China’s MOFCOM continues to actively pursue companies failing to notify deals. Three new fine decisions published on 3 May 2016 illustrate a trend toward enhanced scrutiny and greater severity. Companies are targeted irrespective of their nationality, ownership or sector background.
Introduction
On 3 May 2016, China’s Ministry of Commerce (“MOFCOM”) published three new decisions imposing fines for failure to notify reportable transactions[1]. This is the third time that MOFCOM has issued fine decisions of that nature since 2 December 2014[2], following MOFCOM’s announcement that it would make available on its website all such penalty decisions in cases opened after 1 May 2014. As of the date of this briefing, eight cases have been published.
Which companies were targeted?
A total of 11 companies have been fined in the eight published decisions. Amongst them, seven were Chinese companies. These Chinese companies include State-owned enterprises (Beijing CNR Investment, CSR Nanjing Puzhen Corporation, Fujian Electronic Information and Tsinghua Unigroup), listed companies (Bestv and Shanghai Fosun Pharmaceutical) and private companies (New United Group). The four foreign companies fined by MOFCOM were Biggain Holdings (BVI), Bombardier (Canada), Hitachi (Japan) and Microsoft (USA).
The industries involved in these cases include pharmaceuticals[3], railway engineering construction[4], software[5], mobile devices manufacturing[6] and semiconductors[7].
The mix of the company profiles and nationalities indicates that MOFCOM does not intend to selectively enforce the rules on failures to file. It also demonstrates that there is no “safe harbour” in practice for companies of any particular nationality, ownership or sector background. The clear message sent by MOFCOM is that all companies doing business in China can be subject to China’s merger control rules and should diligently apply for clearance before closing a transaction if it is notifiable to MOFCOM.
How were the cases detected?
There are at least four possible ways for MOFCOM to detect that a transaction has not been notified: self-reporting by the companies concerned; complaints by a third party; discovery by MOFCOM during the review of another transaction; or finding out about the deal from public sources.
Self-reporting happens frequently. Three of the eight published decisions mention that the case was pursued by MOFCOM as a result of companies voluntarily reporting that they had failed to file a transaction[8].
Two other cases[9] were reported by unidentified third parties. Of particular interest is the Fujian Electronics/ZhongNuo decision. When Fujian Electronics notified the acquisition of 100% of the shares of ZhongNuo using the simplified procedure, MOFCOM issued a public notice on its website for public comment. At that point, an unidentified third party (which could potentially be a disgruntled customer, supplier, competitor or employee) flagged to MOFCOM that Fujian Electronics had in fact already acquired a controlling minority stake in ZhongNuo which at the time had not been reported to MOFCOM.
The other three published cases do not contain any indication as to how MOFCOM initiated an investigation. These could have been cases of self-reporting or complaints (even if the decisions do not say so) or could be the result of MOFCOM noticing, through unrelated filings or through the press, that previous transactions had not been reported. In practice, MOFCOM has in the past contacted companies which have publicly announced transactions to inform them that they were under a duty to notify in China before closing could take place.
What were the violations at stake?
Amongst the eight published decisions, four relate to the creation of joint-ventures and four to the acquisition of shares.
One important point to note in relation to the creation of joint-ventures is that, contrary to many other jurisdictions, MOFCOM adopts a very strict and formalistic approach to the implementation of a joint-venture transaction. As evidenced by the four relevant decisions, obtaining a business licence or certificate of incorporation for the joint-venture without first securing clearance is already in itself a violation of China’s Anti-Monopoly Law – even in the absence of any other concrete steps taken to establish the joint-venture’s commercial presence on the market.
It is worth reminding that the acquisition of minority shareholdings may be subject to MOFCOM’s review. In both the Fujian Electronics/ZhongNuo and Fosun Pharmaceutical/ErYe cases, the transactions were set as two-step deals and the acquirers were fined by MOFCOM for failure to notify the initial acquisition of 35% of the shares of the respective targets.
How are the fines set?
The current statutory maximum fine is RMB500,000 (approximately EUR68,000). There is no official guidance on how fines ought to be set in any specific case. In practice, MOFCOM has discretion to decide on the amount.
The published decisions do nonetheless shed some light on some of the factors that MOFCOM will take into account when setting fines.
Firstly, MOFCOM has noted in a number of decisions that voluntarily reporting a previous failure to file and displaying a cooperative attitude did help to mitigate the fine.
Secondly, recidivism appears to be an aggravating circumstance. MOFCOM expressly noted in the Bombardier/New United decision published on 21 April 2016 that Bombardier had already been fined in the CSR Nanjing/Bombardier decision published in September 2015. MOFCOM imposed on Bombardier the highest fine of all the published decisions, ie RMB400,000.
Thirdly, all published decisions to date relate to transactions that did not raise competition issues. Fines would most certainly be higher – and probably set at the maximum statutory level of RMB500,000 – in cases where remedies would be required. MOFCOM could also adopt other corrective measures, such as suspension, ring-fencing or divestiture obligations, for the most problematic transactions.
Conclusion
MOFCOM made it clear in 2014 that it would strengthen its efforts to enforce the AML against companies that failed to notify reportable transactions. MOFCOM, however, is conscious that the current statutory maximum of RMB500,000 (approximately EUR68,000) is not high enough to be considered a deterrent for large companies and falls well below the level of fines that can be imposed in other jurisdictions (e.g. the European Union). Publishing all fine decisions in such cases, something that MOFCOM did not previously do, is also dubbed by MOFCOM as a name-and-shame exercise and is an integral part of an effort to raise awareness within the business community. Reputational damages and hurdles when dealing with Chinese regulators also constitute risks attached to a failure to notify.
There is no doubt that MOFCOM will continue to actively investigate alleged failures to notify and welcome complaints. Additional decisions – and higher fines – are expected in the future and will likely target both Chinese and foreign companies. Increasing deterrence by sharpening MOFCOM’s powers through higher statutory fines is also on the agenda.
[1] For the Chinese version of the decisions, please refer to http://tfs.mofcom.gov.cn/article/xzcf/.
[2] The first decision for a failure to notify was published on MOFCOM’s website on 2 December 2014. On 29 September 2015, MOFCOM published another four decisions and, on 3 May 2016, it published three new decisions.
[3] Acquisition of 50% of the shares in Jiling Sichang Pharmaceutical by Biggain Holdings (“Biggain/Sichang”); and acquisition of 35% of the shares in ErYe Pharmaceuticals by Fosun Pharmaceutical (“Fosun Pharmaceutical/ErYe”).
[4] Establishment of a joint-venture between Beijing CNR Investment and Hitachi (“Beijing CNR/Hitachi”); establishment of a JV by Bombardier Transportation Sweden and New United Group (“Bombardier/New United”); and establishment of a JV between CSR Nanjing Puzhen Corporation and Bombardier Transportation Sweden (“CSR Nanjing/Bombardier”).
[5] Establishment of a joint-venture between BesTV and Microsoft (“BesTV/Microsoft”).
[6] Acquisition of 35% of the shares in Shenzhen ZhongNuo Communications by Fujian Electronic Information (“Fujian Electronics/ZhongNuo”).
[7] Acquisition of RDA Microelectronics, Inc. by UNIS (“UNIS/RDA”).
[8] Beijing CNR/Hitachi; Biggain/Sichang; CSR Nanjing/Bombardier.
[9] Fujian Electronics/ZhongNuo and BesTV/Microsoft.
