled cases of concentration of business operators and initiating investigation, including self-discovery, third-party tip-off and voluntary reporting by the businesses involved.

In the case of the acquisition of 35% equity in Shenzhen Chino-E Communication by Fujian Electronics and Information (Group) (Case 1), the acquirer filed for a subsequent transaction to MOFCOM according to simplified procedures. During the public comment period required under simplified procedures, MOFCOM received a tip-off by a third party that the acquirer failed to file for the prior acquisition transaction.

In the case of the acquisition of 35% equity in Suzhou Erye Pharmaceutical by Shanghai Fosun Pharmaceutical (Group) (Case 2), the acquirer bought the equity of the target jointly via two group companies. After the acquirer’s anti-monopoly filing, MOFCOM discovered that one of the group companies had already completed the acquisition of the target’s partial equity.

In the case of the establishment of a joint venture by CSR Nanjing Puzhen Rolling Stock and Bombardier Transportation Limited (Sweden) (Case 3), after completing the concentration and obtaining the business licence, the two companies voluntarily reported to MOFCOM on the possible failure to make a filing pursuant to the law, and submitted the filing subsequently.

In the case of the establishment of a joint venture by BesTV New Media and Microsoft Corporation (Case 4), a third party lodged a tip-off against their alleged illegal concentration eight months after the transaction was completed.

Parties punishable. Pursuant to the Interim Measures for the Investigation and Handling of the Failure to Notification for Concentration of Business Operators Pursuant to the Law and the Measures for Notification of Concentration of Business Operators of MOFCOM, where a concentration is not reported pursuant to the law, the parties subject to investigation and punishment are the business operators under filing obligations (typically those who have gained the controlling right).

A total of six parties under reporting obligations were punished for the aforesaid four cases. In cases 1 and 2, the acquirers obtained equity of, and thus the controlling right in, the targets, and were therefore under the obligations to make a filing. In cases 3 and 4, on the other hand, a new joint venture was established by two companies who also became its joint controllers, hence their obligations to make a filing.

Investigation process. The Interim Measures set out the process for investigating cases of unfiled concentration, according to which MOFCOM may take up to 300 days to issue an investigation decision after such a case is put on file. The investigation duration of the four cases is shown in the table on this page.

MOFCOM probes and punishment for unfiled business concentrations table

In comparison, MOFCOM typically spends considerably less time in reviewing transactions of concentration that are filed pursuant to the law (in particular, the review period of a case eligible for simplified procedures is usually no more than 30 days after being put on file).

Amount of fines. According to the Interim Measures and the Ant-monopoly Law, MOFCOM may impose a fine of up to RMB500,000 (US$78,400) on business operators that fail to notify for concentration pursuant to the law, and may order them to restore their business to the pre-concentration state. While meting out punishments, MOFCOM considers the nature, circumstances and duration of the illegal acts, their impact on competition, etc.

Therefore, requiring business operators to restore business to the pre-concentration state is the harshest punishment against the failure to notify for concentration. However, such punishment has not been ordered by MOFCOM so far. If the concentration in question will not eliminate or restrict competition, only a fine of up to RMB500,000 will be imposed. As in the four cases mentioned above, MOFCOM only imposed a fine between RMB150,000 and RMB200,000 against the errant business operators.

Impact on transactions

Jet Deng Zhisong
Jet Deng Zhisong

It thus becomes clear that the fines imposed by MOFCOM are of relatively small amount, and that restoration to the pre-concentration state will normally not be ordered for completed transactions. That said, business operators should always make anti-monopoly filings pursuant to the law to avoid consequences in the following three aspects.

Impact on the deal itself. Once MOFCOM finds an unfiled concentration will eliminate or restrict competition, it will be entitled to order the business operators involved to restore business to the pre-concentration state, which would no doubt be disastrous for businesses as well as the transaction itself.

Ken Dai Jianmin
Ken Dai Jianmin

Completion time of the deal. Investigation by MOFCOM may last a long time and may also affect other affiliated transactions, resulting in delays in the deal concerned or other related transactions.

Corporate image. Since MOFCOM has started to announce the punishments it imposes on unfiled concentrations, this would have a negative impact on the images of the companies involved as legitimate business operators.

The failure of business operators to file concentration transactions may be inadvertent. Nevertheless, businesses should consult specialized anti-monopoly lawyers or MOFCOM in a timely manner to avoid legal risks and adverse impacts.

Jet Deng Zhisong is a partner of Dacheng Law Offices in Beijing. He can be contacted on +86 10 5813 7038 or by email at zhisong.deng@dachenglaw.com

Ken Dai Jianmin is a partner of Dacheng Law Offices in Shanghai. He can be contacted on +86 21 5878 1965 or by email at jianmin.dai@dachenglaw.com