THE INFLUENCE OF THE U.S. REGULATION OF M&A LEADING TOWARDS MONOPOLY ON THE LEGISLATION OF ANTI-MONOPOLY LAW IN CHINA

by Xiaochen Hu

I. INTRODUCTION

The United States, the first country to enact an anti-monopoly law with the Sherman Act in 1890, has a long established set of regulations on mergers and acquisitions (M&A) leading towards monopoly under Section 1 and 2 of the Sherman Act, Section 7 of the Clayton Act, Section 5 (a) of the Federal Trade Commission Act, the merger guidelines, and Supreme Court cases. During its development for over a century, the regulation underwent changes to meet domestic and international economic developments. Through these regulations (the U.S. regulation), a series of principles and tests have been set up to control monopoly issues with respect to M&A, all of which have far-reaching influence on the legislation of anti-monopoly laws in other countries, including China.

After Deng Xiaoping’s reform and opening door policy was adopted by the Chinese government in 1978, China has been experiencing a dramatic growth in economic development, which has attracted foreign firms on the huge potential Chinese market. Many of them, through M&A, control China’s domestic leading firms to obtain control over the competition in the relevant market. To prevent M&A that lead towards monopoly, Chinese legislators began to draft an anti-monopoly law in the early 1980s.[1] However, for many reasons, the anti-monopoly law has not yet been enacted. After its entry into the WTO, China was required to open its domestic market to the world. Thus, anti-monopoly regulation on M&A leading towards monopoly became a big and sudden concern. The Chinese government is aware of the urgent necessity to legislate on this issue.

The Provisional Regulation on the M&A of Domestic Enterprise by Foreign Investors (the Provisional Regulation),[2] which was enacted in 2003, provided China with its first anti-monopoly regulation concerning M&A leading towards monopoly. This law, to some extent, influenced by the U.S. regulation on M&A leading towards monopoly, will definitely impact the legislation of future anti-monopoly laws in China.

This paper will discuss the influence of the U.S. regulation of M&A leading towards monopoly on the legislation of anti-monopoly laws in China. Part II will provide a background on the regulation of M&A leading towards monopoly in the U.S. and the legislation of anti-monopoly laws in China. Part III will describe the main features of the regulation of M&A leading towards monopoly in the U.S. Part IV will discuss the first provision concerning M&A leading towards monopoly in China to show the influence of U.S. regulations on the legislation of anti-monopoly laws in China. Part V will propose that China, in legislating its own anti-monopoly law should adopt certain concepts and principles from the U.S. regulation on how to define M&A leading towards monopoly, what is market share, how to define the relevant market and market concentration, and how to enforce the law effectively. Part VI will give the conclusion.

II. BACKGROUND

A. The Historical Development Of The Regulation Of M&A Leading Towards Monopoly In The U.S.

After the American Civil War, the unified domestic market promoted economic development. At the end of the 19th century, the United States experienced the first climax of M&A in its history. A number of small and medium sized enterprises, through M&A, became giant enterprises. Gradually, few enterprises in its relevant industry controlled most of the market share and obtained monopoly power. Without any legal restraint, these enterprises abused their monopoly powers to dominate the market, prohibit competition, and restrict free trade. Under this circumstance, the Federal Trade Commission (FTC) enacted the first anti-monopoly law, the Sherman Act in 1890, which laid the foundation for the regulation of M&A leading towards monopoly in the U.S. to “safeguard the free-enterprise system.”[3]

In 1914, the Clayton Act took effect. Section 7 of the act is the principal anti-monopoly law applicable to M&A.[4] This Act focuses not only on the present effect of M&A on competition, but also on the “probable effect” which may be “substantially to lessen competition, or to tend to create a monopoly.”[5] Thus, some M&A, which cannot be originally challenged by the Sherman Act, began to be under the control of the Clayton Act, which enlarged the scope of M&A regulation. The Clayton Act did not cover asset acquisition until the 1950 amendment.[6] The Clayton Act also required pre-merger notification, known as the Hart-Scott-Rodino (“HSR”) Antitrust Improvement Act of 1976 which became a part of Section 7 of the Clayton Act.[7] Section 7 of the Clayton Act also includes exemptions to the pre-merger notification.[8] Later in 1980, the parties to an M&A under this Act also came to include individuals and partnerships, not merely corporations.[9]

Section 5 of the Federal Trade Commission Act is enforced only by the Federal Trade Commission.[10] This Act challenged M&A under Section 5 where one of the parties was not a corporation.[11] Thus, it was used as a supplement to Section 7 of the Clayton Act before 1980.

Since 1960, the first merger guideline was issued and became a part of the regulation. Though the guidelines are not binding, [12] the principles and tests with respect to M&A play an important role in the development of regulations.

The 1960 and 1968 guidelines identified market share and market concentration as the primary indicators of the lawfulness of all types of mergers.[13] The anti-monopoly policy has dramatically changed since the 1980s. The market share and the market concentration are no longer the key factors to determine whether M&A leads towards monopoly, however, other factors such as barriers to entry and the efficiencies arising from the merger are also considered.[14]

In 1982, the Department of Justice issued substantially revised merger guidelines which provided a very different framework in which to evaluate the competitive effects of mergers.[15] Before 1982, mergers were divided into three categories: horizontal, vertical, and conglomerate mergers.[16] After the issuance of the 1982 merger guidelines, mergers were divided into two categories: horizontal and non-horizontal mergers.[17] This structure change indicates that the regulation changed its focus mainly to horizontal mergers instead of non-horizontal mergers. The 1982 guidelines also employed the Herfindahl-Hirschman Index (“HHI”) to measure market concentration.[18]

The 1984 merger guidelines made some refinements to its 1982 guidelines, which provided much more flexible measures to analyze mergers in light of their particular factual circumstances. It also expanded the scope of the market. The geographic market may include both domestic and international markets.[19] This change manifested that the U.S. government loosened its control over some M&A if it benefits the party in international competition.

A big step was taken on the merger guidelines of 1992. The first guidelines, issued by the Department of Justice (DOJ) and the FTC, are called the 1992 Horizontal Merger Guidelines.[20] They created a five-step analysis to determine whether a horizontal merger would create, enhance, or facilitate the exercise of market power.[21] Thus, the attitude of the U.S. government towards M&A leading to monopoly changed from overall interference to selective interference.

Nowadays, the anti-monopoly policy in the U.S. is much more flexible and selective. With the global economy, the U.S. regulation of M&A leading towards monopoly has moved towards an international perspective. Under this circumstance, there are fewer and fewer M&A challenges by the FTC and DOJ.

B. Background On Anti-monopoly Laws Legislation In China.

Before the reform and opening up policy was adopted in China, China’s economic system had been running under the highly concentrated planned economy since the founding of the People’s Republic of China. All the industries, except agriculture, were state-owned.[22] Private investments were prohibited in these industries.[23] Therefore, during 1949 to 1978, the economy itself was as a matter of fact a state-monopolized economy. No real competition existed. From this point of view, it is not hard to understand why there was no anti-monopoly law in China during that period.

