Lawyers in Mainland China have urged companies to screen all M&A deals, regardless of size or location, ahead of new Ministry of Commerce of the People's Republic of China (Mofcom) merger rules which take effect February 1.
Hogan Lovells’ Beijing-based counsel Adrian Emch told IFLR that Mofcom’s Provisional Measures on the Investigation and Handling of Concentrations between Business Operators which were Not Notified in accordance with the Law (Provisional Measures) aims to flesh out the prohibition in China’s Anti-Monopoly Law (AML) on implementing a reportable transaction without notification.
But procedures established under the new measures were very complex, he said.
M&A lawyers and dealmakers in New York and London are generally aware of the merger control regimes around the globe, Emch said. But many of their peers in Hong Kong are less aware, given that until very recently there were few biting antitrust regimes in the region.
This, of course, changed dramatically with the introduction of China’s AML in 2008. However Emch believed some lawyers and investors in Hong Kong and elsewhere may have been slow to adapt.
“These new measures signal that the 'grace period' is over,” he said. “It's now high time for companies to do their homework.”
He urged companies to check transactions very early in the deal process to ascertain whether they are caught under the rules.
Doing so not only guarantees that both companies’ legal teams and the managers driving the deals are made aware of what is expected under the Provisional Measures, he explained. But also ensures deal teams can give the necessary time and attention to preparing a filing should the notification obligation be triggered.
“If the initial analysis, on whether or not a notification is required, is not done early the closing of the transaction could be delayed as the notification obligation is ‘suspensory’, indicating the deal cannot be closed without Mofcom's approval,” Emch said.
Those that did not make the appropriate preparations and go through with a filing, once initial analysis indicated it necessary, must live with the risk that Mofcom might hear about the deal and start a procedure for failure to file, he said.
Andrew McGinty, managing partner of Hogan Lovells in Shanghai said the promulgation of the Provisional Measures could be a sign that Mofcom has had enough time to get its feet under the table in processing merger control filings and is keen to start enforcing the rules more aggressively.
For example, the Measures could represent a turning point whereby Mofcom will now actively start to scour the web looking for potential unreported transactions or open up hotlines for whistle-blowers. He therefore advised those in substantial doubt on whether or not a filing is required to consider tabling a consultation request with the Ministry.
Additionally, the Provisional Measures state that Mofcom may publish its decisions regarding findings of failure to file. The fact that this possibility is explicitly stated in the Provisional Measures, when the Ministry could do this in any event, indicated that the authority was contemplating publishing some, or all such, decisions to deter market players.
“This threat to ‘name and shame’ may prove to be the greatest deterrent of all, particularly for listed companies and those who prize their public image in the China market,” said McGinty.
The new measures, which were uploaded to Mofcom’s website on 5 January 2012, take the AML remedies and punishments as a starting point. In the AML, the maximum fine that can be imposed for failing to file a reportable transaction is RMB 500,000.
The Provisional Measures also restates the arsenal of other AML sanctions. This includes ordering the parties to cease implementation of the transaction, disposal of the shares or assets acquired within a given timframe, transfer of the business by a given deadline, and any other measures necessary to restore the situation before the transaction.
“The power of Mofcom to unwind transactions is the dead moose on the table,” McGinty said.