- New Chinese legislation regulating merger filings for financial institutions
- Explanation of filing thresholds, and methods for computing turnover of financial institutions
- What it means for financial institutions doing M&As and joint ventures
The China Anti-Monopoly Law (“AML”), which came into effect in August last year, requires mergers, acquisitions and joint ventures meeting certain financial thresholds to be notified to the Ministry of Commerce Anti-Monopoly Bureau (“MOFCOM”) and their potential impact on competition in China reviewed, in advance of closing.
New measures make it clear that a range of banking, insurance and other financial institutions are also subject to this filing requirement, and provide sector-specific thresholds to be used in determining whether a filing is required. Until now, the position of such bodies had been ambiguous, with the filing thresholds published by the State Council suggesting that specific thresholds for this sector would be published.
The picture is now much clearer, with the publication last week of the
Measures for Computation of Turnover for Notification of Concentrations by Business Operators in the Financial Sector (“Financial Sector Measures”), effective from 16 August 2009. These were issued by MOFCOM, in consultation with various financial sector regulators (namely the People's Bank of China (PBOC), China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC), and with the approval of the State Council Anti-Monopoly Commission. The large number of agencies involved suggests a welcome coordinated approach between the relevant government agencies.
Why are the financial sector measures significant?
While the vast majority of transactions are cleared unconditionally, the Chinese merger control regime has gained considerable publicity as a result of a number of recent cases that according to MOFCOM raised significant issues.
Most famously, Coca-Cola's proposed acquisition of HuiYuan was blocked by MOFCOM in April, the only case to be prohibited outright to date. In another case, rigorous conditions were imposed on Mitsubishi Rayon as a condition for antitrust clearance in China, including the possible divestment of one party’s Chinese plant. With new joint ventures, acquisitions and consolidations continuing in the financial sector as the current banking crisis unfolds, financial companies and their advisers must now consider whether such deals trigger a filing to MOFCOM. Given the lead time needed to prepare and submit an effective filing, and the need to allow 30 days or more for MOFCOM review and (if unproblematic) approval, companies are advised to consider at an early stage whether a filing is required.
Who do the financial sector measures apply to?
The Financial Sector Measures are applicable to transactions undertaken by banking financial institutions, securities companies, futures companies, fund management companies, insurance companies and other financial institutions. Entities falling outside these categories remain covered by the AML’s more general filing thresholds.
Filing thresholds
Under the AML, a filing will be triggered if:
(1) as a result of a proposed transaction, the buyer will acquire control or decisive influence over the target; and
(2) either of the following turnover thresholds has been exceeded:
(a) the combined worldwide turnover in the preceding accounting year of all parties to a transaction exceeds Renminbi 10 billion (approximately US$1.46 billion), AND each of at least two parties has turnover in China exceeding Renminbi 400 million (approximately US$ 58 million); or
(b) the combined turnover in China in the preceding accounting year of all business operators participating in the concentration exceeds Renminbi 2 billion (approximately US$ 293 million), AND each of at least two business operators has turnover in China exceeding Renminbi 400 million (approximately US$ 58 million).
As financial institutions generally have higher turnover, the Financial Sector Measures seek to address this by stipulating that for the purpose of computing the turnover of a financial institution under the AML, only 10% of turnover (net of business tax and ancillary taxes) shall be counted as a financial institution’s “turnover” for these purposes. Thus, if in an acquisition, a target company in China has annual turnover of Renminbi 3 billion, then for the purpose of determining whether the filing threshold has been exceeded, its turnover will be regarded as only Renminbi 300 million.
It should be noted that MOFCOM has the statutory right to investigate any transaction that has not met the quantitative thresholds but may pose competition concern in China. Thus, if a transaction results in a high market share post-acquisition, that could trigger complaints by aggrieved competitors and bring the matter within the attention of MOFCOM. It is worth observing whether and to what extent MOFCOM will exercise its discretion to intervene for transactions that come within the Financial Sector Measures.
