Mergers and Acquisitions: China's New Anti- Monopoly Law Edward Lehman Managing Director – Lehman, Lee & Xu Gerson Lehrman Group Education Seminar Gerson Lehrman Group Education Seminar November 8, 2007

Introduction to M & A in China China one of the hottest markets for FDI China one of the hottest markets for FDI Previous preferred entry through green field investment, M & A increasingly popular Previous preferred entry through green field investment, M & A increasingly popular In 2006 (11 months): In 2006 (11 months): o Domestic M&A: US$56 billion o Foreign M&A: US$30 billion In first half of 2007: In first half of 2007: o M&A increase of 20%

M & A Models (simplified) Foreign Investor 2SPV/Foreign Investor 1 Domestic Co. OffshoreOnshore China offshore/onshore Share Purchase/Subscription Agreement SPV/Foreign Investor WFOE Share Purchase/Subscription Agreement

Anti-Monopoly Law - General Anti-Monopoly Law of the People’s Republic of China Anti-Monopoly Law of the People’s Republic of China o Promulgated: August 30, 2007 o Effective: August 1, Years to Draft 13 Years to Draft Previous laws which governed (non-comprehensive framework): Previous laws which governed (non-comprehensive framework): o Unfair Competition Law (1993) o Price Law (1997) o Provisions on the Acquisition of Domestic Enterprises by Foreign Investors (2006)

Anti-Monopoly Law – Purpose and Scope Purpose: Purpose: o guarding against and curbing monopolistic conduct, protecting fair market competition, enhancing economic efficiency, maintaining consumer interests and public interests, and promoting the healthy development of a socialist market economy. Scope: Scope: o Within China. o AND outside the territory of China where eliminates or restricts competition on the domestic market. o Includes use and abuse of intellectual property rights. Exception: Exception: o concerted actions of agricultural producers and rural economic organizations in the economic activities such as production, processing, sales, transportation and storage of agricultural products.

Anti-Monopoly Law - Administration State Council to establish: State Council to establish: o Anti-monopoly Committee which is responsible for overall development of anti-monopoly regulations o Anti-monopoly Enforcement Agency (AMEA) Enforcement/operations authority Enforcement/operations authority May delegate authority to provincial, autonomous region, or municipality under central government level May delegate authority to provincial, autonomous region, or municipality under central government level Has been suggested that the AMEA will be a combined effort between NDRC (monopoly agreements/price fixing), SAIC (abuse of dominant market position) and MOFCOM (merger review) Has been suggested that the AMEA will be a combined effort between NDRC (monopoly agreements/price fixing), SAIC (abuse of dominant market position) and MOFCOM (merger review)

Anti-Monopoly Law - Definitions Monopolistic conduct includes: Monopolistic conduct includes: 1. Monopoly agreements reached between Business Operators; 2. Abuse of dominant market status by Business Operators; and 3. Concentration of Business Operators that may have the effect of eliminating or restricting competition.

Anti-Monopoly Law – Definitions (cont’d) “Business Operator” “Business Operator” o Natural person o Legal person, or o Any other organization that engages in the production or business of commodities or provides services. “Relevant market” “Relevant market” o The commodity scope or territorial scope within which the business operators compete against each other during a certain period of time for specific commodities or services.

Anti-Monopoly Law – Monopoly Agreement Definition Definition o The term “monopoly agreements” as mentioned in this Law refers to agreements, decisions or other concerted behaviours that eliminate or restrict competition. For example: For example: o Fixing or changing the price of commodities; o Restricting the production quantity or sales volume of commodities; o Dividing the sales market or the raw material procurement market; o Restricting the purchase of new technology or new facilities or the development of new technology or new products;

Anti-Monopoly Law – Abuse of Dominant Position Definition Definition o The term “dominant market status” as mentioned in this Law refers to a market status held by business operators that can control the price or quantity of commodities or other trading conditions in the relevant market or can block or affect the entry of other business operators into the relevant market. For example For example o Selling products at unfairly high prices or buying products at unfairly low prices o Selling products at prices below cost without any justifiable cause o Refusing to trade with a trading party without any justifiable cause o Restricting their trading party so that it may conduct deals exclusively with themselves or with the designated business operators without any justifiable cause

Anti-Monopoly Law – Concentration “Concentration of Business Operators” refers to: “Concentration of Business Operators” refers to: 1. Merger of Business Operators; 2. Acquiring control over other Business Operators by acquiring equity or assets; or 3. Business Operator acquires control over other Business Operator(s) or is able to exert a decisive influence on other Business Operator(s) by contractual or any other means.