After the new policy was adopted, the Chinese economic system moved from the planned economy to the socialist market economy, which requires breaking up state monopolies and introducing competition and setting up a unified, open, competitive, and orderly modern market system.[24] Since the early 1980’s, the economic policy encouraged private investors to enter into certain industries, such as textile, food and electronics to introduce competition between private firms and state owned enterprises (SOEs).[25] The SOEs, after the reform, are run by the corporation itself instead of the government.[26]

The economic reform led the government to consider the necessity of regulating competition. Under this circumstance, the legislation of anti-monopoly law was initiated in the 1980’s. By 1993, the government has already enacted laws and regulations with respect to anti-monopoly laws. However, there is no unified anti-monopoly law in China. They are scattered in various laws and regulations.[27]

M&A leading towards monopoly did not gain much attention until the 1990’s.[28] There are several reasons for this. First, in order to develop the market economy in China, the Chinese government encouraged M&A to enhance the economy of scale. Second, it is hard to get a monopoly power through M&A in a huge domestic market like China with relatively small firms. Thus, at the beginning stage of drafting the anti-monopoly law in China, M&A was not a big issue.

After multinational firms entered the Chinese domestic market, through competition, a lot of them began to monopolize the competition and some of them used M&A as an effective means to engage in direct investment in China. Though the anti-monopoly law is still in the process of drafting, some other regulations were enacted to regulate this issue.

The Ministry of Commerce began to draft the anti-monopoly law as early as 1994.[29] The draft has been revised many times. The key issues in the draft with respect to M&A include the form of abusing market dominant position, the standard and procedure of merger control, and the extraterritoriality of the anti-monopoly law.[30]

Currently, the only regulation on M&A leading towards monopoly in China is the Provisional Regulation on the M&A of Domestic Enterprise by Foreign Investors which was enacted on March 7, 2003.[31] The regulation only applies to transactions involving foreign investment. The proposed anti-monopoly law is in the drafting process and is expected to pass at the end of 2005.

III. THE FEATURES OF THE REGULATION OF M&A LEADING TOWARDS MONOPOLY IN THE U.S.

A. The U.S. Regulation Was Changed To Be Consistent With The Goal Of Economic Efficiency And Consumer Welfare.

Law should be stable so that it can be predictable, but should not be too rigid. During over a century of development in the U.S. anti-monopoly regulations, the basic foundations, such as the Sherman Act and Clayton Act, remained stable. However, the Merger Guidelines and the Supreme Court Cases reflect some substantial changes in the U.S. regulation in the past three decades.

Since the Sherman Act, it was particularly receptive to the FTC and DOJ that M&A in markets with certain structural characteristics would lead to anticompetitive effects.[32] Antitrust policy should favor the small business interests in maintaining their entrepreneurial freedom instead of consumer interests in the efficient organization of vast new industries.[33] Thus, the policy reason underneath the U.S. regulation determined that efficiency could not be treated as a sufficient defense to M&A at that time.

It was not until the United States Supreme Court decided the Brown Shoes Case[34] that the policy of M&A turned to accept “efficiency” as an affirmative defense to M&A with certain conditions. In the mid-1970, the federal courts and enforcement agencies, accepting many of the Chicago School’s[35] criticisms of the activist antitrust of the Warren Court[36] era, began to reshape antitrust law to make its standards more consistent with the goal of economic efficiency.[37] The 1968 and 1982 Merger Guidelines provides that efficiency claims would be considered only in “extraordinary cases” and the DOJ explicitly showed its concern on how to determine the magnitude of efficiencies.[38] The 1984 Merger Guidelines stated that “if the parties to the merger establish by clear and convincing evidence that a merger will achieve net efficiencies, the department will consider those efficiencies in deciding whether to challenge the merger … the department will reject claims of efficiencies if equivalent or comparable savings can reasonably be achieved by parties through other means.”[39] M&A lead to market concentration, which result in both enhancing economic scales and lessening competitions. M&A enable firms with capital, management expertise, and marketing savvy to expand internationally without having to build duplicative infrastructures.[40] The 1997 Amendment to the 1992 Merger Guidelines even explicitly states that “the Agency will not challenge a merger if cognizable efficiencies are of a character and magnitude such that the merger is not likely to be anticompetitive in any relevant market.”[41]

In most cases, the purpose of the M&A is to enhance efficiencies; therefore, less M&A were challenged by the U.S. regulations because of this efficiency defense. In addition, with the international trade development, the FTC and DOJ are inclining to accept this defense to enhance the competitive ability of U.S. firms in the international market. The policy reasons behind the merger guidelines and the Supreme Court case show the U.S. regulation is stable but also has flexibility.

B. The U.S. Regulation Provides Well-defined Concepts Of Key Terms Such As Market, Market Share, And Market Concentration.

In the U.S., there are a lot of factors to determine whether an M&A violates the regulation. Market share and market concentration are the most important factors.

Before M&A is challenged under the U.S. regulation, the Court and the enforcement agencies have to define the relevant market. In the Merger Guidelines, the relevant market is composed of the product market and the geographic market. The product market is ''determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.''[42] Geographic markets are frequently national, occasionally regional or local, and increasingly worldwide.[43] The Supreme Court has held that the geographic market must ''both 'correspond to the commercial realities' of the industry and be economically significant.''[44] In addition, the relevant geographic market should reflect the ''area of effective competition ... in which the seller operates, and to which the purchaser can practicably turn for supplies.''[45] The relevant geographic market ''must be broad enough that buyers would be unable to switch to alternative sellers in sufficient numbers to defeat an exercise of market power by firms in the area.''[46]

After the relevant market is determined, the next step is to consider the market concentration. Since the 1982 Merger Guidelines, the FTC and DOJ adopted HHI, which is computed by squaring and then adding together the market shares of all industry participants, as a measure of concentration.[47] Whether the merger will increase the possibility of monopoly is determined by examining both the pre-merger and post-merger HHIs. The Guideline divided markets into three groups by using post-merger HHI: (1) unconcentrated market (HHI less than 1000); (2) moderately unconcentrated market (HHI between 1000 and 1800); and (3) highly concentrated market (HHI greater than 1800).[48] The DOJ examines not only the post-merger HHI, but also the HHI change resulting from the merger.[49] When a merger increases the HHI by more than 100, and the post-merger HHI is between 1000 and 1800, the DOJ is inclined not to challenge it.[50] However, when a merger increases the HHI by more than 50, and the post-merger HHI exceeds 1800, the DOJ will challenge it anyway.[51]

The U.S. regulation provides concrete definitions to the key terms through its merger guidelines and Supreme Court cases, which make the analysis of the M&A leading towards monopoly workable in practice.