Turnover calculation principles
As different financial institutions derive turnover from different sources, the Financial Sector Measures clarify what items are to be included when computing the turnover for banking financial institutions, securities companies, futures companies, fund management companies and insurance companies. It is interesting to note that for insurance companies, the turnover comprises insurance premiums but not investment gains, unlike the treatment for banks. More generally, it is worth noting that many of the principles are similar to those applied in other major jurisdictions with turnover-based filing thresholds, such as the European Union.
(1) Items to include for computing turnover of banking financial institutions
For banking financial institutions, the turnover shall comprise of:
- net interest earnings;
- handling fee and commission fee net earnings;
- investment gains;
- earnings derived from change of fair market value;
- currency exchange earnings; and
- other business earnings
Other types of financial institutions like financial asset management companies, trust companies, finance companies, financial leasing companies, automobile finance companies and money broking companies, follow the same approach as the rules applicable to banking financial institutions.
(2) Items to include for computing turnover of securities companies
For securities companies, the turnover shall comprise of:
- handling fee and commission fee net earnings (inclusive of brokerage business, asset management business, underwriting and sponsor business and financial consulting business);
- net interest earnings;
- investment gains;
- currency exchange earnings; and
- other business earnings
(3) Items to include for computing turnover of futures companies
For futures companies, the turnover shall comprise of:
- handling fee and commission fee net earnings; and
- net interest earnings from bank deposits
(4) Items to include for computing turnover of fund management companies
For fund management companies, the turnover shall comprise of:
- management fee earnings; and
- handling fee earnings
The Financial Sector Measures do not define “fund management companies”, and it remains to be seen whether all types of fund, ranging from mutual funds to private equity and hedge funds, are applicable, or a narrower interpretation will be adopted.
(5) Items to include for computing turnover of insurance companies
For insurance companies, the turnover shall comprise of the insurance premiums less business taxes and ancillary taxes. When computing insurance premiums, the insurance premiums set out in insurance contracts underwritten by the insurer shall be added to any reinsurance premiums received, and less outward reinsurance premiums.
Practical pointers
- There is existing practice and draft measures prescribed by MOFCOM as to how turnover should be computed on a group basis.
- Recent regulatory developments suggest that joint ventures are also subject to the Chinese antitrust filing regime in certain cases.
- Under the AML, it is possible for penalties and sanctions to be imposed on the parties to a transaction and their corporate groups for failing to make antitrust filings. In particular, where a transaction has been implemented yet raises significant competition concerns, MOFCOM can require the transaction to be unwound.
- While transactions involving Chinese banks, insurers and other financial institutions will certainly be affected, foreign-to-foreign ("offshore") M&As could also be subject to the Chinese antitrust regime if the filing requirements have been fulfilled (i.e. if the parties do sufficient business in China).
- Unlike jurisdictions such as the European Union and Canada, there is no official system for fast-track filings in China, even in uncomplicated cases. Parties should budget adequate time for preparing the filing and the subsequent governmental review. The timing issue becomes more challenging in distressed sales in the current environment where vendors expect to close quickly, and makes it important to kick-start the antitrust preparations as early as possible. It is also important to bear in mind that China market data is required as a key part of the filing may not be readily available, and will need significant time to obtain.
- The filing form requires parties to give details of competitors, customers and trade associations. MOFCOM usually contacts the parties listed, and seeks their views. The views of such third parties should be anticipated in the filing itself.
- Where significant issues in China are identified, the Mitsubishi Rayon case has shown that MOFCOM will not hesitate to conduct a thorough review and seek to agree on substantial divestment undertakings (see Antitrust & Competition Client Alert April 2009).
- Where significant competition issues are likely to be identified, parties should actively engage with MOFCOM in proposing remedies. As in other jurisdictions, the burden is on the parties, not the regulator, to put forward solutions.