Anti-trust Laws and Regulations in Foreign Merge and Acquisition


-----Linus Zhu

Attracting foreign investment has always been of great significance for China's economic development. Now that China has had the biggest foreign investment flow, the high market share of some foreign investors and the great market concentration of some industry has made necessary the stipulation of anti-trust laws and regulations. Although in practice anti-trust examination has long been a part of the general foreign investment examination, the adoption of laws and regulations serve as the benchmarks to provide explicit standards for transparency, which is indispensable to the spirit of rule of law. A uniform Anti-Trust Law was already drafted last year and will come into effect soon.

Currently, the requirements for anti-trust examination concerning M&A by foreign investors are dotted in various regulations such as Guideline Catalogue of Foreign Investment Industries, Certain Regulations on Changes to Shareholders' Rights in Foreign Investment Enterprises, Provisions on Merger and Division of Foreign Investment Enterprises and Provisional Regulations on Merges and Acquisitions of Domestic Enterprises by Foreign Investors. As one of the earliest regulations on anti-trust issue, Provisions on Merger and Division of Foreign Investment Enterprises and Provisional Regulations on Merges adopted in November 1999, provides in its Article 24.2 that if the MOFTEC, as the examination and approval organ for an M&A, is of the opinion that the potential M&A has the possibility of industry monopoly or market domination obstructing fair competition, it may call for a hearing process and carry out investigation over the company.

This article has made clear the government's attitude for anti-trust examination, despite its lack of specific procedure for determination. In April 2003, Provisions on Merger and Division of Foreign Investment Enterprises and Provisional Regulations on Merges (Provision), jointly made by several major economic governmental departments, reflects the government's new attitude towards M&A by foreign investors.

1. An expansion of the sphere of foreign invested enterprises (FIE):
Article 5 of Provision classifies as FIEs those enterprises with the proportion of foreign investment lower than 25%. With no furnishing of preferential policies for those newly-classified FIES, the main purpose of such inclusion probably is to expand the jurisdiction of relevant governmental departments over foreign capitals, so that the activities of foreign capitals involved in listing companies and major enterprises can be strictly monitored while China gradually opens its capital market.

2. Examination standard for M&A by foreign investors
The standards for examination are elaborated in Article 19 and 20. Article 19, among other things, stipulates the circumstances under which the M&A will possibly lead to monopoly. Article 20 sets out the time limit for such examination. Compared with Article 24.2 mentioned above, this new regulation is obviously more detailed on aspects as application standard, report submitter, the appeal right of interested parties, examination department, etc. However, there are still some problems in the regulation:
(1) The application of the standards: whether it has taken into account the investment diversity and the multi-region situation of the Chinese market; whether the standard of "Chinese market turnover", "the number of related enterprises", "market share", etc., should apply to all enterprises; and whether these standards have correctly reflect "the market concentration".
(2) Details of implementation: for instance, the calculation of market turnover and market share, the criteria for related enterprises, the scope of files to be submitted.
(3) Whether it is consistent with Guideline Catalogue for Foreign Investment Industries and WTO Protocol.

3. Examination on foreign investors' M&A outside China for the first time
By setting standards such as asset value, market turnover, market share for examination, Article 21 has brought China into the sixty countries and regions or so that adopt examination for M&A outside their territory. However, problems concerning the application of the standards, the determination of anti-trust and implementation, especially the legal effect in case of violation, still prevail.

4. Waiver:
Article 22 sets out four circumstances for exemption from examination. Some M&A by foreign investors may be able to take advantage of this article since the stated situation is very common during State-Owned Enterprises restructuring process. Yet, it should be noted that the application for the exemption itself also go through examination.

Summary:
The recent adoption of several laws and regulations has seen the government's concern over the increasing concentrating market as a result of foreign investment. We also can see the possible problems that are likely to occur in their implementation. Most importantly, they have indicated the stance the Chinese government take over anti-trust issues.

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