C. Pre-merger Notification Effectively Reduces The Possibility Of The M&A Leading Towards Monopoly.

HSR, which is a part of the Clayton Act, requires M&A parties to give notification to the FTC and DOJ before a merger if the transaction meets certain thresholds. The pre-merger notification mechanism affected a sea-change in merger enforcement activity, away from litigation seeking “divestiture” relief after a merger had been completed and toward much more of a “regulatory” regime of advance review and negotiation over competitive concerns before a merger is allowed to proceed.[52]

Generally, HSR provides three criteria for the thresholds: (1) the commerce test which means if the acquiring or acquired person is engaged in commerce or in any activity affecting commerce;[53] (2) the size of person test which means if the annual net sales of one person participating in the transaction are $10 million or more and those of the other person, $100 million or more for transactions valued between $200 million and $50 million;[54] (3) the size of transaction test which means the acquiring person will hold voting securities or assets of the acquired person valued in excess of $50 million as a result of the acquisition.[55]

There is a 30-day mandatory waiting period for the pre-merger notification after the parties file all the required documents, which means the M&A will not take into effect until this period passes by. Usually, FTC and DOJ make their decisions in 30 days.[56] If no decision is given during this period, then the M&A will take into effect. However, the waiting period can be extended for another 30 days if the government issues a “second request” for further information.[57]

There is also implementing regulations to facilitate the pre-merger notification process. Substantial fines can be imposed on those who fail to file notification or provide accurate information. Generally, failure to comply with the requirements can result in a civil penalty of up to $10,000 per day.[58] This enforcement provision facilitates the pre-merger notification process by urging the M&A parties file the motion promptly.

HSR also provides exemptions from pre-merger notification, listing eleven exemptions[59] in detail which “are not likely to violate the antitrust laws,”[60] such as acquisitions in the ordinary course of business, acquisitions of voting securities held solely for investment purposes, and institutional investment; and which “antitrust problems are not likely to arise,”[61] such as intraperson transaction, acquisitions by underwriters,[62] creditors and insurers,[63] and transfers by gift, will, or trust.[64] Additionally, HSR gives the FTC and the Assistant Attorney General the power to exempt, from the requirements of the HSR, transactions that “are not likely to violate the antitrust laws.”[65]

E. The Enforcement Mechanism Ensures That Violations Of The U.S. Regulation Are Challenged And Punished.

The Supreme Court of United States and agencies like the FTC and DOJ are the authorities to punish M&A that violates the U.S. regulation. The FTC and DOJ also have the rights to challenge the M&A leading towards monopoly. In the pre-merger notification period, failure to file the documents or provide accurate information can result in a civil penalty of up to $10,000 per day as mentioned above.

One of the significant features of the U.S. regulation in the enforcement mechanism is that it allows the private party to bring an action against M&A leading to monopoly under the Clayton Act if “the private party has been or is likely to be injured as a result of anticompetitive effects.”[66] Remedies available to a private party include equitable relief such as preliminary relief[67] and permanent relief,[68] divestiture,[69] and treble damage recovery.[70] Usually, Congress authorized state attorney generals to file federal antitrust suits on behalf of all citizens within their states.[71] Congress also sharply raised the penalties for criminal violations by, for example, raising the maximum prison sentence for convicted individuals from one to three years per violation.[72]

F. The Extraterritorial Principle Exists In The U.S. Regulation.

The scope of the market has a significant influence in determining the legality of an M&A. Sometimes, whether an M&A violates the U.S. regulation utterly depends on the definition of the relevant market. For a long period, the geographic market in M&A only means the local, state or national market. It was not until the 1984 Merger Guidelines that the extraterritorial principle was recognized. This Guideline points out that when the FTC and DOJ scrutinize an M&A, they should also take foreign firms into account.[73] Thus, the geographic market definition was expanded to the international level.

In order to protect the U.S. consumers’ welfare, the U.S. regulation employed the extraterritorial principle to expand its effect across its border.[74] The U.S. applies its antitrust laws to foreign business combinations based on the “effects test,” established initially in United States v. Aluminum Co. of American.[75] In that case, Judge Learned Hand ruled that the U.S. had jurisdiction and could apply its antitrust laws where wholly foreign conduct had an intended effect in the U.S.[76]

In 1991, the FTC and the European Community’s competition authority jointly announced their execution of a U.S.-E.C. Antitrust Enforcement Cooperation Agreement, inaugurating a liaison that became a significant feature of antirust enforcement activity on both continents over the course of this decade.[77]

In the U.S., it is settled law that any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders that the state reprehends; and these liabilities other states will ordinarily recognize.

IV. THE INFLUENCE OF THE U.S. REGULATION ON THE LEGISLATION OF M&A LEADING TO MONOPOLY IN CHINA.

There is no unified anti-monopoly law in China up to now, but the Provisional Regulation in China firstly addresses the control of M&A leading towards monopoly in detail, which reflect the influence of the U.S. regulation.

A. The Purpose Of Enacting The Provisional Regulation Is To Promote Foreign Investment, Regulate The M&A Of Foreign Investors, Ensure Fair Competition, And Protect The National Economic Security.[78]

After a year of investigation, SAIC’s fair trade bureau came up with a report entitled “The Competition-restricting Behavior of Multinational Companies in China and Countermeasures,” which warned that foreign business giants were building monopolies in China. According to the report, some multinationals carry out sweeping M&A to absorb their major competitors to ensure market dominance.[79]

The report used Eastman Kodak as an example. Kodak formerly held more than 50% of China’s film market and is expected to further consolidate its market dominance after taking another 20% from its only Chinese rival Lucky Film Corporation.[80]

M&A that help multinationals consolidate monopolistic positions met with few legal limits in China.[81] While continuing to welcome their investments, China is learning about the potentially negative effects of multinational giants.[82] To control the M&A leading towards monopoly and to protect the effective market competition, the provisional regulation especially aims at how to regulate the M&A of foreign investors.

B. The Main Articles Concerning M&A Leading To Monopoly Are Influenced By The U.S. Regulation.

1. The Provisional Regulation Establishes Similar Extraterritorial Principle as the U.S. Regulation.

The Provisional Regulation divides the M&A into two groups: one is onshore M&A, and the other is offshore M&A. Onshore M&A refers to any M&A of a domestic enterprises by foreign investors in China, while offshore M&A means any M&A of domestic enterprises by foreign investors outside China. Thus, the Provisional Regulation extends its legal effect across the board. The rationale behind this regulation is to protect the domestic market from excessive concentration, which may jeopardize fair competition and consumer interest. With the development of the global economy, more and more countries begin to define the term “market” much boarder than before. The first M&A regulation shows that China is also aware of that.

2. Certain Key Concepts, such as “Market Share,” “Related Industries,” “Consumer Interests,” and “Excessive Concentration,” are Adopted in the Provisional Regulation.

