• When do Group restructures need to be notified?
  • January 4, 2011
  • Law Firm: King Wood - Beijing Office
  • We often receive queries from clients in relation to whether group restructures need to be notified to the Ministry of Commerce (MOFCOM) for antitrust merger control clearance.

    This article provides some general guidance as to when a group restructure needs to be notified to MOFCOM for antitrust merger control clearance.

    Generally, businesses need to notify MOFCOM of a transaction if:

    (a) the transaction amounts to a "concentration" (pursuant to Article 20 of the Anti-Monopoly Law or AML); [Note: The term "concentration" refers to: (a) a merger of business operators; (b) an acquisition of a controlling stake of other business operators by a business operator through an acquisition of equity or assets; and (c) the acquisition of the controlling stake in other business operators by way of contracts etc or decisive influence by a business operator over other business operators); and

    (b) the "concentration" meets the turnover thresholds (as set out by Article 21 of the AML and the Provisions of State Council on Declaration Threshold for Concentration of Business Operators).

    However, there is one statutory exemption to the above two conditions ¿ that if the concentration amounts to an internal restructure in shares or assets within a corporate group, the concentration may not need to be notified.  Specifically, Article 22 of the AML states that entities will not need to notify MOFCOM of a concentration, pursuant to the following circumstances:

    • where a business operator involved in the concentration already owns more than 50% of voting shares or assets in relation to each of the other business operators involved in the transaction; and
    • where more than 50% of the voting shares or assets of each of the business operators involved in the concentration is owned by a business operator which is not involved in the concentration.

    The above "internal restructure" exemption is quite a limited one.  The "more than 50% of voting shares or assets" threshold is quite a high one to reach.  For instance, if Parent Company A owns 30% of voting shares over Subsidiary B, Parent Company A may, because of its voting shares, have decisive influence or "control" over Subsidiary B.  However, if members of this corporate group wish to undertake some restructure within the group; the above "internal restructure" exemption may not apply because the "more than 50% of voting shares or assets" threshold has not been reached.

    In addition, what does the phase "more than 50% voting shares or assets" mean?  Does this include 50% of all assets or only above 50% of all assets?  What if Parent Company A owns 50% of all assets ¿ would this fall into the exception?  We note that in other laws (e.g. Article 99 of China's Criminal Law), the term "more than X" normally includes the figure "X".  However, currently, it is not clear if "more than 50% voting shares or assets" pursuant to Article 22 of the AML, includes 50% of all assets.

    Lastly, we assume that Article 22 is an "internal restructure" exemption, which means that the term "business operator" is meant to refer to entities within the same corporate group.  However, what happens if one or two entities participating in the concentration does not belong to the same corporate group?  Could that concentration still be exempt pursuant to Article 22 of the AML?

    More guidance is needed in relation to Article 22 of the AML.  When in doubt, it is best to seek legal advice and if necessary, consult with MOFCOM before making up your mind on whether to notify MOFCOM of your concentration.