China issues new notification threshold for merger control filings

The State Council of China recently revised and published the Provisions of the State Council on the Notification Threshold for Concentrations of Undertakings, which went into effect on 22 January 2024, the date of the announcement.

Under this New Notification Threshold, the turnover thresholds triggering the notification of a concentration of undertakings have been increased in the following ways:

• All undertakings involved in the concentration have a combined global turnover of more than CNY12 billion in the preceding financial year, with at least two undertakings each having an individual turnover within China of more than CNY800 million in the same period; or
• All undertakings involved in the concentration have a combined turnover within China exceeding CNY4 billion in the preceding financial year, with at least two operators having individual turnover within China exceeding CNY800 million each in the same period.

As a result, the aggregate worldwide turnover threshold for all undertakings involved in a concentration has been raised from the original CNY 10 billion to CNY 12 billion. The China-wide turnover threshold has been raised from the original CNY 2 billion to CNY 4 billion. In addition, the China-wide turnover threshold for at least two undertakings involved in the concentration has been increased from the original CNY 400 million to CNY 800 million.

The New Notification Threshold is based on the draft amendment to the old notification threshold,  (Draft) which was published by the State Council for public comment on 27 June 2022. When releasing this Draft, the State Council also issued a statement explicitly stating that the increase in the turnover thresholds is derived from China's economic and social development, antitrust enforcement practices and reference to international experience. The increase in the turnover thresholds will effectively reduce the reporting burden for small and medium-sized mergers and acquisitions that do not raise competition issues, reduce institutional transaction costs for enterprises, enhance economic efficiency and create a wide development space, especially for small and medium-sized enterprises. As a result of the increased turnover thresholds in the New Notification Threshold, some undertakings, due to their insufficient size, will no longer be required to notify their transactions.

It is noteworthy that the New Notification Threshold, as finally adopted, does not include the notification threshold for transactions that may not meet the turnover thresholds, but do raise competition concerns, as set out in Article 4 of the Draft. According to Article 4 of the Draft, a transaction may trigger merger control filing obligations if the turnover thresholds are not met, but the following conditions are met:

• the turnover in China of one of the parties to the concentration exceeded CNY100 billion in the previous fiscal year; and
• the market value (or valuation) of the other party(ies) to the transaction is not less than CNY800 million and its turnover in China in the previous fiscal year accounts for more than one-third of its worldwide turnover.

The Article 4 under discussion, which was introduced in the Draft, is primarily aimed at addressing "killer acquisitions" that generally refer to transactions that are designed to stifle innovation or restrict or eliminate competition, typically by a leading acquiring party with strong market power that acquires a target with a lower market value/valuation but with significant competitive potential. The purpose or effect of such acquisitions is to stifle the innovation of the acquired start-up or to eliminate potential competition in the future. The State Council's explanation of the amendment emphasises that large enterprises, due to their greater market power in comparison to small and medium-sized enterprises, are more likely to engage in concentrations that may restrict or eliminate competition.

In addition, the monitoring of mergers and acquisitions involving large companies is in line with international trends. By setting specific notification thresholds for concentrations involving large enterprises and conducting competition analysis, the antitrust review system can effectively prevent monopolistic market structures in advance. This helps reduce the adverse effects of concentration on competition, enhances the accuracy and effectiveness of antitrust administration, and protects the innovative vitality of market entities.

The provision in Article 4, which attracted attention and was considered to be in line with international trends in antitrust enforcement, was ultimately not included in the final version of the New Notification Threshold. One widely accepted reason for this omission is the significant uncertainty associated with the use of market value/valuation as a declaration criterion in practice (e.g. the uncertainty surrounding the valuation basis, procedures and criteria for valuation). Another perceived reason is that the provision could be seen as too broad. The lack of precise targeting of the industries that antitrust enforcers wish to "catch" could potentially dilute the original focus of the New Notification Threshold on transactions that may genuinely attract competitive attention. Regulators often must strike a balance between catching anticompetitive activity and ensuring that the rules are clear, workable and not unduly burdensome for business. The decision not to include Article 4 in the final text may reflect a cautious approach to avoid unintended consequences or difficulties in implementation.

Prior to the release of the D draft, the old notification standards already contained a "catch-all" provision that allowed antitrust enforcers to monitor transactions that did not meet the turnover thresholds but raised competition concerns. The amended PRC Anti-monopoly Law of 2022 further clarified this at the legislative level, stipulating that enforcement agencies have the right to require operators to declare such transactions and to investigate those that are not reported. The subsequent Provisions on the Review of Concentrations of Enterprises of 2023 provided more detailed measures for enforcement agencies to implement their power.

From this perspective, antitrust enforcement agencies have tightened supervision over transactions that may attract competition attention but fall short of the standard. In practice, however, the enforcement agencies have not proactively reviewed and imposed penalties on the transactions on the basis of this "catch-all" provision, at least as far as publicly available information suggests. One reason for this may be that, under this provision, enforcement agencies would first need evidence that the transaction "has or may have the effect of eliminating or restricting competition". Given the burden of proof, enforcement authorities may find it difficult to actively use this provision to regulate such transactions. Therefore, after the Draft was published, there was widespread attention to its potential impact, including clearer specifications of the applicable scenarios (including the size of the parties involved).

Although the provision was not adopted, the trend towards regulatory oversight of such transactions remains evident. In addition, the final clause of the New Notification Threshold explicitly states that antitrust enforcement agencies should assess the implementation of the reporting standards based on economic development. This implies that, although not adopted this time, more scientifically detailed regulations may be introduced when conditions are more mature.

The increase in reporting standards, while easing the burden on smaller companies, also reduces the previous burden on enforcement agencies to review a large number of transactions that are less likely to have restrictive effects on competition. This shift will allow enforcement agencies to better focus their resources on reviewing transactions that are likely to have a real impact on competition. Large companies are advised to remain vigilant when planning transactions that may raise substantial competition concerns, particularly companies in the digital economy, artificial intelligence, biopharmaceuticals and other new Internet+ industries.

The new reporting threshold is effective from the date of its official announcement on 22 January 2024. For transactions where the transaction documents have already been signed, there may be less likelihood of a declaration being required under the new standards if a declaration was not required under the old standards. If a declaration was required under the old standards but not under the new standards, the conclusion is not clear since the new declaration threshold does not provide for retrospective application. It may be more appropriate, however, to apply the conclusion that a declaration is not required under the new standards.

For parties to transactions that have made a declaration and obtained approval as a condition to the transaction, we recommend that they closely monitor any further detailed rules that the Chinese antitrust authorities may introduce in this regard. Timely communication and adjustments to the terms and timing of the transaction are advisable.

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