The Provisional Regulation uses “market share” as a term to define the market concentration. If the China market share of one of the M&A parties to the transaction exceeds 20% during the current year, or the M&A will result in the China market share of a party reaching 25%, then the M&A of a Chinese domestic company should conform to the provision.[83] It seems that “market share” here means only the national level market share. However, there is no further provision to clarify this definition. The literal meaning of “the China market share” in the provision is only restricted the geographic market, but not product market. Since the domestic market in China is huge, the general “China market share” definition is too vague to be workable in practice. Even if the definition really means only the national market, then M&A will be hard to challenge by MOC and SAIC because of the huge national market.

The Provisional Regulation also mentioned related industries, which is similar to the “product market” in the U.S. regulation. According to the Provisional Regulation, if a foreign investor has merged with or acquired more than 10 domestic enterprises in related industries within one year, the M&A should also conform to the Regulation.[84] However, the Provisional Regulation itself does not define what “related industries” mean.

The concepts of “excessive concentration” and “consumer interests” are adopted in the Provisional Regulation in its Article 20 and 21, which authorizes the MOC and SAIC to scrutinize whether the proposed M&A will cause excessive concentration, hinder market competition, or harm consumer interests.[85] Despite the abstract concepts, there are no detailed definitions for these terms. The concept of “excessive concentration,” especially, seems to be defined according to the authorities’ discretion, which is not predictable for M&A parties.

Though the Provisional Regulation adopts some key concepts of M&A leading towards monopoly from the U.S. regulation, the lack of concrete definitions, to some extent, hinder the implementation of the Provisional Regulation.

3. The “Pre-merger Notification” Principle was also Adopted in the Provisional Regulation which Authorizes the Approval and Registration Authorities to MOC and SAIC.

The Provisional Regulation provides the authority over M&A leading towards monopoly in China to the Ministry of Commerce (MOC) and the State Administration of Industry and Commerce (SAIC).[86] The two agencies are responsible for the approval and registration of foreign investments. Both the onshore M&A and offshore M&A require pre-merger notification; however, they are not exactly the same.

In onshore M&A, the foreign investors should notify MOC and SAIC if certain requirements are met under the Provisional Regulation.[87] After the MOC and SAIC receive the pre-merger notification, they have 90 days to decide whether to approve the M&A. However, offshore M&A only requires the foreign investors to give pre-merger notification to the MOC and SAIC without clarifying the waiting period as in an onshore M&A.

In the Provisional Regulation, the standards to determine whether the onshore and offshore M&A will lead towards monopoly are the same. Both Article 20 and 21 provide that after receiving the pre-merger notification, MOC and SAIC will examine whether there is any possibility that the proposed transaction will cause excessive concentration in the domestic market, impair domestic competition or harm domestic consumers, and make a determination whether to approve the transactions.[88]

Where notification is required but is not filed, the application for M&A will not be approved by the MOC. Without approval, the new business cannot obtain a business license, comparable to the Certificate of Incorporation in the U.S., from the SAIC. No Chinese company will be able to complete its establishment or carry on even routine business without a Business License. Thus, the whole transaction will not take effect under Chinese law. But no further enforcement provision is provided by the Provisional Regulation.

4. The Provisional Regulation Provides an Exemption Clause For M&A Leading Towards Monopoly.

Like the U.S. regulation, the Provisional Regulation also employs an exemption clause for M&A which may lead towards monopoly. Article 22 of the Provisional Regulation lists four circumstances where a party to an M&A can apply to the MOC and SAIC for an exemption from antitrust review. These circumstances are if the transaction (1) can improve the conditions for fair market competition; (2) will restructure loss-making enterprises and ensure employment; (3) will introduce advanced technologies and management talent, and increase the international competitiveness of enterprise; or (4) can improve the environment.[89] These four exemptions are similar to the efficient defense in the U.S. regulation.

C. The Regulation still Leaves Some Loopholes.

From the above, it is not hard to find that the Provisional Regulation was influenced by the U.S. regulation. However, some of its provisions are still too vague and leave some loopholes. These provisions only borrowed the structure from the U.S. regulation, not the content. For instance, the regulation lacks procedural guidelines as to when a party should file a pre-merger notification and what kind of information should be included in the notification. Though it mentioned the market share, related industries, and excessive concentration, it does not clarify these concepts in detail, and the Provisional Regulation also lacks implementation rules.

V. THE PROPOSALS TO THE LEGISLATION OF M&A LEADING TOWARDS MONOPOLY IN CHINA ANTI-MONOPOLY LAW.

The proposal section will be divided into two parts: the first part will propose that the legislation of M&A leading towards monopoly in China’s anti-monopoly law should adopt certain provisions from the U.S. regulation; however, because of differences in China and the U.S. legal systems, cultural backgrounds, and experiences in M&A, the second part will propose that while transplanting[90] some important terms from the U.S., China also needs its own ways to effectively regulate this issue.

1. The Legislation of China Anti-monopoly Law can Transplant[91] some Provisions From the U.S. Regulation.

(a) The anti-monopoly law in China should clarify the definitions of key terms.

The Provisional Regulation manifests its reference from the U.S. regulation. Even though, as mentioned in Part IV, the reference is very limited by adopting some concepts without detailed definitions. China has been aware of the importance of anti-monopoly laws since the 1980’s. However, the practical experience on how to control M&A leading towards monopoly is quite limited. Therefore, it is worth referring to the U.S. regulation to define certain important terms.

The U.S. regulation divides the geographic market into four levels: local, state, national, and international. This classification is extremely suitable to China. China is a country with a large geographic market. If the anti-monopoly law only challenges M&A on the national level under the Provisional Regulation, then it will boost local or provincial protectionism. Also, it is absurd and illogical that the monopoly is prohibited nationwide, but prevails monopoly in the local and provincial levels. The Provisional Regulation states that the offshore M&A, which has certain impact on China domestic market, is under the control of it. Hence, the international market has already been recognized as one type of the geographic markets. But the Provisional Regulation does not address the local and provincial market at all. To better the definition of the geographic market, in the legislation of future anti-monopoly in China, the U.S. geographic market classification should be covered.

The concept of “excessive concentration” in the Provisional Regulation is too vague to be applied in practice. HHI in the U.S. regulation provides a good explanation on how to test the market concentration. By using post-merger HHI, the authorities may easily identify the “unconcentrated market,” “the moderately unconcentrated market,” and “highly concentrate market.” In addition, the HHI change between pre-merger and post-merger also provides important information to the authorities to decide whether the change will increase the possibility of monopoly. The HHI test has already been tested as a workable and efficient measure in the U.S. Thus, in the legislation of China anti-monopoly law, the HHI test can be considered to measure the market concentration.

(b) Foreign firms and domestic firms should be treated equally.

The Provisional Regulation only provides articles on how to control M&A leading toward monopoly by foreign investors. Since this is the first regulation which concerns the M&A leading towards monopoly issue in China, it implies that there is no law to regulate M&A leading towards monopoly by domestic firms. Thus, if a domestic firm merges or acquires domestic firms, which may tend to create a monopoly, it is more likely that it will not be challenged at all. The policy reason may explain why foreign investors and domestic investors are treated differently under the current circumstance.