Concentration - Requirements for Declaration Prior declaration Prior declaration o When threshold met, Business Operators must make prior declaration to AMEA o Threshold NOT yet determined (to be prescribed by the State Council) Suggested to be based on: Suggested to be based on: o Sales turnover o Market share o Total assets

Concentration - Requirements for Declaration (cont’d) Related Parties Exemption Related Parties Exemption o Business Operators exempt from declaration when: 1. Among Business Operators involved, one Business Operator owns 50% or more of the voting shares or assets of every other Business Operator; or 2. A Business Operator not involved in the concentration owns 50% or more of the voting shares or assets of every other Business Operator involved

Concentration - Declaration Documents 1. A declaration paper which contains: 1. names of the business operators 2. their domiciles, 3. business scopes, 4. date on which concentration is to be implemented, and 5. other matters prescribed by AMEA 2. Explanations on the effects of the concentration on the relevant market competition situations 3. The concentration agreement 4. The financial and accounting reports for the previous fiscal year of the business operators involved in the concentration, as audited by an accounting firm 5. Other documents and materials as required by AMEA

Concentration – Approval Timelines Concentration Declaration Documents to ALEA for Preliminary Investigation Investigation Required Decision No Further Investigation Required 30 days 90 days to 150 days (on extension)

Concentration – Question and Factors Considered Issue: Whether concentration ‘will or may eliminate or restrict market competition’ Issue: Whether concentration ‘will or may eliminate or restrict market competition’ Factors: Factors: 1. Relevant Business Operators’ market share in the Relevant Market and their controlling power over that market 2. Degree of market concentration in the Relevant Market 3. Impact of the concentration on market access and technological progress 4. Impact of concentration on consumers and other Business Operators 5. Impact of concentration on national economic development 6. Other factors that may affect market competition and as determined by the AMEA

Concentration - Decisions Allow concentration Allow concentration Prohibit concentration Prohibit concentration Allow concentration with conditions Allow concentration with conditions All prohibition decisions will be publicized in a timely manner. All prohibition decisions will be publicized in a timely manner. Regardless of concentration, if Business Operators can prove either that: Regardless of concentration, if Business Operators can prove either that: o the favourable impact of concentration on competition obviously exceeds the adverse impact, or o the concentration is in harmony with public interests the concentration will be permitted.

Concentration - Appeal If dissatisfied with the decision, a Business Operator may: If dissatisfied with the decision, a Business Operator may: 1. apply for an administrative reconsideration 2. if dissatisfied with the reconsideration, lodge an administrative lawsuit according to law

National Security If foreign company merges with or acquires domestic enterprise or by any other means and national security is involved If foreign company merges with or acquires domestic enterprise or by any other means and national security is involved o Additional examination on national security issues shall also be conducted according to the relevant provisions of the State. o Previously included in M&A Provisions, however, related to “national economic security”

Concentration – Legal Liabilities Concentration without approval: Concentration without approval: o AMEA shall order stop to concentration, stop to concentration, disposal of shares or assets, disposal of shares or assets, transfer of business or transfer of business or adopt other necessary measures to restore the market situation before the concentration within a time limit adopt other necessary measures to restore the market situation before the concentration within a time limit o May be subject to a fine of less than RMB 500,000

Concentration – Some Unresolved Issues 1. Various definitions/requires further regulations: 1. Triggering thresholds for Declaration 2. “national economic development” 3. “national security” 2. Objective and fair consideration of Factors 3. Coordination with M&A Provisions (2006) which require notification of MOFCOM and SAIC (above certain threshold)

Concentration – Some Unresolved Issues 4. Use of concentration review to protect national interests o Not likely because of several factors: Length of time to draft law – careful consideration of international practice Length of time to draft law – careful consideration of international practice Length of time between promulgation and effective date (11 months) allows for time to promulgate many necessary regulations Length of time between promulgation and effective date (11 months) allows for time to promulgate many necessary regulations Includes foreign AND domestic companies (in comparison to M & A Provisions) Includes foreign AND domestic companies (in comparison to M & A Provisions) International attention/WTO pressure International attention/WTO pressure

Questions? Edward Lehman Lehman, Lee & Xu Phone: Fax: