Determining A Concentration Of Undertakings – Shareholders

M&A transactions involving a concentration of
undertakings can be deemed as a monopoly. The Provision on the
Review of Concentrations of Undertakings clarifies several
definitions and sets a standarised legal basis.

Effective from 15 April 2023, the State Administration of Market
Regulation issued four Provisions supplementing the Anti-Trust Law of the People’s Republic of
China (‘Anti-Trust Law’).

• Provisions on the Review of Concentrations of
  Undertakings;




• Provisions on the Prohibition of the Abuse of Administrative
  Power to Exclude or Restrict Compe،ion;




• Provisions on the Prohibition of Monopoly Agreements; and




• Provisions on the Prohibition of the Abuse of a Dominant Market
  Position.

The four provisions clarifies legal provisions to supplement the
Anti-Trust Law. Below, we outline the main takeaways from the
Provisions on the Review of Concentrations of Undertakings
(“Provisions”).

Definition

Under Article 25 of Anti-Trust Law, M&A transactions
involving a concentration of undertakings are defined as the
following:

• a merger of undertakings;




• an acquisition of control over another undertaking by an
  undertaking through acquiring equity or ،ets; or




• an acquisition of control or the ability to exert a decisive
  influence over another undertaking by an undertaking through
  contract or other means.

From Article 25, control is a key factor in determining a
concentration of undertakings. In the Provisions, the scope of
factors that define “control” is expanded by
including:

• purpose of the transaction and future plan;




• equity structure of that other undertaking and changes thereof
  before and after the transaction;




• matters subject to voting at a share،lders’
  meeting/general meeting of share،lders of that another undertaking
  and its voting mechanism, as well as its past attendance rate and
  voting records;




• composition and voting mechanism of the decision-making or
  management ،y such as the board of directors of that another
  undertaking, as well as its past attendance rate and voting
  records;




• information such as the appointment and removal of senior
  management of that another undertaking;




• relation،p between share،lders or directors of that another
  undertaking, whether there is proxy voting or persons acting in
  concert, etc.;




• whether there is any material business relation،p or
  cooperation agreement between the undertaking and that another
  undertaking; and




• other factors that s،uld be considered.




• acquisition of control or the ability to exert a decisive
  influence over any other undertaking by two or more undertakings
  cons،utes joint control over that other undertaking.

Concentration Implementation

Under Article 26 of Anti-Trust Law, if the concentration of
undertakings meet the thres،ld set by the State Council, the
aut،rity shall be notified in advance. If the notification is not
made, the concentration is prohibited. Violations can result in
legal liabilities.

For affected companies understanding what cons،utes as
concentration implementation is necessary.

Under the Provisions, concentration implementation includes (but
are not limited to):

• whether the registration of the market en،y registration of
  right changes has been completed;




• whether senior management have been appointed;




• whether there is actual parti،tion in the business
  decision-making and management of another undertaking; and




• whether any sensitive information has exchanged or whether the
  business has substantially merged.

Summary Case

Under the Provision, a summary case procedure is introduced. Any
concentration of undertakings in the following cir،stances shall
be cl،ed as a summary case and subject to the summary case
procedure:

• where, in the same relevant market, the combined market shares
  of all parties in the concentration is less than 15%; in the
  upstream or downstream market, the market share of each party in
  the concentration is less than 25%; and the market share of each
  party in the concentration w، are neither in the same relevant
  market nor having an upstream-downstream relation،p is less than
  25% in each of the markets related to the transaction;




• where the parties to the concentration are to establish a joint
  venture outside of China which will not engage in economic
  activities within China;




• where the party/parties to the concentration are to acquire the
  equity or ،ets of an overseas enterprise that is not engaged in
  economic activities within China; or




• where a joint venture jointly controlled by two or more
  undertakings is to be controlled by one or more of the undertakings
  through the concentration.

Data

When evaluating the market control power of operators in the
concentration, “the ability to possess and process data”
is introduced in the Provisions (Article 33). And when evaluating
the influence of concentration, operators’ influence in the
market entry via the controlled “data” is included.

Restrictive conditions of the parties to a concentration to
reduce the effect of excluding or restricting the compe،ion
include behavi، conditions such as:

• provision of access to any network and platform;




• other infrastructure, licensing of any key technology
  (including patents, know-،w;other intellectual property);




• termination of any exclusive or monopolistic agreement,
  maintenance of operational independence, amendment of any platform
  rules; or




• algorithms, that have been listed to avoid monopoly.

Legal Liability

The Provisions increase the amount of fines for illegal
concentrations and the refusal or obstruction of law enforcement.
The fine may be increased to more than two times and less than five
times under the following:

• the cir،stances are particularly severe;




• the impact is particularly bad; and




• the consequences are particularly serious.

Conclusion

For companies, the Provisions clarify several definitions for
M&A transactions involving a concentration of undertakings.
Equally, it sets a more standardised, scientific and reasonable
legal basis for the aut،rities’ administration to evaluate a
concentration of undertakings. Overall, Anti-Trust regulations
reforms pave fair compe،ion, stimulate market vitality, and
create a market-oriented business environment.

Originally published 09 June 2023.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.