As former state owned firms enter the socialist market economic system after Deng’s reform and opening door policy, they have to be used to the extremely competitive market. Some of them survived through competition. However, due to the huge domestic market, it is still hard for these firms to get monopoly power by M&A on the national level. Some of them do get monopoly power on the local and provincial levels, but serious local and provincial protectionism serves as a big umbrella to these monopolies without any prohibitions. Meanwhile, even if there is an M&A leading towards monopoly in the national level, it is usually entirely state owned, and its M&A is encouraged by the government to enhance its international competitiveness.

Generally, the policy behind the Provisional Regulation is that it is much easier for foreign investors through M&A to get monopoly power than domestic investors do because (i) in most cases, the foreign investors are the multinational firms that do business in the international, or at least multinational markets; (ii) they have sufficient capitals to directly invest in the Chinese domestic firms; (iii) they have much more experience in how to do M&A efficiently and successfully as compared to domestic investors in China. In addition, the lack of anti-monopoly law in China provides a good opportunity for those foreign investors who want to occupy the huge domestic Chinese market immediately without being worried that the M&A will be challenged under the Chinese law. In the official report as mentioned in Part IV, foreign business giants has already carried out sweeping M&A to absorb their major competitors and to ensure market power. Therefore, the policy attempts to balance the regulation of foreign investors while still encouraging foreign investment in China. Thus, the Provisional Regulation was enacted to focus on foreign investors only.

However, in the U.S. regulation, there is no specific regulation or even article showing that it has any different regulations for domestic or foreign investors. Thus, the U.S. regulation treats domestic and foreign firms equally, which should be adopted by the Chinese legislators.

Since China is a member of the WTO, it should fulfill its WTO obligations. The WTO requires that the principles of national treatment and transparency are to apply to investment measures put in place by member countries.[92] However, the Provisional Regulation seems to discriminate against foreign firms and overemphasize the protection of its domestic industries. Therefore, the Provisional Regulation violates China’s WTO obligations by not giving national treatment to foreign investors who are from WTO member countries.

The Chinese government may argue that because the socialist market economic system had been established for only over two decades, many domestic firms are still too weak to get monopoly power through M&A. Even if there are certain domestic firms through M&A that get monopoly power, the importance of enhancing domestic firms’ competitive ability in the international market preempts that of challenging their legality of getting monopoly power in the domestic market.

However, China has been experiencing a stable and fast economic development in recent years. Some of the state-owned firms through M&A do have monopoly power, thus these firms may abuse its monopoly power to lessen competition. Some private firms grow up very quickly, which may also get monopoly power through M&A. Thus, the argument that domestic firms are too weak to get monopoly power does not hold water. Second, the M&A can be a way to enhance the international competitive ability of the domestic firms. However, it should not be an excuse to exclude domestic firms from the legislation of anti-monopoly law. When China legislates its own anti-monopoly law, enhancing the international competitive ability of domestic firms can be used as an efficient defense just like the U.S. regulation to protect domestic firms because of national interest concerns. Third, national treatment is one of the WTO principles so that China should perform its obligation by treating domestic and foreign investors the same. To fulfill the WTO obligation is also important to establish China’s creditability in the global economy, which may attract more foreign investors to invest in China. Fourth, even though the domestic investors’ M&A transaction is not a big concern right now, it is necessary to regulate the M&A by domestic investors as well in the future anti-monopoly law to make it predictable. With the development of China’s economy, it is more likely than not that the domestic investors may abuse its market power by M&A. Therefore, it is necessary to treat foreign firms the same as domestic firms in the future anti-monopoly law by canceling this classification.

2. The Proposal to the Legislation of China Anti-monopoly Law which Matches China’s Own Characteristics.

In the past decade, a lot of developing countries, such as Peru[93], Brazil[94], and Mexico[95], began to transplant[96] wholesale from either the U.S. or European models of antitrust law, but they leave much to be desired.[97] While the developing country legislating its own anti-monopoly law, it can and should transplant some provisions, which are suitable to its own economic, legal, and political environment. Meanwhile, because of differences in the U.S. and China legal systems (common law system v. civil law system), cultural backgrounds (the western cultural v. the eastern cultural), the M&A experiences (over one century development v. at most ten-year practice), and economy power (developed country v. developing country), the wholesale transplant cannot work out the optimal regime of anti-monopoly law in China from the lessons of other developing countries. Thus, it is proposed that while transplanting some important principles and tests from the U.S., China also needs its own effective ways to regulate M&A leading towards monopoly in its anti-monopoly law.

(a) Enforcement rule should be effectively provided in the anti-monopoly law.

In the Provisional Regulation, there is no enforcement rule with regard to non-compliance with the pre-merger notification principle. Without the enforcement power, some M&A transactions that violate the Provisional Regulation by leading towards monopoly can use this loophole to continue its post-merger business because there is no punishment even if this violation was found later on. Therefore, the enforcement rule is necessary in the anti-monopoly law legislation.

In the U.S. regulation, a private party can bring a private action to enforce the antitrust law. However, China is a country without too much experience in M&A. It is extremely hard and almost impossible for a private party in China to bring a suit against a M&A transaction, which may violate the anti-monopoly law.

In the Provisional Regulation, article 19 provides a sub-article, which allows a domestic Chinese competitor, relevant governmental agencies, or industry associations to ask for the foreign investor to file a notification to MOC or SAIC even if the general requirements for the pre-merger notification are not met. If MOC or SAIC believes that a very substantial market share is at stake, or there are factors that seriously affect market competition or the national well-being and the economic security of the country, the MOC and SAIC may use its discretion to decide whether the foreign investors should file the notification or not. This provision, to some extent, offers a third party to supervise the M&A which may lead towards monopoly and authorizes the decision-making power to the MOC and SAIC, which is more suitable to China’s current situation.

Currently, the Provisional Regulation does not authorize the MOC and SAIC the right to file a lawsuit against M&A parties who violates the principle, which seriously hinder the enforcement of the principle. If the authorities cannot enforce the rules effectively, then the so-called authority is powerless. The future anti-monopoly law in China should adopt the provision of article 19 to give the third party the right to supervise certain M&As. Meanwhile, the law should give the authorities the right to file a lawsuit against any M&A violating the anti-monopoly law because the authorities are the ones who investigate the legality of the M&A and decides whether or not to approve the M&A. If they cannot sue the M&A parties for violating the anti-monopoly law, the law will not be enforced effectively.

In the future anti-monopoly law, the non-compliance with the pre-merger notification principle should be fined at a certain amount. In the U.S. regulation, failure to comply with the principle can result in a civil penalty of up to $10,000 per day, which seems to be harsh and rigid. The China anti-monopoly law may give the M&A parties a reasonable amount of time, for example, ten days, to prepare the required document to file a pre-merger notification. If in this reasonable time the M&A parties do not file the pre-merger notification, the fines should be imposed on them. Also, the fines may be increased according to the length of the delay to encourage the parties to file the notification promptly. If the parties still refuse to comply with the principle, then the future anti-monopoly law should authorize the MOC and SAIC to file anti-monopoly lawsuits against the violated parties.

(b) More procedure rules should be enacted in the pre-merger notification principle.

In the Provisional Regulation, it does not specify when should file a pre-merger notification if the transaction meets one of the requirements for an onshore M&A under Article 19. However, it does specify in Article 21 that the offshore M&A parties should notify MOC and SAIC of their M&A plan before the plan is announced in public or at the same time that it is submitted to the authorities in the country where the M&A transaction is done. The U.S. regulation also does not specify when should file a pre-merger notification to the FTC and DOJ, but it imposes a $10,000 fine per day to urge the parties to file the notification promptly. As mentioned in the enforcement regulation of part (a), the future anti-monopoly law should consider providing a reasonable time for the M&A parties to prepare required documents in order to file the notification. The reasonable time can be decided according to (1) the complication of the transaction; (2) the type of the transaction; or (3) the amount of the transaction. It should also set up a bottom line for the reasonable time to prevent some M&A parties from using it as a loophole.

Article 20 of the Provisional Regulation provides 90 days for the MOC and SAIC to decide whether or not to approve the onshore M&A after they receive all required documents. Unlike the U.S. regulation which will offer another 30 days for the second request if it is necessary, there is no second request in the Provisional Regulation. However, a total of 90 days is still longer than the U.S. regulation which offers a total of 60 days to make a decision. Therefore, the 90 days waiting period provision should be kept in the legislation of future anti-monopoly law as to give enough time to the MOC and SAIC to make their decision. But the Provisional Regulation does not state how long the offshore M&A can get approval. Thus, it is hard for the foreign investors in the offshore M&A to predict how long the approval process will take. The anti-monopoly law should solve this procedure issue by either referring to the waiting period provided in the onshore M&A or enacting a different waiting period for an offshore M&A if necessary.

In the onshore M&A notification review, the Provisional Regulation states that the MOC and SAIC may jointly or separately convene the relevant departments, institutions, firms, and other relevant parties for a public hearing within 90 days after receiving the all required documents to decide whether or not to approve the transaction. But there are no other provisions to define these relevant parties, or to clarify under what conditions MOC and SAIC may convene these parties. There is also no provision to regulate the hearing procedure. Therefore, the Provisional Regulation leaves too much power to these two authorities. With respect to the lack of M&A practices in China, it is not wise to authorize too much power to the authorities to determine the procedural issues. The future anti-monopoly law should provide more detail on these procedural loopholes.

VI. CONCLUSION

The U.S. regulation establishes a well-structured legal system to control the M&A leading towards monopoly for over a century of development. It keeps the stability of its basic foundation, such as the Sherman Act and the Clayton Act, while updating some out-dated provisions through amendments, the Merger Guidelines, and Supreme Court cases. The principles and concepts such as the pre-merger notification principle, the extraterritorial principle, the enforcement mechanism, and well-defined concepts have significant influence on the Provisional Regulation in China. Some of these principles and concepts have been adopted in the first Provisional Regulation. However, it still needs lots of improvements[98] in future M&A leading towards monopoly legislation.

The influence of the U.S. regulation on the legislation of China M&A leading towards monopoly is considerable. However, since the U.S. and China are different with respect to the legal system, the cultural background, the M&A experience, and economic power, the wholesale transplant is not workable. Therefore, China should not only learn from the precious experience from the U.S. regulation, but also need to find out its own ways to effectively legislate M&A leading towards monopoly in its anti-monopoly law. With China’s entry into the WTO and with the fast development of its economy, M&A leading towards monopoly will definitely be a big issue in the legislation of China anti-monopoly law. How to effectively regulate this “Economic Constitutional law” has confused Chinese legislators for over two decades. This paper proposes that certain improvements can be made in the legislation of future anti-monopoly laws in China according to the U.S. regulation from comparative perspective and China’s current situation. The proposals deserve attention from both Chinese legislators and business investors in China.



[1] Yuanyuan, <反垄断法>缘何十年难产 [Why the anti-monopoly law is slow in coming in the decade?], http://www.zaobao.com/special/newspapers/2005/01/lwothers270105e.html (Xiaochen Hu trans., Jan 24, 2005).

[2]外国投资者并购境内企业暂行规定 [The Provisional Regulation on the M&A of Domestic Enterprise by Foreign Investors] (Landon R. Prieur & Pengfei Su, trans., 2003) (CHN); See also Landon R. Prieur & Pengfei Su, The International Comparative Legal Guide to Merger Control 2005, http://www.coudert.com/publications/articles/041125_3_MergerControlChina_iclgmc.pdf (accessed Feb. 21, 2005).

[3] Robert A. Skitol, The Shifting Sands of Antitrust Policy: Where It has been, Where It is now, Where it will be in Its Third Century, 9 Cornell J. L. & Pub. Pol’y 239, 240 (1999).

[4] Julian O. von Kalinowski, Peter Sullivan & Maureen McGuirl, Antitrust laws and Trade Regulation, § 29.01 (2d ed., Matthew Bender & Co. 2005).

[5] 15 U.S.C. § 18 (2005).

[6] Id.

[7] 15 U.S.C. § 18a (2005) (This subsection is about the notification and waiting period which is known as “HSR”).

[8] Kalinowski, Sullivan & McGuirl, Supra n. 4 at § 34.05.

[9] 15 U.S.C. § 18 (2005).

[10] Kalinowski, Sullivan & McGuirl, Supra n. 4, § 29.03 (3).

[11] 67 F.T.C. 282 (1965).

[12] Ernest Gellhorn, William E. Kovacic & Stephen Calkins, Antitrust Law and Economic 421 (5th ed., West 2004).

[13] Id. at 405.

[14] U.S. Dep’ of Justice, Merger Guidelines (1982), reprinted in 4 Trade Reg. Rep. (CCH) P 13,102, at pt. IV (The DOJ in the 1982 Merger Guildelines stated that in accessing whether to challenge mergers, it would consider market concentration, market share, conditions of entry, barriers to entry, and whether merger would facilitate collusion or evasion of rate regulation).

[15] Skitol, Supra n. 3, at 250.

[16] Gellhorn, Kovacic & Calkins, Supra n. 12, at 409.

[17] Skitol, Supra n. 3, at 251.

[18] Calkins, The New Guidelines and the Herfindahl-Hirschman Index, 71 Cal. L. Rev. 402 (1983).

[19] U.S. Dep’t of Justice, Merger Guidelines § 4.0 (1984), reprinted in 4 Trade Reg. Rep. (CCH) P13, 103, at 20, 637 (June 29, 1984).

[20] U.S. Dep’t of Justice & Federal Trade Comm’n, Horizontal Merger Guidelines § 0.1 (1992).

[21] Id.

[22] Junkuo Zhang, Anti-Competitive Conducts: China Experience, http://www.fias.net/Conferences/CompetitionPolicySriLankaDocs/Junkuo%20Zhang.prn.pdf (June 22, 2004).

[23] Id.

[24] Wang Yang, The Improvement of the Competition Status in China, http://www.apeccp.org.tw/doc/APEC-OECD/2003-12/007.pdf (Dec. 23, 2003).

[25] Zhang, Supra n. 22

[26] Id.

[27] Dai Yan, Monopoly law badly needed, report says, http://www.chinadaily.com.cn/english/doc/2004-05/24/content_333377.htm (updated May 25, 2004, 08:35 a.m.) (The main laws and regulations concerning anti-monopoly provisions are the 1993 Law against Unfair Competition, the 1998 Price Law and the 2000 Bid and Tender Law).

[28] Id.

[29] Id.

[30] Shibing Cao, 反垄断法研究 [The Research on the Anti-monopoly law] Ch. 10 § 2 (1)-(2), 252-253 (Xiaochen Hu trans., 2d ed., Law Press 1997).

[31] Jointly enacted by the former Ministry of Foreign Trade & Economic Cooperation (“MOFTEC”), the State Administration of Taxation (“SAT”), the State Administration of Industry and Commerce (“SAIC”) and the State Administration of Foreign Exchange (“SAFE”) on March 7, 2003 and effective on April 12, 2003. Under the Plan on the Organizational Reform of the State Council passed on March 10, 2003, MOFTEC and State Economic and Trade Commission (“SETC”) were combined into the new Ministry of Commerce (“MOC”).

[32] Arthur Austin, Antitrust Reaction to the Merger Wave: The Revolution vs. the Counterrevolution, 66 N.C. L. Rev. 931, 948 (1988).

[33] Skitol, Supra n. 3, at 241.

[34] Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962) (In Brown case, the government brought suit to enjoin consummation of a merger of two corporations on the ground that its effect might be substantially to lessen competition or to tend to create a monopoly in the production, distribution, and sale of shoes, in violation of § 7 of the Clayton Act, as amended in 1950. The Brown Court entered the judgment for the government); see also Timothy J. Muris, The Efficiency Defense Under Section 7 of the Clayton Act, 30 Case W. Res. L. Rev. 381, 403-407 (1980) (The treatment of efficiencies in Brown Case is discussed); See Timothy J. Muris, The Government and Merger Efficiencies: Still Hostile After All These Years, 7 Geo. Mason L. Rev. 729, 730 (1999).

[35] Skitol, Supra, n. 3, at 248 (Chicago School evolved from the work of an army of antitrust critics populating both the law schools and economics departments of prominent universities across the country. The University of Chicago was the center of this effort and there by gave the movement its name).

[36] Id, at 246 (Warren Court represented the aggressive antitrust enforcement activity whose precedents blocked all significant horizontal and vertical merger transactions).

[37] William H. Page, Antitrust Review of Mergers in Transition Economies: A Comment, with Some Lessons from Brazil, 66 U. Cin. L. Rev. 1113, 1114 (1998).

[38] Timothy J. Muris, The Government and Merger Efficiencies: Still Hostile After All These Years, 7 Geo. Mason L. Rev. 729, 730 (1999).

[39] Supra n. 19, § 3.5 at 20, 564.

[40] Kenneth J. Hamnerr, Focus on: International Terrorism: Comment: the Globalization of Law: International merger Control and Competition Law in the United States, the European Union, Latin America and China, 11 J. Transanat’l L. & Pol’y 385, 388 (1998).

[41] U.S. Dep’t of Justice and Federal Trade Comm’n, 1992 Horizontal Merger Guidelines § 0.1 (1992) (with April 8, 1997, revisions to 4), available at http://www.ftc.gov/bc/docs/horizmer.htm.

[42] Brown Shoe Co., 370 U.S. at 325 (1962); Times-Picayune Publishing Co. v. United States, 345 U.S. 594 (1953); see also FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34, 46 (D.D.C. 1998) (''In other words, when one product is a reasonable substitute for the other, it is to be included in the same relevant product market even though the products themselves are not the same. A product is construed to be a 'reasonable substitute' for another when the demand for it increases in response to an increase in the price of the other. Because the ability of customers to turn to other suppliers restraints a firm from raising prices above the competitive level, the definition of the 'relevant market' rests on the determination of available substitutes'').

[43]United States v. Phillipsburg Nat'l Bank, 399 U.S. 350, 362-365 (1970); FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34 (D.D.C. 1998) (national geographic market, as well as regional geographic markets); FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997) (geographic markets defined as 42 specified metropolitan areas); AlliedSignal, Inc. v. B.F. Goodrich Co., 183 F.3d 568 (7th Cir. 1999) (global market for landing gear used in commercial aircraft); United States v. Eastman Kodak Co., 63 F.3d 95, 109 (2d Cir. 1995) (worldwide geographic market for photographic film); Northeastern Educ. T.V. of Ohio, Inc. v. Educ. T.V. Ass'n of Metropolitan Cleveland, 758 F. Supp. 1568, 1579 (N.D. Ohio 1990) (worldwide geographic market for television programming); In re ABB, 5 Trade Reg. Rep. (CCH) P 24,552 (Analysis to Aid Public Comment, 1999) (global market for process gas chromatographs and process gas spectrometers)

[44] Brown Shoe Co., 370 U.S. at 336-337 (1962).

[45]United States v.Philadelphia Nat'l Bank, 374 U.S. at 354-59 (1963) (Relevant geographic market is the area ''to which consumers can practically turn for alternative sources of the product and in which the antitrust defendants face competition'').

[46] In re Hospital Corp. of Am., 106 F.T.C. 361, 466 (Order, 1985), aff'd, 807 F.2d 1381 (7th Cir. 1986).

[47] Kalinowski, Sullivan & McGuirl, Supra n. 4, § 30.03 (3) (a) (ii).

[48] Supra n. 19, at 26,824; 26,831-26,835.

[49] Andrew M. Rosenfield, The Use of Economic Analysis in Antitrust Litigation and Counseling, 1986 Colum. Bus. L. Rev. 49, 60 (1986).

[50] Kalinowski, Sullivan & McGuirl, Supra n. 4, at § 31.01 (2) (iv).

[51] Id.

[52] Skitol, Supra, n. 3, at 246-247.

[53] 15 U.S.C. § 18a (a) (1) (2005).

[54] 15 U.S.C. § 18a (a) (2) (B) (2005).

[55] 15 U.S.C. § 18a (a) (2) (2005).

[56] 15 U.S.C. § 18a (b) (1) (B) (2005).

[57] William M. Hannay, Transnational Competition Law Aspects of Mergers and Acquisitions, 20 NW. J. INT’L L. & Bus. 287, 289 (2000).

[58] U.S. Dep’t of Justice, Antitrust Division Manual III: 26 n. 26 (3d ed. 1998).

[59] 15 U.S.C. § 18a (c) (1)-(11) (2005).

[60] 15 U.S.C. § 18a (c) (12) (2005).

[61] Kalinowski, Sullivan & McGuirl, Supra n. 4, § 34.05 (2).

[62] Id. at § 34.05 (2) (a).

[63] Id. at § 34.05 (2) (b).

[64] Id. at § 34.05 (2) (c).

[65] Id. at § 34.05 (1).

[66] Id. at § 34.05 (3).

[67] Id. at § 32.03 (1) (A preliminary relief means a private party may seek a preliminary injunction or a temporary restraining order to prevent the consummation of a proposed merger or acquisition).

[68] Id. at § 32.03 (2) (A permanent relief means a private party may seek permanent injunctive relief to eliminate the threat of continuing injury posed by past and possible future unlawful acquisitions).

[69]California v. American Stores Co., 495 U.S. 271 (1990) (The Supreme Court held that the divestiture remedy was available to private parties).

[70] 15 U.S. C. § 15 (2005) (The Section 4 of the Clayton Act entitles a private plaintiff to treble damages for injury to his “business or property by reason of anything forbidden in the antitrust laws.” The Supreme Court also recognized in Brunswich v. Pueolo Bowl-O-Mat case (429 U.S. 477 (1977)), that a private party can recover treble damages in Section 7 of the Clayton Act).

[71] Skitol, Supra n. 3, at 246.

[72] Id.

[73] Id. at 254.

[74] Id.

[75] United States v. Aluminum Co. of American, 148 F.2d 416, 444 (2d Cir. 1945) (In this case, the United States alleged that the actions of the Aluminum Co. of American violate the Sherman Act by monopolizing interstate and foreign commerce, particularly in the manufacture and sale of virgin aluminum ingot).

[76] Joseph P. Griffin, Extraterritoriality in U.S. and E.U. Antitrust Enforcement, 67 Antitrust L.J. 159 (1999).

[77] Skitol, Supra n. 3, at 255.

[78]外国投资者并购境内企业暂行规定 [The Provisional Regulation on the M&A of Domestic Enterprise by Foreign Investors] Article 1 (The Provisional Regulation on the M&A of Domestic Enterprises by Foreign Investors, Mar 7, 2003. The Provisional Regulation was enacted by the State Administration of Taxation (SAT), the ministry of Foreign Trade and Economic Cooperation, MOFTEC (now merged into MOC), the SAIC, and the State Administration for Foreign Exchange (SAFE)) (Landon R. Prieur & Pengfei Su, trans., 2003) (CHN); See also Landon R. Prieur & Pengfei Su, The International Comparative Legal Guide to Merger Control 2005, http://www.coudert.com/publications/articles/041125_3_MergerControlChina_iclgmc.pdf (accessed Feb. 21, 2005).

[79] Dai, Supra n. 27.

[80] Id.

[81] Id.

[82] Id.

[83]外国投资者并购境内企业暂行规定 [The Provisional Regulation on the M&A of Domestic Enterprise by Foreign Investors] Article 19 (3)-(4); Article 21 (3)-(4) (Landon R. Prieur & Pengfei Su, trans., 2003) (CHN); See also Landon R. Prieur & Pengfei Su, The International Comparative Legal Guide to Merger Control 2005, http://www.coudert.com/publications/articles/041125_3_MergerControlChina_iclgmc.pdf (accessed Feb. 21, 2005).

[84] Id. at Article 19 (2).

[85] Id. at Article 20-21. (Article 20 states that If one of the requirements listing in Article 19 is met, the foreign investor must file a notification with MOC and SAIC. Even if none of the requirements is met, MOC or SAIC may also require the foreign investor to file a notification at the request of a domestic Chinese competitor, relevant governmental agencies, or industry associations if MOC or SAIC believes very substantial market share is at stake, or there are factors that seriously affect market competition or national well-being and the economic security of the country. Article 21 is about the standards set for the offshore M&A parties to file a pre-merger notification. The Article provides that if any of the following factors are present in an overseas transaction, the parties should submit the merger or acquisition plan to MOC and SAIC prior to public announcement of the plan or simultaneously with its filing with the authorities of their home countries: (1) one party to the offshore transaction has assets in China worth over 3 billion RMB (approximately $ 362 million); (2) the current year China market turnover of one party to the offshore transaction exceeds 1.5 billion RMB (approximately $ 181 million); (3) the China market share of one party to the offshore transaction (including its affiliates) has already reached 20%; (4) the China market share of one party to the offshore transaction (including its affiliates) will reach 25% as a result of the proposed offshore transaction; or (5) as a result of the overseas transaction, one party to the offshore transaction will directly or indirectly hold an equity interest in more than 15 foreign investment enterprises in the corresponding industry. MOC and SAIC examine whether there is any possibility that the proposed transaction will cause excessive concentration in the domestic market, impair domestic competition or harm domestic consumers, and make a determination whether to approve the transaction).

[86] Id.

[87] Id. at Article 19 (It provides that any M&A of a Chinese domestic company resulting in at least 25% foreign ownership should conform with the provision if one of the four requirements listed below is met: (1) turnover of one of the parties to the transaction in the China market exceeds 1.5 billion RMB (approximately $180 million) in the current year; (2) the foreign investor has merged with or acquired more than 10 domestic enterprises in related industries within one year; (3) the China market share of one of the parties to the transaction exceeds 20% during the current year; or (4) the M&A will result in the China market share of a party reaching 25%. If one of the requirements is met, the foreign investor must file a notification with MOC and SAIC).

[88] Id. at Article 20-21.

[89] Id. at Article 22.

[90] Here, “transplant” has the similar meaning as “borrow”, which is widely used in China law review Articles. This concept is also used in the U.S. law review articles, too; See also Manisha M. Sheth, Formulating Antitrust Policy in Emerging Economies, 86 Geo. L.J. 451, 452 (1997) (The author pointed out that the developing countries’ structural reforms are usually transplanted wholesale from either the U.S. or European models of antitrust law).

[91] Id.

[92] White & Case, New Antitrust Rules for Mergers In China, http://www.whitecase.com/files/tbl_s47Details/FileUpload265/262/china_law_bulletin_11_2002.pdf (accessed Feb. 13, 2005).

[93] Clive S. Gray & Anthony A. Davis, Competition Policy in Developing Countries Pursuing Structural Adjustment, 38 Antitrust Bull. 425, 430 (1993).

[94] Id. at 428.

[95]A.E. Rodriguez & Malcolm B. Coate, Limits to Antitrust Policy for Reforming Economies, 18 Hous. J. Int’l L. 311, 338 (1996).

[96] Supra n. 90.

[97] Gray & Davis, Supra n. 93, at 452.

[98] The improvement includes that the “marker share”, “relevant industries”, and “excessive concentration” concepts should be clarified; the foreign investors and the domestic investors should be treated equally; the more efficient enforcement provision should be enacted; and more procedure rules need to be added in the pre-merger notification.